Fed adrenaline continues to pump, PBOC inertia could pull Reuters

By Jamie McGeever

(Reuters) – A look at the day ahead in Asian markets.

The adrenaline from the Federal Reserve’s bold interest rate cut and signal of intent to continue easing still appears to be flowing through global financial markets, which should see Asian risk assets start the week on a strong footing on Monday.

futures are up more than 1 percent at the open in Japan, with Japanese stocks also getting a boost from the yen’s decline last week. However, rising long-term US Treasury yields could temper some of the optimism.

Friday’s monetary policy decisions in Japan and China could also reverberate around Asian markets on Monday, and from that point of view, the picture is more mixed.

As expected, the Bank of Japan decided not to raise rates, but signaled it is in no rush to raise them again. That helped push the yen to its weakest daily close since Sept. 4, which in turn helped lift Japanese stocks.

The People’s Bank of China also left rates on hold, but that was more of a surprise. Domestically, China’s weak inflation and economic dynamics seem to be crying out for lower rates, and internationally, the Fed’s huge 50 basis point rate cut has given the PBOC cover to move.

But he didn’t, despite mounting evidence that perhaps he should have. The latest figures to reflect investors’ gloomy view of China were foreign direct investment flows on Friday – in the first eight months of the year, they fell 31.5% from the same period last year, the biggest decline in January 2009.

The yuan is still at its strongest in 16 months, thanks to the central bank’s reluctance to cut rates and growing expectations that authorities will soon unveil stimulus that will revive growth, asset prices and confidence.

Meanwhile, the yen is starting the week on a soft footing after a roller coaster ride last week. It rose to 140.00 per dollar for the first time in over a year, but closed near 144.00 per dollar for a weekly loss of 2%, its worst week since April.

Japan’s top currency diplomat, Atsushi Mimura, said past yen trades were likely largely undone, but Tokyo was watching for any rebuilding that could add to market volatility, public broadcaster NHK said.

US futures market positioning data showed speculators grew bullish on the yen for an 11th consecutive week, increasing their net long positions to an eight-year high.

Monday’s Asia Pacific calendar is quite busy, with inflation figures from Malaysia and Singapore, flashy September purchasing managers’ index (PMI) data from Australia and India and trade figures from New Zealand the highlights.

The Reserve Bank of Australia also begins its two-day policy meeting.

Here are the key developments that could provide more direction for Asian markets on Monday:

– Australia flash PMI (September)

– India flash PMI (September)

– Inflation in Malaysia (August)