MORNING BID ASIA-Japan’s dramatic FX, bond market divergence – 2023-10-31

Nov 1 (Reuters) – A look at the day ahead in Asian
markets from Jamie McGeever, financial markets columnist.

It promises to be another dramatic day in Asia on Wednesday, as
investors digest the huge moves in Japan’s government bond and
currency markets and brace for a raft of potentially
market-moving economic indicators from across the continent.

The U.S. Federal Reserve policy decision and details from
the U.S. Treasury outlining its $776 billion fourth quarter
borrowing needs are the two major global events on Wednesday.
But Asian markets’ first chance to react to that will be
Thursday.

Before then, purchasing managers index reports for several
countries, including India, South Korea and Indonesia are on
tap, as well as Indonesian inflation, South Korean trade, Hong
Kong retail sales and Australian housing data.

Particular attention will be paid to China’s ‘unofficial’
Caixin PMI report, a day after ‘official’ PMI data showed that
factory activity unexpectedly contracted in October. Not only
that, it shrank faster than the most pessimistic prediction in a
Reuters poll had forecast.

This calls into question the strength of China’s recovery.
Economic surprises had recently risen to the highest since May,
and stocks had rallied five days in a row. That run was brought
to a halt on Tuesday.

A gloomy ‘official’ PMI report would likely intensify that
downward pressure on stocks, and the currency. The yuan is
languishing near September’s 16-year low, and selling pressure
bearing down on the offshore yuan, in particular, is strong.

But if the yuan is under pressure, it is nothing compared to
the onslaught Japan’s yen is facing. After the Bank of Japan on
Tuesday scrapped the 1% ceiling for the 10-year government bond
yield, the yen sank to a new one-year low against the dollar and
a fresh 15-year low against the euro.

The currency and bond market reactions to the BOJ’s policy
tweak could not have been more different – the yen fell the most
since April, while Japanese bond yields surged to a fresh
decade-high.

This suggests investors are not sure what the longer term
implications are, or they are not fully convinced by the BOJ’s
actions. Or both.

World and U.S. stocks ended the month with a flourish on
Tuesday, Wall Street volatility fell back below long-term
averages, the Treasuries market was pretty steady, and oil
prices fell more than 1%. All this bodes well for the Asian
market open on Wednesday.

But it was a bruising start to the fourth quarter. World,
U.S. and Asian stocks all fell for a third month in a row, bond
yields surged and financial conditions tightened significantly.
Investors will be hoping for some respite in November.

Here are key developments that could provide more direction
to markets on Wednesday:

– China PMI (Caixin, October)

– Indonesia CPI inflation (October)

– South Korea trade (October)

(By Jamie McGeever;)