Global yield fever has cooled, but EM conditions have tightened

Jan 10 (Reuters) – A look at the day ahead in Asian markets.

Investors in Asia are heading towards the end of a volatile week on hopes that the relative calm on the dollar and the short session of the US bond market on Thursday could extend into Friday’s local session.

With December’s US employment report on the horizon and markets still feeling the pinch from the surge in global long-term bond yields this week, trading in Asia could be quite limited and subdued.

Nikkei futures are pointing to a flat start for Japanese stocks. The Nikkei is on track to decline about 0.7% this week, underperforming the broader MSCI Asia ex-Japan index, which remained flat in the week’s Friday session.

Chinese stocks are also expected to end the week unchanged and without any losses. However, this can be interpreted in two ways. This is welcome news, given the pessimism and gloom surrounding the China outlook among many investors.

On the other hand, Chinese stocks fell more than 5% last week, their worst week in more than two years. In that light, failure to achieve a modest rebound next week is a very ominous sign.

The start of the year has been difficult for China’s bulls. Stocks are lagging far behind their regional and global peers, the decline in bond yields is worrying, and uncertainty over a potential trade war with the US is deepening.

According to Goldman Sachs, financial conditions in China are the toughest since last April. Broadly speaking, emerging markets are the hardest hit since November 2023.

China’s latest inflation data on Thursday was also not particularly encouraging. Consumer and producer prices for December were broadly in line with forecasts, lending credence to the view that deflationary pressures are not likely to ease any time soon.

Economists at Barclays have cut their already weak 2025 CPI forecast to 0.4% from 0.8%, and they expect PPI inflation to remain in deflation throughout 2025. This would mark more than three years of declining factory gate prices.

And it could get even worse if the incoming Trump administration in Washington follows through on its aggressive tariff threats.

“We think a new trade war between China and the US would, on balance, have a deflationary impact, given the downward pressure on exports that would exacerbate overcapacity issues in China,” he warned.

The regional calendar is light on Friday, with the latest Japanese household spending data most likely to sway the market. Investors will be looking for early signs that recent wage settlements in Japan – the highest in decades – are beginning to boost consumer spending.

The Bank of Japan said on Thursday that wage increases are rising across the country, suggesting the situation may be ripe for an interest rate hike in the near term.

Here are the key developments that could provide greater direction to the market on Friday:

– Japan’s domestic consumption (November)

– India Industrial Production (November)

– Malaysia Industrial Production (November)

(Reporting by Jamie McGeever; Editing by Dianne Craft)