Asia open: The dragon economy faces severe distress

As 2025 dawns, Asia's financial theatres awaken to a potentially turbulent first full New Year trading week, shadowed by significant economic dramas. Eyes are fixed on China, as the yuan's decline past critical levels and plummeting bond yields hint that the dragon economy faces severe distress. Meanwhile, South Korea grapples with escalating political strife, and a high-stakes U.S.-Japanese corporate merger hits a deadlock, casting ripples across investment waters.

This week, a batch of purchasing managers' index (PMI) reports will be unveiled, providing a first look at how major Asian economies, including China, concluded 2024. Yet, expectations are tempered, and there is little anticipation of positive surprises from China's data.

Stateside, Wall Street is radiating a cautious optimism, bouncing back robustly from an uncertain start to the year—a boon that should lend a slight lift to Asian stocks. Now, liberated from the conservative shackles of late December's balance sheet constraints, traders are plunging into 2025 with a revived appetite for risk and volatility—a typical start-of-the-year modus operandi. However, this initial bullish surge is cast under the long shadow of potential upheavals from the anticipated policy shifts under "Trump 2.0." The markets are tensely poised, prepared to shift from initial euphoria to navigating the complexities of policy-driven anxieties.

Specifically, "The Street" might eventually develop cold feet about the fiscal jitters tied to Trump's intent to push an already hot economy to run even hotter and its consequential effects on Fed policy.

Emerging markets are under siege, pressured by surging U.S. Treasury yields and a formidable dollar that remains near a two-year zenith despite a brief softening. This dollar dominance stems from an intriguing twist: as the Fed's rate cuts drove yields unexpectedly higher, the fiscal dynamism anticipated from Trump's administration has fortified the greenback further, challenging global currency balances.

In stark contrast, China faces an economic quagmire. As Beijing signals readiness for monetary easing to counteract economic slowdowns, the yuan's weakness and sinking bond yields paint a grim picture. Investor sentiment towards Chinese bonds reflects haunting anticipation of stagnation, with long-term yields nosediving to unseen levels since 2018, signalling alarm over China's protracted deflationary woes.

The pervasive economic gloom in China is underscored by a relentless decline in producer prices and anemic consumer inflation, pointing to a deep-seated reticence among Chinese consumers and businesses to spend. As Trump's second term looms, threatening new trade wars, China's deflationary spiral only deepens, posing stark challenges to its economic stability.

As policymakers in Beijing tread cautiously, the lessons from Japan’s prolonged deflation battle loom large, suggesting that China’s economic revival may falter without forceful fiscal intervention. The global stage is set for a year in which monetary strategies clash with geopolitical realities, potentially reshaping the financial landscape as markets navigate the unfolding drama of 2025.