Financial conditionality

By Jamie McGeever

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

Asian markets close the week on a solid footing, which is how they may well round off the year if financial conditions – global and local – remain as supportive as they are right now.

The dramatic reaction in U.S. markets to Fed Chair Jerome Powell’s speech on Wednesday afternoon will likely continue to fuel risk appetite across Asia, a move that could get extra impetus from South Korea on Friday.

Annual inflation in November is expected to fall to 5.1% from 5.7% in South Korea. That would be the lowest since April this year, more than a full percentage point down from July’s peak, and a sign that the Bank of Korea may soon end its rate-raising campaign.

Evidence that inflation is definitely coming down in one of the continent’s most important economies would be welcome news for regional stocks, which are coming off the back of an extraordinary month.

The MSCI Asia ex-Japan index rose a staggering 17.4% in November, its best month in 29 years and the second best since the index was launched in the late 1990s.

The substantial easing in U.S. financial conditions since mid-October has been crucial to this performance. And if the reaction to Powell’s speech is any guide – surging stocks and bonds, and a near 2% fall in the dollar – it will remain so.

Local financial conditions are also supportive. Mostly.

According to Goldman Sachs (NYSE:)’s financial conditions indexes, China’s conditions are the loosest in almost two years, and have eased over 200 bps in just five weeks; India’s and Indonesia’s have eased more than 100 bps since early October; and the Philippines’ have loosened by almost 100 bps.

Financial conditions in Japan, South Korea and Thailand have all stayed relatively tight, almost entirely due to the appreciation of their currencies against the dollar.

But signs that regional inflation is easing, however, could change that soon enough.

Three key developments that could provide more direction to markets on Friday:

– South Korea inflation (November)

– U.S. non-farm payrolls (November)

– PBOC’s Yi speaks

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