Marketmind: Rally fades, Bank of Japan looms into view

By Jamie McGeever

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

Asia kicks off the last full trading week of 2023 on Monday, with the U.S. Federal Reserve-fueled surge in risk appetite from last week losing steam and investors gearing up for the last major central bank meeting of the year from Japan.

The Bank of Japan’s policy decision on Tuesday is the main event in Asia this week, and investors also have rate decisions from the People’s Bank of China and Bank Indonesia, Reserve Bank of Australia meeting minutes, and Japanese consumer price inflation to navigate.

Investor sentiment appears to be mixed. The index last week rose 3% for its best week since July, outperforming the , which rose 2.6%. Still, the MSCI World is up seven weeks in a row, a winning streak not seen for six years.

Interest rate futures markets are pricing in 150 basis points of rate cuts from the Fed next year, despite pushback from some Fed officials. The recent slide in bond yields and the dollar could continue to support risk assets this week.

But the rally in stocks and bonds has been pretty remarkable, and with the holiday season fast approaching investors may be tempted to reduce exposure and take profit.

Especially with the BOJ decision and guidance on Tuesday. None of the 28 economists in a Reuters poll predicted any changes to policy at this meeting, but six reckon the BOJ will start dismantling ultra-loose conditions in January.

Over 80% of economists expect the BOJ to ditch negative interest rates by the end of next year. This might be a stretch, given the BOJ’s ability to surprise and the fact that 12 months is a very long time.

Whenever the BOJ does start raising rates, however, it will be moving against the global tide – markets expect the Fed, European Central Bank, Bank of England and several other major central banks to be cutting rates to some extent next year.

One central bank leaning towards easing policy rather than tightening is the PBOC, which is battling against deflation and sub-par growth. But there appears to be no clear appetite from the Beijing to significantly ease policy.

China’s CSI 300 index of blue chip stocks fell 1.7% last week, its fifth consecutive weekly loss. The index is down 4.4% in December, on track for a fifth monthly loss in a row for the first time since the index was launched in December, 2004.

Economic indicators last week showed that key November data were weaker than expected and the pace of deflation accelerated. As a result, China’s economic surprises index has now slipped into negative territory and is at its lowest since mid-October.

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

– Indonesia trade (November)

– Australia business sentiment (November)

– Germany Ifo business sentiment index (December)

(By Jamie McGeever; Editing by Deepa Babington)

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