With the U.S. having already announced a change in monetary policy and the economy showing some resilience — albeit with some challenges — markets are now looking for triggers elsewhere.
Renewed tensions in the Middle East initially grabbed attention but did not significantly affect the markets, not even the energy market, as crude oil prices remained relatively stable, unlike XAUUSD.
Attention has now turned to Asia, especially China, which is rolling out a huge stimulus package to revitalize its economy, with a growth target of 5% this year, and, most importantly, pulling out of deflation.
Among the main measures adopted by the People's Bank of China was a 50 basis point cut in banks' reserve requirements, freeing up some US$142 billion of liquidity for the financial system.
In addition, regulators have announced $113 billion in market support. This has sparked renewed interest in Chinese stocks, prompting margin calls and causing the CSI 300 index to post its biggest rise since 2008.
The only concern is that this optimism may only last for a while, as it may become apparent that even the announced stimulus measures will not be enough to reignite consumer interest.
It is no coincidence that commodity markets did not react strongly to the news. To be more fair, they initially saw some movement, but it quickly settled down. For example, oil prices are trading below $70 a barrel.
Developments in Japan may also influence global market sentiment, not least because of the risk of another round of yen strengthening, which could disrupt carry trades in the currency.
The election of former Defense Minister Shigeru Ishiba as Japan's new prime minister could create uncertainty and pressure in the markets, given his pro-military stance and plans to strengthen Japan's self-defense forces.
If the rumors are true and he moves forward with a referendum to implement significant policy changes, it could spark new geopolitical tensions in the region—something that big money typically dislikes.
As for the more direct impact on markets, it is believed that the Bank of Japan could raise interest rates under the new Prime Minister, possibly as early as December. This could lower the USD JPY pair.
Shigeru Ishiba has also hinted at potential tax increases for companies, which would undoubtedly affect their net profit figures. It’s no surprise that, following the news of his victory, the Nikkei 225 index dropped by 5%.