Week Ahead: Asian Stock Markets Likely To Remain Range-Bound

on August 26 2012 1:24 AM

Most Asian markets ended on a negative note last week as disappointing economic reports on China and the euro zone revived concerns over the floundering global economy while the lack of stimulus measures from policymakers also weighed.

Market sentiment is likely to remain range-bound in the coming week ahead of the central bankers' meeting in Jackson Hole, Wyo., to discuss monetary policy. Federal Reserve Chairman Ben Bernanke will speak Friday and European Central Bank President Mario Draghi is scheduled to give a speech Saturday. Investors will be looking for hints of what the Fed and ECB plan to pursue at their September meetings.

Investor sentiment got a boost during U.S. trading hours Friday from Bernanke's letter to a congressional panel in which he stated that there was room for additional monetary action by the Fed to ease financial conditions and strengthen the recovery. It came after James Bullard, the president of the Federal Reserve Bank of St. Louis, said Thursday that growth in the second half could keep the Fed on hold.

Bullard observed that FOMC minutes were a bit stale as data released indicated that the economy had picked up throughout the last few weeks, hinting that additional stimulus was not required. The Fed strengthened its bias to ease policy at the August FOMC meeting as indicated in the minutes, wherein it was reported that the central bank was ready to deliver another round of stimulus fairly soon unless a substantial and sustainable strengthening of recovery occurred.

Bernanke's view and the Beige, which will likely report on the regional economic activity that continues to increase at a modest to moderate pace, might give the public a better picture on whether or not the Fed will launch additional easing soon.

Does the recent improvement in the economic data flow and supportive financial market conditions qualify as substantial and sustainable strengthening? Mr. Evans thinks not but Mr. Bullard thinks that 2 percent growth in the second half could keep the Fed on hold. The key will be Bernanke's view and we currently see 50/50 odds of an easing move in September, said a note from Credit Agricole.

However, the ECB will not reveal its strategy before the next governing council meeting, which will be held Sept. 6. Draghi pledged last month that the bank was ready to do whatever it takes to help support the euro. Speculations are running high that the central bank will unveil plans to help lower Spanish and Italian bond yields and will cut interest rates to record lows at its next policy meeting.

Rhetoric is going back and forth about what we can expect and we could see some big gyrations going into the meeting, depending on the latest rumor. I think we're priced so that we won't see a major move if something is announced. But if the status quo persists, which is what I'm expecting, that could be a big disappointment, Michael Matousek, senior trader at the U.S. Global Investors Inc. in San Antonio, told Reuters.

On the economic front, the Japanese industrial production is expected to increase 2.5 percent in July on a monthly basis and actual production will be well short of producers' projections of the 4.5 percent monthly growth. India is due to release the second quarter GDP data Friday and is likely to show that the economic activity remained near the multi-year low that was registered in the first quarter. Analysts expect that the growth rate will be 5.2 percent on an annual basis due to weak industrial production and exports.