Asia week ahead: Focus shifts to central banks
A series of positive developments in geopolitics had enlivened markets, but with the European Central Bank (ECB) and Federal Reserve meetings coming up, expect a central bank focus to be the case going into the fresh week.
Oscillating geopolitical risks
The stars appear to have been aligned this week with the series of positive turns across key geopolitical concerns ranging Brexit, Hong Kong’s protest and US-China trade tensions. In addition, China’s State Council meeting this week hinted at further policy support, altogether looking to aid the MSCI Asia Pacific ex-Japan index on its biggest weekly percentage gain since June.
While the change in trends for the above-mentioned issues may still swiftly turn once again, seeing how these are built on shaky fundamentals, it nevertheless serves as a support for sentiment in the short-term. As discussed across the week, although the likelihood of a hard Brexit scenario had significantly declined following the developments in the UK parliament, we are no closer to a solution for UK’s departure from the EU. Meanwhile, despite talks planned for early October between US and Chinese trade officials, few are likely counting on the event to kickstart a one-way journey towards a deal. Lastly for Hong Kong, though we have seen a 3.9% jump for the Hang Seng Index on Wednesday from the extradition bill withdrawal, the region remains braced for further protests over the weekend. Importantly, it will be whether the size of the activity reduces. These will all be reservations to hold even as we find the markets seeing a temporary relief.
Focus shifts to central banks
With both the ECB and Federal Open Market Committee (FOMC) meeting lined up for the next two weeks, expect the attention to be split between geopolitics and monetary policy updates.
The ECB is notably congregating in the coming week and expected to cut interest rates and introduce a stimulus package to arrest the issues faced by the eurozone. According to a poll by Reuters, the consensus is for a 10 basis point cut to -0.50% at the September 12 meeting, though a good portion had also pencilled in for a deeper cut from the current negative interest rate levels. In addition, as alluded to by earlier ECB discussions, we could also be seeing the ECB pulling all stops to re-introduce asset purchases and a tiered reserve system, among others. Against the deterioration of economic conditions, particularly that seen from Germany this week, expectations are rife for these support measures. The euro had likewise been weakening of late, particularly against the greenback. Any disappointment from the ECB, however, could provide EUR with some breathing room.
Meanwhile for the Fed, while we will be expecting the Fed’s blackout period after Friday’s Fed Powell’s comments and ahead of the September 17-18 FOMC meeting, data will come into play. August retail sales, CPI and University of Michigan sentiment will be items to scrutinize in the coming week amid the heightening of trade tensions in the month. These will be items that play into the changes in interest rate expectations. A stronger August retail sales performance including the control group which feeds into GDP accounting is expected, that could have mixed impact for markets. For Asia markets, Bank Negara Malaysia (BNM) likewise meets on Thursday with the consensus suggesting no change to rates.
A barrage of Chinese data continues to be expected into the second week of the month. While Asia markets are set to react to the weekend release of both China’s foreign reserves and trade data at the start of the week, items such as August’s monetary and inflation conditions will be released in the coming week. Onshore USD/CNY and offshore USD/CNH have both cracked the 7.0 level in August, falling by more than 3.0% amid the escalation of trade tensions. PMI numbers out of the country had so far displayed resilience, but these high frequency readings should add more colour to the economic conditions as the authorities consider further stimulus.
One more thing, while largely expected in terms of the deliverables, Apple will be holding their iPhone event next week, set to unveil new handsets and a new iteration of the Apple Watch device. Typically one to generate positive performance for share prices, this launch is seen against the backdrop of heightened tariffs that implicates a subset of the company’s flagship products. Apple had returned to earlier heights to retest resistance with the latest trade talk optimism, one to watch.
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