Asian markets may have a surge on Monday as Congress reaches tentative debt limit deal

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Asian markets may have a surge on Monday as Congress reaches tentative debt limit deal

A look at the future ahead in Asia markets from Jamie McGeever.

Investors are likely to have a surge on Monday, as Congress in Washington reached a tentative agreement on the U.S. debt ceiling, reducing the risk of a catastrophic default.

The U.S. and UK markets closed for holidays, allowing for outsized market movements, but trading and market liquidity in Asia will be lighter than usual.

If so, they are likely to be outsized gains, certainly across risk assets - Wall Street rallied strongly on Friday, especially the Nasdaq and multi-billion dollar tech stocks, and the news from Washington over the weekend will only be seen as positive.

Republicans and Democrats reached a tentative agreement to suspend the $31.4 trillion debt ceiling, which now must get through the Republican-controlled House of Representatives and the Democratic-led Senate before June 5 to avoid a crippling first-ever default.

Both sides are confident it is going to pass.

It could be a double-edged sword for Asian markets, if not on Monday than in the days and weeks ahead. A debt limit deal could give the Federal Reserve more room to tighten policy, which could push up U.S. bond yields and strengthen the dollar - not usually a good mix for emerging markets.

The dollar is already on a tear, reaching a two-month high on an index basis last week and six-month peaks against the Japanese yen and the Chinese yuan above 140 yen, respectively. While Japanese and Chinese policymakers are grappling with different issues, they are facing different challenges.

Japan's inflation is high, and the Bank of Japan is under pressure to adjust or abolish its excessively loose 'yield curve control' monetary policy. Tokyo may quietly prefer the yen to strengthen from here.

The Chinese government, on the other hand, may want the yuan to fall further. The economy's post-pandemic lockdown recovery has been less than expected, and inflationary pressures are evaporating. Barclays economists forecast 10 - 20 basis points of policy rate cuts and 25 - 50 bps of reserve requirement ratio cuts over the next six to nine months.

Japanese equity markets opened on Monday near the 33-year highs reached last week, while Chinese stocks are languishing near six-month lows. So is the Hang Seng tech index, struggling under the cloud of rising U.S.-China trade tensions, rather than benefiting from the U.S. tech boom.

On Monday, it is possible that changes, if only briefly.

The Asian economic data and events calendar is light on Monday and fills up later in the week, with the focus turning to Japanese unemployment on Tuesday, India's first quarter GDP and Thailand's interest rate decision on Wednesday, and South Korea's Q 1 GDP on Friday.

Purchasing managers index reports for several countries are scheduled for release too, with China's May data on Tuesday and Wednesday likely to be the biggest market-movers.

Here are three key trends that could provide more direction to the market on Monday: