Asian stock markets advanced for the second straight week on expectations that major central banks in the world would act to tackle deteriorating global economic conditions.
The outcome of Greece elections over the weekend and the FOMC (Federal Open Market Committee) meeting in the U.S. will set the tone for Asian Stock markets next week.
Market participants are likely to focus on the outcome of Greece's election Sunday as opinion polls in early June have put pro-bailout New Democracy party and anti-bailout Syriza party at very close scores while recent secret polls have pointed to a slight lead for the New Democracy party, but they are unlikely to be very reliant.
However, it is unlikely that either of the two parties will win an outright governing majority and the most probable outcome will be the emergence of some sort of a coalition. If the two major pro-bailout parties, the New Democracy and PASOK, win enough votes to form a united pro-bailout front, it will be positive for the markets as the probability of a Greek exit would be reduced.
The markets will react negatively if Syriza forms an anti-bailout coalition government as that scenario could lead to the debt-ridden country's exit from the euro area and intensify the regional crisis again. However, hopes of a positive outcome are rising.
Market participants are also likely to focus on the FOMC meeting and interest rate decision June 20. The interest rate is expected to remain unchanged at 0.25 percent. The Federal Reserve kept interest rates at historic lows in the range between 0 percent and 0.25 percent in an attempt to increase consumption and business operations by making borrowing cheaper to revive the economy.
The recent batch of disappointing economic readings from the U.S. signal that the recovery is slowing in the world's biggest economy while investors hope that the weak economic data, coupled with intensifying crisis in the euro zone, will force policymakers to announce further monetary easing measures to strengthen the recovery.
Facing an intensification of downside risks to growth prospects in the U.S., it will be difficult for the FOMC to remain inactive. We believe that the FOMC will find it prudent to increase current policy accommodation in June with a modest $200 billion increase in its maturity extension program (Operation Twist), said a note from Credit Agricole.
Meanwhile, the G20 leaders are scheduled to meet in Mexico Monday and Tuesday. Officials from G20 nations told Reuters that the central banks were ready to take steps to stabilize financial markets, if needed, by providing liquidity and preventing any credit squeeze after Sunday's Greek election.
In Asia, the main focus will be on the central bank meetings in India and Taiwan. Market participants seem confident that the Reserve Bank of India will cut its key policy rate by 25bp Monday, in view of the downside risks to growth, despite the recent rebound in WPI inflation while Taiwan central bank is likely to stay put Wednesday.