Marketmind: Markets soothed as peak Fed looms

By Jamie McGeever

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

The shadow over Asian markets cast by China’s economic malaise continues to darken, but chinks of light are beginning to appear – ‘peak Fed’ is drawing closer, U.S. bond yields may be topping out, and the dollar is its weakest in three weeks.

These dynamics could intensify later this week if U.S. inflation data for June undershoots analysts’ already soft expectations. All else equal, this would be a tailwind for Asian stocks, bonds and currencies.

Several Fed officials on Monday said interest rates will have to rise further to contain inflation, but the end of the tightening cycle is in sight. A New York Fed survey of consumer and inflation expectations was also “risk-friendly.”

There are no major economic, policy or corporate events on the Asian calendar on Tuesday, leaving investors to take their cue again from the outlook for U.S. rates, and Chinese growth and stimulus.

Sentiment toward Asian stocks in recent months has been mostly bearish, with the exception of Japan, but a pause in the selling on Monday lifted the gloom a little. Chinese and broader Asian stocks rose for the first time in four sessions, while the yuan and yen strengthened to two-week highs against the dollar.

The dollar’s slide will cool speculation that Japanese authorities are poised to intervene to support the yen, and a steadier yuan will halt the spiral of a weakening currency, capital outflows and pressure on the central bank to intervene.

But China’s latest inflation figures on Monday were sobering. Annual consumer price inflation in June was zero and producer price inflation slumped to -5.4%, signaling the heaviest deflation since 2015.

Both readings undershot economists’ expectations, triggering another slide in Citi’s Chinese economic surprises index to a two-year low. The index has risen just four out of the last 60 trading sessions and is down 11 weeks in a row, its longest stretch of underperformance since 2010.

Chinese bank stocks, measured by the Hong Kong-listed Mainland Banks Index, fell for a fifth day on Monday, but a potentially significant turnaround in the tech sector helped boost broader equity sentiment.

Analysts reckon China’s near $1 billion fine slapped on Ant Group could draw a line under the fintech giant’s woes, giving hope to investors that a regulatory crackdown on China’s broader technology sector is over.

The regional economic data calendar is light on Tuesday, with only Australian consumer confidence and business sentiment, and Philippines trade figures on tap.

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

– Australia consumer confidence (July)

– Australia business confidence (June)

– Germany inflation (June, final)

(By Jamie McGeever; Editing by Marguerita Choy)