Morning Bid: Goodbye Soft Landing, Hello Emergency Landing

Asian markets are set to open on Monday with their first opportunity to respond to Friday's dramatic market moves, which saw stocks and bond yields plummet, and volatility and rate cut expectations surge following an unexpectedly weak U.S. employment report.

This 'risk off' sentiment is likely to cascade into Asian markets, which were already unsettled last week due to the Bank of Japan's hawkish policy shift, disappointing Chinese economic data, and lackluster U.S. tech earnings.

On Friday, the MSCI Asia ex-Japan stock index plunged 2.5%, marking its steepest decline in over two years. Japan's Nikkei 225 fell 5.8%, its worst drop since March 2020, and the broader Topix index slid 6.1%, experiencing its most significant fall since 2016.

Given the payrolls-induced selloff on Wall Street, a sharp downturn in Asian markets on Monday morning is anticipated. While Friday's market reactions might seem exaggerated, they are noteworthy.

The two-year U.S. Treasury yield dropped 30 basis points, its steepest one-day decline since the U.S. regional banking crisis of March last year. The weekly fall of 50 basis points aligns with significant historical crises such as COVID-19, the Lehman collapse, 9/11, and Black Monday.

Equity markets saw the VIX volatility index double at one point on Friday.

The rush to unwind carry trades resulted in the yen appreciating nearly 5% against the dollar last week, a movement rarely seen in the past 25 years.

Although falling U.S. bond yields might ease financial conditions—reflected in Goldman Sachs's emerging market financial conditions index hitting its lowest since March—these changes are driven by recession fears rather than positive economic indicators.

Expectations for a U.S. economic 'soft landing' have dissipated, replaced by concerns of a 'hard landing.' Traders now see a 70% probability that the Federal Reserve will cut rates by half a percentage point next month. They are also pricing in 115 basis points of easing by year-end and over 200 basis points by next June.

High-yield corporate debt markets will be critical to monitor. These markets often show the initial signs of a 'credit event,' which can signal broader economic retrenchment, rising unemployment, and ultimately recession.

On Friday, U.S. high-yield debt spreads over Treasuries widened to the year's highest point at more than 370 basis points, driven largely by the drop in government bond yields rather than a mass selloff in corporate debt. If this dynamic shifts, market volatility could intensify.

Monday's economic calendar in Asia includes service sector purchasing managers index data from across the continent, including China, inflation figures from Thailand, GDP numbers from Indonesia, and some Japanese earnings reports.

Key developments to watch on Monday include: