Trump tariff doubt swirls, JGB yields in rarified air

A look at the day ahead in Asian and global markets

By Jamie McGeever, Columnist, Global Finance & Markets

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Risk appetite in Asia should get a lift on Tuesday, as the feel-good factor sparked the previous day by a report that U.S. President-elect Donald Trump's tariff agenda won't be as aggressive as feared continues to ripple through world markets.

Trump denied the Washington Post story, but investors seem to want to believe it - European and world equities rallied on Monday, U.S. stocks rose for a second day, and the dollar fell against developed and emerging currencies alike.

If U.S. tariffs are broadly lower than Trump promised on the campaign trail and aimed only at "critical" sectors, then the outlook for global growth should improve and the dollar should weaken. 

On the face of it, this is bullish for Asian and emerging markets. But if Trump is true to his pre-election word and 'Truth Social' media post on Monday, risky assets will come back under pressure.

A supporter of U.S. President-elect Donald Trump hold flags and banners near U.S. Capitol, on the day of a joint session of Congress to certify Donald Trump's election, as a winter storm that brought snow, ice and freezing temperatures to a broad swath of the U.S. arrived, in Washington, U.S. January 6, 2025. REUTERS/Shannon Stapleton

Wall Street's gains melted a bit as Monday's session progressed and Trump's denial kept Treasury yields elevated ahead of this week's debt auctions. The 30-year yield is the highest in over a year and closing in on 5.00%. 

That will give investors grounds for caution on Tuesday. In addition, political uncertainty persists in South Korea and is flaring up in Canada too following Prime Minister Justin Trudeau's announcement on Monday that he will step down. 

In Asia, developments in Japanese markets bear monitoring, with yields hitting multi-year highs after Bank of Japan Governor Kazuo Ueda signaled interest rates will be raised again, but the yen still anchored near 160.00 per dollar.

The 10-year Japanese Government Bond yield on Monday hit 1.1350%, the highest since July 2011. Japan's finance ministry will auction 10-year bonds on Tuesday, and recently said it will raise the amount of five-year bonds to be sold early in the new fiscal year.

Japanese stocks, which last week touched their highest level since July last year, are feeling the heat from higher JGB yields. The Nikkei 225 index fell 1.5% on Monday, the biggest fall since Nov. 13.

Will Japanese stocks on Tuesday take their cue from the weak, export-friendly yen, or the multi-year peak in long-dated borrowing costs? 

Investors in China will focus their attention once again on the two-year bond yield's flirtation with 1%, the weakening exchange rate, and Beijing's efforts to support the currency and stock markets in the face of slumping yields and persistent deflationary pressures.

The spot yuan is now through 7.33 per dollar for the first time since September 2023, getting closer to a break below 7.35 per dollar which would signal a new 17-year low.

Asia's economic calendar on Tuesday is light. The main releases will be inflation data from the Philippines and Taiwan, and China's latest FX reserves.

Graphics are produced by Reuters.

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