Optimism over the potential resolution of the longest federal government shutdown in U.S. history has fueled a broad rally in Asian emerging market equities, particularly in AI-linked tech stocks. These stocks rebounded sharply after last week's pullback from record highs amid "AI bubble" concerns, signaling a notable recovery in risk sentiment.
On Monday, the MSCI Emerging Markets Index surged nearly 2%, while another benchmark tracking large- and mid-cap emerging market equities posted similar gains. A separate MSCI index measuring emerging market currencies climbed about 0.5%, led by Asian currencies.
The rebound follows a procedural Senate vote (60-40) advancing legislation to end the shutdown, with several moderate Democrats crossing party lines. The prolonged shutdown had restricted global investors' access to U.S. economic data, clouding assessments of growth and interest rate trajectories.
"Monday’s moves—including a weaker U.S. dollar against risk-sensitive currencies like the Australian dollar and Korean won—reflect optimism about the shutdown’s imminent end," said Frances Cheung, head of FX and rates strategy at Oversea-Chinese Banking Corp.
South Korea’s Kospi led Asian gains, buoyed by reports of potential dividend tax cuts and increased pension fund equity allocations. The won strengthened for the first time in six sessions, supported by foreign inflows into local stocks, particularly AI beneficiaries SK Hynix and Samsung Electronics.
Concerns over an AI bubble eased after AMD and SanDisk reported robust earnings tied to AI demand, while Goldman Sachs and UBS research pushed back against bubble fears. This lifted shares of Japan’s Advantest, Tokyo Electron, and SoftBank Group, propelling the Nikkei 225.
Chinese hotel and airline stocks rallied after better-than-expected October CPI data, driven by holiday demand. The rebound marks a sharp reversal from last week’s selloff, when the MSCI Asia Pacific Index posted its worst performance since August amid AI valuation worries. Still, the index remains up ~25% YTD, supported by the global AI investment boom.
A potential short squeeze could further fuel bullish momentum. If the shutdown resolves swiftly, ~$1 trillion may flow from the U.S. Treasury General Account (TGA) back into markets, injecting liquidity. Goldman Sachs notes rising S&P 500 futures open interest (+$21B) suggests new long positions, setting the stage for a year-end rally.