As Asian markets begin the new trading month, investor sentiment is notably positive, buoyed by hopes for a ‘soft landing’ in the U.S. economy and a more dovish outlook from the Federal Reserve. This optimism is expected to enhance risk appetite and increase interest in emerging market assets.
The recent decline in the U.S. dollar, coupled with falling bond yields and a rebound in global equities, has eased financial conditions significantly, encouraging a cycle of growing investor confidence.
Recent U.S. economic data has been promising, with growth surpassing forecasts and inflation showing signs of easing. This backdrop, alongside an upcoming Fed easing cycle and a robust Q2 earnings season, suggests a favorable ‘Goldilocks’ scenario. However, there’s a cautionary note regarding the potential for complacency, as market volatility can still arise unexpectedly, reminiscent of the August 5 volatility shock.
China’s economic data for August, released in the form of the official Purchasing Managers Index (PMI), revealed troubling trends. Factory activity has dropped to a six-month low, and deflationary pressures are increasing, highlighting a pressing need for stimulus.
Manufacturing activity has contracted for the fourth consecutive month, while service sector growth remains minimal. The composite PMI, at 50.1, indicates nearly stagnant economic conditions.
The forthcoming ‘unofficial’ Caixin PMI index is anticipated to show slight improvement, moving to 50.0 from 49.8, suggesting marginal growth in manufacturing. Additionally, PMIs from other Asian economies like Japan, India, Australia, and South Korea will be closely monitored. The yuan’s strength against the U.S. dollar is also notable, reflecting growing corporate demand and anticipated U.S. rate cuts.
Despite lighter trading volumes due to U.S. markets being closed for Labor Day, the overall financial environment remains supportive. Goldman Sachs reports that emerging market financial conditions are at their lowest in over a year, with U.S. and global conditions also at extended lows.
The S&P 500 and MSCI indices have shown strong performance, suggesting a generally positive outlook for Asian markets. Key developments to watch include August PMIs from China and Japan, Indonesia’s inflation data, and Australia’s Q2 company profits.
