Introduction
Asia enters the final full trading week of 2023 with a waning risk appetite following the surge fueled by the U.S. Federal Reserve last week. Investors are now focusing on the upcoming major central bank meeting in Japan. Additionally, the Bank of Japan’s policy decision on Tuesday is expected to take center stage in Asia this week. Other factors that investors need to navigate include rate decisions from the People’s Bank of China and Bank Indonesia, the Reserve Bank of Australia meeting minutes, and Japanese consumer price inflation.
Mixed Investor Sentiment
Investor sentiment appears to be mixed as markets recorded varied performances. The MSCI Asia ex-Japan index had its best week since July, rising by 3% and outperforming the MSCI World index, which posted a 2.6% gain. The recent decline in bond yields and the dollar may continue to support risk assets in the coming week. However, given the remarkable rally in stocks and bonds, coupled with the approaching holiday season, investors may be tempted to reduce exposure and secure profits.
Bank of Japan’s Decision and Outlook
The main focus this week is on the Bank of Japan’s policy decision and subsequent guidance. A Reuters poll of 28 economists predicted no policy changes during this meeting. However, six economists believe that the BOJ may start dismantling ultra-loose conditions in January. Over 80% of economists anticipate that the BOJ will abandon negative interest rates by the end of next year. It is worth noting that any decision by the BOJ to raise rates will contradict the direction taken by other major central banks such as the Fed, ECB, and the Bank of England, which are expected to implement rate cuts to some extent next year.
PBOC’s Stance on Easing
While most major central banks are contemplating easing policies, China’s People’s Bank of China (PBOC) is leaning in the same direction. The PBOC is currently fighting against deflation and sub-par growth. The CSI 300 index, consisting of blue-chip stocks, experienced its fifth consecutive weekly loss last week, falling by 1.7%. Moreover, December could mark the index’s fifth monthly loss since its inception in December 2004. Economic indicators from last week suggest weaker-than-expected key November data and an accelerated pace of deflation. Consequently, China’s economic surprises index now resides in negative territory, reaching its lowest point since mid-October.
Key Developments on Monday
Several key developments on Monday could provide more direction to markets:
- Indonesia trade data for November.
- Australia business sentiment data for November.
- Germany’s Ifo business sentiment index for December.
By Jamie McGeever; Editing by Deepa Babington