These 3 themes are driving the stock markets today

Today’s markets focused on 3 hot topics, from China’s moves on Red Sea tensions to Fed rate cut bets and the dragon’s potential response to elections in Taiwan.

Asian stock markets closed the session on uncertain sentiment in China, while Japan’s Nikkei continued its run to close on gains.

US stock and bond markets will remain closed today for Martin Luther King Day. In the US, all three major indexes closed mixed on Friday evening. It was a less-than-stellar start to the earnings season in the fourth quarter, with the big four banks reporting disappointing results.

The spotlight is on today 3 themes that investors consider key navigate between stocks, bonds, raw materials and define the direction World stock exchanges on this new exchange day.

1. China is the absolute protagonist. Reasons

Monday People’s Bank of China kept unchanged rates for your one-year loans, disappointing investors who had expected the first intervention since August. While the central bank stepped in more liquidity in a system designed to meet funding demand, another round of weak credit data last Friday boosted expectations for bolder moves.

Data released on January 12 showed that Beijing saw its longest run of deflation in December since 2009, while growth in financing and lending last month disappointed expectations and exports fell last year for the first time since 2016.

President Xi Jinping’s government is struggling with weak domestic demand real estate crisis prolonged and a labor market without dynamics. Full GDP data for 2023 due out on Wednesday will paint a clearer picture.

2. After the Taiwan elections: will China react?

Reaction to the Democratic Progressive Party’s victory in Taiwan at the weekend, which left the cross-strait status quo largely intact, has so far been limited, with Beijing predictably angered by the election of the most separatist candidate.

The Newly elected president of Taiwan Lai Ching-te he will face a divided parliament that, according to initial analyzes after the vote, is likely to moderate his political agenda. The result could be that Lai adopts a more restrained policy towards the dragon, although Beijing is likely to strengthen it pressure on the Taiwanese government when Lai will officially take the presidential oath in May. The new parliament takes office next month.

William Lai, the challenges of the new president of divided Taiwan

“Lai refrained from provocative pro-independence rhetoric during the campaign, and our base case scenario is that his administration will show continuity with Tsai, who capitalizes on anti-mainland sentiment and avoids overt provocations.”said Gabriel Wildau, CEO of Teneo.

Potentials tensions with China on the issue of Taiwan – which could also involve the USA in the defense of Taipei in the event of a military attack – they recalled that this year geopolitics will loom over markets, elections around the world and the threat of a the wider conflict in the Middle East.

“For now, we believe China is still focused on building economic stability”said Damien Boey, chief macro strategist at investment bank Barrenjoey in Sydney.

3. Central banks and rates in the spotlight

The question that continues to dominate investors is still the question about the actions of the Fed and the ECB: when will they start? reduce rates?

According to Reuters, futures now imply a 73% chance of the first drop in borrowing costs Fed in March, as last Friday’s report on weak manufacturing output helped offset the disappointing consumer price (rising) data from the previous day.

Markets also discount the discount from the company ECB in April, although its chief economist pointed to June as a more likely window at the weekend.

Are these 5 unknowns about to overwhelm the markets?

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