Inauguration caution tempers risk-on rebound amid US holiday-thinned liquidity

Amid burgeoning signs of rejuvenation in China’s economy and a buoyant session on Wall Street last Friday, fresh optimism could percolate in Asian markets today. However, the shadow of President-elect Donald Trump's impending inauguration casts a complex mix of anticipation and apprehension across the trading floors.

With U.S. markets shuttered for Martin Luther King Jr. Day, a thinner-than-normal global liquidity pool could lead to cautious trading. However, the spectre of U.S. debt ceiling debates sharpens investor focus, adding another layer of caution to Monday's market activities.

Investors have been initially receptive to the more market-friendly proposals in Trump’s anticipated agenda, such as tax cuts and deregulation, which have sparked rallies. Yet, the potential for disruptive policies like significant tariffs and sweeping deportations looms large. These policies threaten to reignite inflation and disrupt the Federal Reserve's rate-cutting trajectory, making the start of this week a pivotal moment for global markets.

His inauguration speech is poised to sway markets significantly, packed as it may be with crucial policy announcements, directives, and a slew of executive orders.

The TikTok situation stands out amid these dynamics, offering a glimpse into Trump's strategic approach toward China. He plans to reinstate the China-owned social media giant’s U.S. operations via executive order post-inauguration, insisting it ensures substantial U.S. investor involvement.

In financial circles, the dollar and Treasury yields have pulled back from last Monday's dizzying heights, concluding last week on a milder note. This pullback has eased the strain on Asian and emerging markets. Remarkably, after surging to a 16-month high of 4.80%, the 10-year Treasury yield dropped by 17 basis points across the week, and the dollar index, despite peaking at a 27-month high, recorded only its second weekly loss in sixteen weeks.

Bullish barrages from a Federal Reserve governor and the incoming Treasury Secretary have firmly anchored the rally in last week's US Treasury yields, setting the stage for Donald Trump's inauguration as president later on Monday.

The rollback in this year's climb of US yields and the dollar, combined with reports of China's economy ending the year on a high note, helped to lift global stock markets on Friday.

Considering how much equity trading has been influenced by rates and bonds since last year, the recent decline in yields has been excellent news for stock investors.

Two-year Treasury yields notably hit their lowest point since January 2, dropping a sharp 20 basis points from last Monday's peak. This significant dip came after Fed Board Governor Christopher Waller suggested on Thursday that three or four interest rate cuts this year are possible, buoyed by the beginning of more favourable inflation data.

As we approach Trump's inauguration later today, the focus intensifies on the Treasury market, which awaits any shifts that could stem from new policy directions. Meanwhile, the US economy continues to defy negative expectations. Recent non-farm payroll data significantly exceeded forecasts, and even the often beleaguered industrial sector has shown signs of vigour, with US production surging 0.9% month-on-month in December, well above the 0.3% expected by analysts. This cross-sector robustness underscores the economy's underlying strength as we enter a new political era.

Last Thursday's confirmation hearing for Trump’s Treasury Secretary nominee, Scott Bessent, proved pivotal for the debt markets and the dollar. Bessent threw his weight behind extending Trump's 2017 tax cuts, warning of economic "calamity" if they lapsed, a stance that stirred some Republican reservations. He staunchly defended the dollar's pivotal role on the global stage and championed the independence of the Federal Reserve. His testimony starkly contrasted the volatility of Trump’s previous term, hinting at a more stable trajectory for his new tenure. This shift seems to resonate with a more hopeful sentiment among corporate leaders, potentially heralding a smoother interaction with the administration this time around.

However, skepticism remains regarding China's reported 5% GDP growth, and concerns about the integrity of these figures, given the worsening deflators, remain. Whatever the actual number, the boost appears to be half driven by stimulus and half by trade partners preemptively securing goods from "the world’s factory" ahead of Trump’s potential tariff escalations. This context requires analysts and the media to cautiously accept official data while remaining aware of the underlying economic manipulation.