Image Source: DepositPhotosFollowing a retreat in U.S. stocks last week from their near all-time highs, Asian equities look set to begin the year on a downward bias. The recent blip in the U.S. market likely reflects year-end dynamics and perhaps concerns that the street has gotten too far ahead on rate-cut bets.Traditionally, strains in funding markets heighten at the end of the year as banks reduce activity to bolster their balance sheets for regulatory purposes. Their withdrawal forces market participants to seek to reduce activity, pare some assets, or face higher funding costs.Outside of year-end dynamics and sparsely covered Wall Street trading desks, there remains an increasing belief that Fed rate cuts, which have bullishly marked all capital market trends in the last eight weeks, are still fully ingrained in stock market sentiment. While a stronger-than-expected U.S. jobs report could shake this conviction, a reversal would require a resurgence in realized inflation, triggering a significantly more assertive hawkish stance from Chair Powell and other key figures to discourage March or May rate cuts bets.The critical question for market participants is how the gap between market-based rate cut expectations and the Fed’s projections will be reconciled. So far, no one is “ringing alarm bells, “as they say, banking on the backdrop of emerging lags impacting the labour and consumption metrics to support 150 basis points of cuts in 2023.2024 began notably inauspiciously as a magnitude 7.6 earthquake (7.5 on the U.S. Geological Survey scale) struck the Noto peninsula in Japan. The seismic event resulted in the collapse of buildings, trapping several individuals, and prompted evacuation orders due to concerns about potential tsunamis.Japan frequently experiences earthquakes, varying in intensity. This recent quake, while significant, did not show indications of developing into a catastrophic event. In the initial stages, Japanese authorities issued a substantial tsunami warning, anticipating waves as high as 16 feet. However, subsequent updates suggested that the highest waves were likely no larger than 10 feet, mitigating the initial concerns of a more severe impact.In December, China’s factory activity contracted for a third consecutive month, with the manufacturing PMI dropping to 49.0 from 49.4 in November, falling below already weak expectations.That’s because the biggest constraint on the manufacturing sector hasn’t been access to capital but rather weak demand, so expanding manufacturing investment mostly means expanding excess capacity.However,  more worryingly, services activity remained in contraction, with an underlying measure at 49.3.The mild expansion in the non-manufacturing PMI, in other words, was driven by construction rather than services, which is the opposite of what you would ideally want to see if you are a mainland policymaker.The PMI figures indicate a slowdown in China’s economic recovery in the last months of the year. This development is expected to pressure fiscal and monetary policymakers to take urgent action, especially after leaders committed to maintaining a pro-growth stance in 2024.China requires more than just stimulating economic activity—it necessitates fundamental reform of the underlying growth engine. More By This Author:Asia Open Insights : Beware Of The Perma Bears In 2024
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