Market Overview by Jamie McGeever

(Reuters) – A look at the day ahead in Asian markets.

Investors in Asia could be forgiven for going into Tuesday's session with a high degree of trepidation, as markets are pulled by various local and global forces.

Rare political instability continues to weigh on Japan's markets following Sunday’s inconclusive general election, while Chinese markets digest another push from the People's Bank of China to inject liquidity into the financial system.

The global backdrop appears unsettling. Optimism around upcoming U.S. megacap tech earnings and oil's 6% decline on Monday boost risk appetite, yet the relentless rise in U.S. bond yields and looming U.S. elections warrant caution.

A challenge arises: Will the Treasury market bears and equity bulls retreat, and what could be the catalyst if they do? This remains unclear.

What is transparent, however, is that the rise in U.S. bond yields shows no sign of slowing. Yields hit new multi-month highs on Monday, with the $139 billion auction of two- and five-year debt applying downward pressure on prices.

The 10-year yield reached 4.30%, increasing 64 basis points since the Fed cut rates on September 18. According to Jim Bianco at Bianco Research, this is the largest increase following the first cut in a Fed easing cycle since 1989.

Despite this backdrop, Wall Street rose on Monday, offering some encouragement to bulls in Asia.

Tuesday's Asian Calendar Includes:

• Japan: Unemployment data (September)
• South Korea: Central bank minutes
• Thailand: Finance minister and central bank governor's discussion on next year's inflation target.

In Japan, swaps market pricing suggests 'no change' from the Bank of Japan on Thursday is nearly certain. Six basis points of rate hikes are priced in for December's meeting, and a total of only 35 basis points by year-end 2024.

This gradual tightening cycle contrasts with a more hawkish Fed in a U.S. 'soft' or 'no landing' scenario, potentially limiting the yen's upside.

U.S. rates traders are also scaling back Fed easing expectations—with just 120 basis points of easing now priced in by the end of next year, down 15 basis points in recent days—explaining the dollar's course toward its best month since April 2022.

Officials in China will be hoping that investors embrace the PBOC's new lending tool, potentially injecting liquidity into the market ahead of almost 3 trillion yuan ($406 billion) in loans maturing at year-end.

Key Developments to Watch:

• Japan unemployment (September)
• South Korea central bank minutes
• Thai finance minister and central bank chief speech