Morning Bid: A market sweet spot?

A look at the day ahead in Asian markets from Jamie McGeever

Whisper it, but markets may be in something of a sweet spot right now, opening up the potential for a few weeks of respite and decent-sized rebounds.

Ok, maybe a few days until the next crisis rears its head and 2022 normal service is resumed. But there is a glimmer of hope.

It’s a new quarter, and after three quarters of misery, if ever there was a time for investors to pause and even put some chips back on the table, this is it. Financial assets are (relatively) cheap.

A lot of bad news is priced in. For example, the United States entering recession within the next 12-18 months is now overwhelming consensus. Citi’s economic surprises indices, with the exception of EM, are mostly back in positive territory at around three-month highs.

Ditto central bank tightening. Broadly speaking, the balance of risks now must surely be that policymakers are less aggressive relative to market expectations rather than more.

Up to 50 basis points of Fed tightening has been taken out of the 2023 U.S. futures curve in recent days – the implied rate for December next year dipped as low as 4.03% on Monday.

Key to this is a steep decline in inflation expectations. Breakeven rates on the U.S. two-, five- and 10-year horizons fell to around 2.15% on Monday, the lowest in 18 months and very close to the Fed’s 2% target.

That’s not to say the coast is clear. Far from it. And liquidity in Asia this week will be light due to China’s Golden Week break and Hong Kong’s public holiday on Tuesday.

But market waves are a little less choppy, and from Wall Street to Brazilian assets to sterling, investors have started Q4 on the offensive.

Key developments that could provide more direction to markets on Tuesday:

Japan inflation (September)

Australia interest rate decision (50 bps hike expected)

South Korea PMI (September)

Fed’s Williams, Logan, Mester, Jefferson, Daly speak