Week Ahead: Asian Stock Markets To Be Moderately Bullish

Asian stock markets posted their biggest weekly gains in almost nine months after the U.S. Federal Reserve announced that it would purchase $40 billion in mortgage-backed securities per month for an open-ended period until the labor market improved substantially. This, combined with the continuation of Operation Twist, will increase the FOMC's holdings of long-term securities by $85 billion per month until December.

Global markets have rallied for the last two weeks, helped by a series of good news. Last week, the European Central Bank (ECB) unveiled a new bond-buying plan called the Outright Monetary Transactions (OMT), which aims at lowering the short-term borrowing costs for the most debt-strapped European countries like Italy and Spain. The German constitutional court gave a legal status to the European Stability Mechanism (ESM) bailout fund and the European fiscal treaty. This will help reduce the debt burden faced by the countries in the region.

The coming week will bring a more sober period for the global markets as market participants digested good news and will turn their attention to other events including presidential elections in the U.S., wrangling over taxes and spending cuts and a slowdown in corporate earnings.

"Right now we have this short-term euphoria. But then the question is where we go from here. I think after a week or so, if the underlying economic data doesn't change, you're going to see the market drop a bit and we'll continue to plod along until the election," Frank Fantozzi, chief executive of the Planned Financial Services, an independent wealth manager in Cleveland, told Reuters.

However, the markets in Asia are expected to begin the week on a positive note. Analysts at Credit Agricole said the commitment of the central banks to support global liquidity would help the emerging market assets in the week ahead and expect a moderately bullish rally as long as the noise regarding Europe remains limited.

Economic releases in Asia during the course of the week are likely to disappoint investors. August non-oil domestic exports in Singapore is believed to have declined 6.7 percent on an annual basis as weak external demand meets a high base of comparison while Taiwan exports orders are unlikely to show pick up in August.

The Reserve Bank of India (RBI) is to review the monetary policy Monday and will set tone for the week in Indian stock markets. The RBI may choose not to cut its key rates as inflation remains a concern. Official data Friday showed that India's wholesale price index (WPI) rose to a higher-than-expected 7.55 percent in July on an annual basis, driven mainly by the higher non-food prices.

In an attempt to cut the subsidy bill on fuels, the Indian government Thursday increased the diesel prices and fixed a cap on the subsidized LPG cylinders for the domestic use. Some economists believe that these decisions indicate a positive change toward pro-reform actions on the government's side and may prompt the RBI to cut rates.

Analysts at Credit Agricole said the RBI would nevertheless need to ease its monetary policy at some point down the road and expected a total of 50bp cuts in fourth quarter.