Asian equities are positioned for potentially robust trading following a short squeeze in US regional banks that spurred risk assets higher yesterday. This bullish trend in stocks reinforced other risk assets such as oil and cyclical currencies, resulting in a downturn in the US Dollar Index. However, these gains were tempered by a dip in the Empire State manufacturing survey and ongoing concerns surrounding the debt ceiling.
Meanwhile, negotiations over the debt limit remain at a standstill, with House Speaker McCarthy voicing dissatisfaction with the progress. A pivotal meeting between President Biden and congressional leaders is slated for later today. If an agreement on the issue is reached before June 1st, it could prompt a short squeeze as market players recalibrate their hedges and directional exposure. Conversely, any negative developments could trigger a risk-off movement, with Gold, US Treasuries, and the Japanese yen serving as key risk indicators.
On the macro front, the People’s Bank of China has forecasted a gradual rebound in inflation in the second half of 2023, underscoring its commitment to a prudent monetary policy. For the session ahead, as demand is still a problem in China and that is affecting GDP performance and outlooks projections, participants will closely monitor Chinese Retail Sales and Industrial Production data. If these indicators underperform expectations, they could fuel concerns about a regional economic slowdown, potentially casting a pall over risk assets as growing fears of global recession amid sticky inflation and higher interest rates come to the forefront.
