Which macroeconomic transmission mechanisms link recent U.S. economic data to the rally in Asian equity markets, and what second‑order effects might arise for global capital flows?
The rally in Asian equity markets during early February 2026 reflects a convergence of macroeconomic transmission channels originating from U.S. economic data, amplified by regional catalysts and structural shifts in global liquidity. The Nikkei 225 surged 3.89% to 54,702, the KOSPI jumped 6.30% to 5,261, and Taiwan's TSEC Weighted Index rose 1.57% to 32,119financialmodelingprep . These movements trace directly to three primary transmission mechanisms and several emergent second-order effects reshaping global capital allocation.
The U.S. ISM Manufacturing PMI released on February 2, 2026, printed at 52.6, significantly exceeding consensus expectations of 48.5 and the prior reading of 47.9 United States ISM Manufacturing PMI tradingeconomics . This marks the first manufacturing expansion in twelve months, with new orders surging to 57.1—a critical leading indicator for Asian export economiesAsia Market Quick Take – 03 February 2026 - Singaporehome .
The transmission operates through direct demand linkages. Japan, South Korea, and Taiwan derive substantial export revenues from U.S. industrial activity. When American manufacturers enter restocking phases, demand for Asian-produced semiconductors, electronic components, and precision machinery accelerates. Taiwan Semiconductor Manufacturing Company expects 2026 revenue growth of nearly 30% in U.S. dollar terms, with a projected compound annual growth rate of 25% through 2029Taiwan Semiconductor's 2026 Outlook Is a Clear Sign to Buy the Stock Now | The Motley Foolfool . This structural demand from AI-driven computing, data centers, and global electrification creates a sustained earnings tailwind for Asian technology exporters.
The ISM's shift into expansionary territory also signals broader confidence in the U.S. manufacturing base, reducing recession fears that had suppressed risk appetite throughout late 2025. Global purchasing managers interpret this data point as validation of the "no landing" scenario—where the U.S. economy sustains moderate growth without triggering inflationary pressures or requiring aggressive monetary tightening.
The Federal Reserve's January 28, 2026, decision to hold the federal funds rate at 3.75% established what market participants term a "yield ceiling"[PDF] Fed Rate Meeting: 29 January 2026samuel . This pause, following three rate cuts in 2025 that eased financial conditions to their most accommodative level since 2022, has materially altered the calculus for Asian central banks and global fund managers.
U.S. 10-year Treasury yields have stabilized in a narrow range, trading at 4.29% as of February 2, 2026Daily Treasury Rates | U.S. Department of the Treasurytreasury +1. This stability—after significant volatility in late January when yields spiked to 4.30% amid tariff concerns and Fed leadership uncertainty@ShervinShares @jonbrooks This chart tracks the US 10-Year Treasury yield, currently at 4.291% (up slightly today, Jan 20, 2026). It shows a sharp rise from ~4.15% recently, reflecting market reactions to economic factors like inflation expectations and policy shifts. Impact on housing: Yields influence mortgage rates—higher ones (potentially 6-7% mortgages) reduce affordability, slowing sales and home price growth in 2026. If yields drop (e.g., via Fed cuts), it could boost demand. Outcomes depend on economy and Trump admin policies.x —has reduced capital flight pressures from emerging Asia.
For Indonesia, the Fed's stance "supports macro stability" by reducing "the risk of sudden yield compression in the US, helping avoid volatility in global capital flows while maintaining accommodative global liquidity"[PDF] Fed Rate Meeting: 29 January 2026samuel . Bank Indonesia maintained its benchmark rate at 4.75% on January 21, 2026, with Governor Perry Warjiyo emphasizing exchange rate stabilization as the primary policy focusIn early 2026, BI will again maintain its benchmark interest rate at 4.75 percent.kompas .
The yield differential between U.S. and Asian sovereign debt remains a critical determinant of portfolio allocation. With the U.S. 10-year at 4.29% and Japan's 10-year significantly lower, the interest rate gap continues to incentivize carry trade activity, though positioning has moderated from extreme levels[PDF] Understanding Currency Carry Tradesamro-asia .
A significant idiosyncratic driver of Asian equity flows is the evolving U.S. trade policy landscape. The announcement of a U.S.-India trade framework reducing reciprocal tariffs from 25% to 18% created an immediate liquidity magnet for Indian equitiesTrump 2.0 tariff tracker | Trade Compliance Resource Hubtradecomplianceresourcehub . India's Nifty 50 surged 5% following the tariff reduction announcementfinancialmodelingprep .
The broader tariff architecture remains complex. China faces a baseline 10% reciprocal tariff with the higher 34% rate delayed until November 2026Trump 2.0 tariff tracker | Trade Compliance Resource Hubtradecomplianceresourcehub . This partial de-escalation, following the October 2025 Busan Summit where the U.S. reduced the "fentanyl" tariff from 20% to 10% and China suspended retaliatory tariffs on U.S. agricultural goodsU.S.-China Trade Tensions and the Implications for Asian Equitiesainvest , has reduced immediate supply chain disruption fears.
Southeast Asian economies are emerging as beneficiaries of supply chain diversification. Chinese exports to ASEAN countries rose 13.4% year-over-year in 2025, with shipments to Vietnam and Thailand increasing 22.4% and 20.3% respectivelyUS-China Relations in 2026: What to Watchchina-briefing . This regionalization trend redirects manufacturing investment flows within Asia, supporting equity valuations in countries positioned as alternative production bases.
Global equity funds recorded their largest outflows on record in the week ending January 22, 2026, with $43.2 billion withdrawn—including $16.8 billion from U.S. equitiesGlobal equity funds see record outflows as U.S., China withdrawals surge | Reutersreuters . However, this rotation favored specific Asian destinations. Japanese funds saw $2.2 billion in inflows, the largest since October 2025, while global emerging market equity funds recorded their fourth consecutive week of increasing inflowsGlobal equity funds see record outflows as U.S., China withdrawals surge | Reutersreuters .
Institutional positioning reflects this shift. Pictet Asset Management has "increased exposure to EM stocks ex-China" while maintaining "an above-benchmark allocation to Chinese equities," expecting emerging market companies to "deliver the highest earnings growth in the world this year at above 11%"February Barometer of financial markets outlook | Pictet Asset Management United Statespictet . BNP Paribas Asset Management has "broadened allocation with increased exposure to emerging markets and added Japan"No need to argue - US Institutional - BNPP AMbnpparibas-am .
State Street Global Advisors notes that "investors, who had been heavily allocated to U.S. assets for several years, had reason to reassess that positioning" with "reallocations away from the US" remaining likely "as the US dollar remains quite expensive in real terms versus history"Comfortably Bullish: Momentum heading into 2026, but balanced positioning is warrantedssga .
The yen carry trade—estimated at $1 to $2 trillion in total exposureYen Carry Trade: A Hidden Risk to US & Global Markets? • Sridhar Chityalayoutube —represents a latent source of global market volatility. Current CFTC Commitments of Traders data shows speculative net positioning in the yen improved from -44.8k to -33.9k as of January 30, 2026, a 24.3% reduction in short positioningCFTC JPY speculative net positions - Investing.cominvesting .
This moderation from extreme levels reduces systemic unwind risk relative to August 2024, when the Bank of Japan's unexpected 25 basis point rate increase triggered a 12% single-day plunge in the Nikkei and a 3% S&P 500 declineYen Carry Trade: A Hidden Risk to US & Global Markets? • Sridhar Chityalayoutube . However, the carry trade infrastructure remains sensitive to rate differentials. Total yen-denominated loans reached approximately 41 trillion yen as of June 2025, up from 27 trillion yen in March 2021[PDF] Understanding Currency Carry Tradesamro-asia .
The Bank of Japan maintained its policy rate at 0.75% in January 2026, with Governor Kazuo Ueda emphasizing the need to "scrutinize" past rate hike impacts before future decisionsAsia-Pacific markets: Nikkei 225, Kospi, Hang Seng Indexcnbc . Most analysts project one to two additional 25 basis point hikes in 2026, with the terminal rate reaching 1.0-1.25%Japan Monetary Policy January 2026 - FocusEconomicsfocus-economics +1. HSBC expects the BOJ's next hike in July 2026 but warns that "further yen depreciation could bring forward the timing"Bank of Japan raises economic growth forecast as it holds rates at 0.75% cnbc .
Rising Japanese government bond yields—with the 30-year yield approaching record highs and the 40-year hitting 4%Rising Japan Bond Yields: Is a Carry Trade Reversal a Real Risk for Asia? | Budget 2026 | ET Nowyoutube —signal market concerns about fiscal sustainability given Japan's debt exceeding 200% of GDPJapan's Inflation Crisis 2026: Why the Yen Collapse Will Reshape Asiayoutube . Should the BOJ accelerate normalization beyond market expectations, rapid carry trade unwinding could trigger cross-asset contagion as Japanese insurers and pension funds reduce foreign bond holdings globallyJapan’s 30-Year Yield Shock — The Warning Signal For Global Borrowing Costsyoutube .
Global M2 money supply has reached a record $137 trillion, reflecting "the highest liquidity level in history"$2000 checks, $1.4 trillion China boost, QE everywhere — is the world entering mega-stimulus mode?indiatimes . China accounts for approximately 37% of global M2 at $47.7 trillion, serving as the primary driver of this expansionGlobal liquidity hits ATH at $130T – Is 2026 the payoff for risk assets?ambcrypto .
U.S. M2 reached an all-time high of $22,411 billion in December 2025, with projections for $22,800 billion by end of Q1 2026United States Money Supply M2 - Trading Economicstradingeconomics . This liquidity backdrop, combined with over 320 global rate cuts in the past 24 months$2000 checks, $1.4 trillion China boost, QE everywhere — is the world entering mega-stimulus mode?indiatimes , creates a structural tailwind for risk assets.
Major economies are pursuing coordinated fiscal expansion. China approved a $1.4 trillion fiscal package targeting local government debt stabilization and infrastructure spending. Japan is deploying a $110 billion stimulus focused on energy relief and corporate support. The U.S. Treasury is issuing nearly $1.9 trillion in new debt annually$2000 checks, $1.4 trillion China boost, QE everywhere — is the world entering mega-stimulus mode?indiatimes . This synchronized stimulus creates demand for Asian intermediate goods and amplifies the earnings transmission from U.S. industrial recovery.
The ISM's new orders surge implies a global restocking phase for base metals. Copper prices have recovered to $5.92 per pound as of February 3, 2026, up 1.68% from the previous day and 36.19% higher year-over-year Copper - Price - Chart - Historical Data - News tradingeconomics . Aluminum pricing is up approximately 4-6% year-to-dateFeb 2026 Metals Market: Pricing, Supply & Buyer Insights | Continental Steel & Tube Companycontinentalsteel .
Goldman Sachs Research expects copper prices to remain supported at $13,000 per tonne in Q1 2026, though forecasts a decline to $11,000 by year-end pending clarity on U.S. refined copper tariffsWhy Record-High Copper Prices Aren’t Forecast to Last | Goldman Sachsgoldmansachs . This commodity price environment benefits resource-exporting Asian economies—particularly Australia and Indonesia—while potentially reigniting inflationary pressures that could constrain central bank accommodation later in 2026.
The interest rate stabilization has meaningful implications for Asian equity discount rates. Japanese stocks trade at a forward P/E ratio of approximately 22x, elevated relative to the 10-year average of 18x but commanding a discount to U.S. equitiesAsia stock markets outlook for 2026: Hang Seng and Nikkei forecastsig . Chinese equities remain at a "significant discount" relative to the S&P 500's forward P/E of 22xAsia stock markets outlook for 2026: Hang Seng and Nikkei forecastsig .
Indian equity valuations reflect premium levels, with the market's earnings yield at approximately 6%Stock Market Live Highlights 7 January 2026: Sensex ended 102.20 pts or 0.12% lower at 84,961.14, and Nifty 50 declined by 37.95 pts or 0.14% to 26,140.75thehindubusinessline . However, foreign institutional investors withdrew over $3 billion from Indian equities in January 2026 alone, following $18 billion in withdrawals during 2025Union Budget 2026: Can PROIs save Indian stock market from FII sell-offs? - The Times of Indiaindiatimes . This divergence between price performance and foreign flows highlights the growing role of domestic institutional investors in supporting Asian market valuations.
The macroeconomic transmission from U.S. data to Asian equities operates through three reinforcing channels. First, direct demand linkages transmit manufacturing cycle improvements to export-dependent economies within approximately one quarter. Second, yield differential stabilization reduces capital flight pressure and grants Asian central banks policy autonomy. Third, trade policy normalization creates idiosyncratic alpha opportunities in specific markets.
The second-order effects—portfolio rotation, carry trade moderation, liquidity expansion, and commodity reflation—amplify these primary transmissions while introducing new risk vectors. The Atlanta Fed's GDPNow model estimates Q1 2026 U.S. GDP growth at 4.2%Federal Reserve Bank of Atlanta GDPNowinvesting , supporting the "no landing" narrative that underpins current risk-on positioning.
Key vulnerabilities include: potential BOJ acceleration triggering carry unwind; sustained commodity reflation forcing "higher-for-longer" global yields; and U.S. consumer spending deceleration undermining the growth transmissionUS retail sales post largest drop in nearly two years in January | REUTERSyoutube . January 2026 U.S. retail sales declined 0.9%, far exceeding the expected 0.1% dip, suggesting consumer resilience may be more fragile than equity valuations imply.
The structural shift toward emerging market allocation appears durable absent material deterioration in U.S. growth or unexpected BOJ tightening. Pictet's expectation that the GDP growth gap between emerging and developed economies will widen to 2.5 percentage points in 2026February Barometer of financial markets outlook | Pictet Asset Management United Statespictet provides the fundamental justification for sustained capital flows into Asian risk assets, though the transmission remains contingent on continued U.S. economic expansion and stable global interest rate differentials.