Asian Markets Surge on Attractive Valuations as Dollar Weakens Amid Fed Independence Concerns

Asian equity markets posted strong gains as investors shifted focus toward attractively valued regional assets, with the MSCI Asia Pacific Index climbing 0.9% for a second consecutive trading session. The rally underscores growing investor appetite for Asian markets, which have outperformed the S&P 500 this year despite the US benchmark reaching record highs with a 0.2% gain.

Japanese Markets Lead Regional Gains

Japanese markets spearheaded the regional advance after returning from a holiday period. The yen demonstrated strength, gaining as much as 0.2% to reach 157.90 per dollar following comments from Finance Minister Satsuki Katayama, who indicated she expressed concerns to US Treasury Secretary Scott Bessent about one-way yen movements.

Japanese government bond yields surged amid speculation that Prime Minister Sanae Takaichi might dissolve parliament as early as next month, adding political uncertainty to market dynamics.

Valuation Advantages Drive Investment Flows

Asian equities present compelling valuation opportunities compared to their US counterparts, attracting investors seeking better risk-adjusted returns. The valuation gap has become increasingly pronounced as US markets reach elevated levels.

David Chao, global market strategist at Invesco Asset Management, which oversees more than $2 trillion, noted that "non-US assets such as European and Asian equities are likely to look more favorable, especially due to cheaper valuations and as US foreign policy becomes more unpredictable."

Federal Reserve Independence Concerns Impact Dollar

The US dollar declined during the session as concerns mounted over Federal Reserve independence following escalating pressure from the Trump administration. Fed Chair Jerome Powell revealed that the central bank had been served grand jury subpoenas from the Justice Department, threatening criminal indictment.

TD Securities strategists, led by Jayati Bharadwaj, indicated that the dollar's "trained haven status" suggests further weakness ahead. The perceived threat to Fed independence represents a fundamental shift that could reshape market dynamics, as central bank autonomy has been a bedrock assumption for investors.

Market Outlook and Key Risks

Asian markets face several key risks this week, including US inflation data and potential Supreme Court rulings on President Trump's tariffs. The core consumer price index is expected to show a 2.7% year-over-year increase for December, which could influence Federal Reserve policy decisions.

Fourth-quarter US earnings season begins in earnest this week, with S&P 500 constituents expected to deliver 8.4% earnings growth for the quarter and 14.6% growth projected for 2026. Excluding the "Magnificent Seven" megacap stocks, profit growth is projected at 4.6% and 13.3% respectively.

The Trump administration's broader market interventions, including potential tariffs on countries conducting business with Iran and ongoing negotiations with Taiwan, continue to create uncertainty. However, the current momentum suggests investors are increasingly willing to diversify beyond US markets in search of value and stability.