Marketmind: Bursting bubbles

[February 06, 2023]  By Alun John

LONDON (Reuters) - A look at the day ahead in U.S. and global markets from Alun John.

It's the Monday after the week before, but if U.S.-based investors are hoping for a quiet day to continue digesting Friday's shock payrolls report, they will be disappointed.

On the global stage, China described Saturday's shooting down of its surveillance balloon over the United States by an American jet as an "obvious overreaction".

The incident has derailed attempts in the U.S. and China to improve communications and begin to mend ties that have been under severe strain in recent years. It's also jolted markets.

China's yuan hit a four-week low in both on and offshore markets Monday and Chinese stocks sold off. While it's hard to isolate the impact of geopolitics from the overall reaction to Friday's U.S. jobs data, renewed Sino-U.S. tensions can't be helping.

The offshore yuan was last at 6.784 per dollar, having firmed from the 6.832 per dollar it hit in early trade. ING say a move into the 6.85-6.9 range would show investors are including more negative trade implications in their thinking.

In other bursting bubble-related news, a major driver of market sentiment in Asian and European hours on Monday was still that payrolls data, which disrupted expectations the Federal Reserve could start cutting rates later this year.

Money markets shifted on Friday to show traders now believe the Fed will lift the benchmark rate above 5% and keep it there to squeeze too-high inflation out of the economy. With the unemployment rate at a more than 50-year low, it's hard to see the Fed feeling any pressure to cut rates.

The Federal Reserve building is seen in Washington, U.S., January 26, 2022. REUTERS/Joshua Roberts/File Photo

Elsewhere, an earthquake of magnitude 7.8 struck central Turkey and northwest Syria on Monday, killing over 500 people and injuring hundreds, adding to the pressure on the lira, which hit record lows after data last week showed a worryingly large monthly rise in consumer inflation.

And in Japan, the yen weakened to its softest in nearly four weeks after the Nikkei newspaper reported Japan's government has sounded out Bank of Japan Deputy Governor Masayoshi Amamiya to succeed incumbent Haruhiko Kuroda in the top job.

As one of Kuroda's key lieutenants, Amamiya is viewed by markets as a continuity candidate, and so while rising Japanese inflation means a move away from the BOJ's current ultra-loose monetary policy stance remains on the cards, Amamiya is unlikely to drive this forward aggressively.

However, Prime Minister Fumio Kishida later told reporters he would continue to consider the best candidate for the job, suggesting that no final decision had been made.

Key developments that should provide more direction to U.S. markets later on Monday:

U.S. results: Hasbro, Simon Property

Conference Board employment trend index

(Reporting by Alun John; Editing by Kirsten Donovan)

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