Asian equities are poised for a positive start, following a volatile yet ultimately positive session for global stocks. This optimism comes as traders consistently engage in buying dips, anticipating a traditional year-end surge, with equities rallying hard in November. On Wall Street, it’s notable that technical flows predominantly fuelled the recent upswing. A significant rally, marked by a substantial buy-side imbalance in month-end flows, helped the Nasdaq recover from its lows and pushed the S&P 500 into positive territory. Traders might adjust their positions in the upcoming session, especially given that US equities are trading near key levels for the year.
In terms of macroeconomic factors, focus is on China’s Caixin PMIs. The mood is somewhat cautious following a slight decline in China’s official manufacturing PMI to 49.4 in November, signalling a persistent contraction in the sector. This is largely due to subdued demand and seasonal slumps in certain manufacturing industries. An interesting point to monitor is the 2024 Federal Reserve rate cut expectations. Confirmation of rate cuts by the Fed in the coming months could bolster the Yuan and reduce yield differentials, potentially allowing the People’s Bank of China (PBoC) to implement further easing measures, possibly even unconventional ones, to support the economy.
Moreover, it’s important to watch if traditional correlation patterns reassert themselves. Equities might face some headwinds from the US Dollar and Treasury yields, which have recently surged due to a rebound in US Treasury yields and hawkish comments from Federal Reserve Bank of San Francisco President Mary Daly, a voting member in 2024. Daly stressed that it’s too soon to consider inflation conquered and dismissed the prospect of imminent rate cuts. Despite some fluctuations, short-term Fed pricing remains aligned with levels seen before recent data releases. The market anticipates roughly 112 basis points in rate cuts by 2024, a slight decrease from the 121 basis points expected before the latest data. Participants are clearly tilted to a 2024 dovish year for the Fed, if data continues to support the thesis, the USD could see a global correction in the next months.
Market attention is now shifting to upcoming statements from Fed Chair Jerome Powell, including a fireside chat. These comments, occurring just before the FOMC’s media blackout and ahead of the US Institute for Supply Management’s (ISM) Manufacturing data release, will be scrutinized for any dovish or hawkish signals. Particularly, dovish signals would align with current market expectations and could influence short-term market dynamics. Conversely, a hawkish stance could lead to a pullback in risk sentiment as market positioning for risk seems to be stretched.