Asia wrap: Too many fires to put out

There are simply too many fires to extinguish, making a Monday recovery rally but a pipe dream—particularly with the resurgence of U.S. recession fears and the looming specter of a hard landing chilling global investors to the bone. This has even driven Tokyo traders to seek solace in a much-needed 45-minute bento box break (my colleagues seldom take lunch), during which not a whisper from the Bank of Japan (BoJ) was heard. Markets are left to attempt a self-correction through their own stabilizers, be it lower U.S. Treasury or Japanese Government Bond yields, but without a hint of policy puts, the market continues on a distinctly risk-off trajectory.

We've shifted from merely taking "Hi Tech Chips off the Table" to facing heightened volatility across the board. This has increased Value-at-Risk (VAR) metrics for financial institutions and forced the downsizing of positions—a complex cocktail for investors to digest. Moreover, as the European market is forced to grab a clumsily held risk baton from Asia, markets now confront anarchy in the streets of the UK and in Australia, the risk level of a terror attack has escalated from 'possible' to 'probable'. It’s not exactly the backdrop for a banner day in risk markets.

Nonetheless, the Fed will likely try to spark a decidedly risk-on "Dove Fest." While it might initially trigger some panic on Wall Street due to perceptions of being behind the curve, the mere anticipation of aggressive rate cuts has a strange way of miraculously buoying U.S. stocks, especially if the U.S. economic data stabilizes or shows signs of stabilizing.

In Tokyo, a stronger JPY continues to drive risk-off sentiment. But even though the Bank of Japan has hinted at a bond-buying diet—planning to slash its JGB purchases from ¥6 trillion to ¥2.9 trillion by early 2026—they've kept a backdoor open. This allows them to reverse course if the bond market experiences severe disruptions, maintaining a pledge to be "nimble" in their bond-buying tactics. This strategy could at least help stem the tide and prevent a financial meltdown akin to a fiscal Fukushima.

Asian currencies are on the rise against the US dollar, capitalizing on declining US yields and a generally weaker dollar. A standout performer has been the CNH, which has notably strengthened to dip below the 7.1500 level, now trading under the onshore CNY rate of 7.1700. This shift highlights a significant realignment in ASEAN currency values.

Meanwhile, the Malaysian ringgit has emerged as a star performer, buoyed by strategic government initiatives. These include encouraging state-linked corporations to repatriate their overseas earnings. Additionally, reports indicate that the country's largest pension fund has put a halt to its plans for foreign investments. These moves have collectively fueled the ringgit's rise, showcasing the impact of targeted economic policies on currency strength.