Jan 6 (Reuters) - A look at the day ahead in Asian

markets.

The first full trading week of 2025 kicks off in Asia on Monday

with the sharp slide in China's currency and bond yields, an

increasingly tense and fluid political situation in South Korea

and a blocked U.S.-Japanese corporate merger all vying for

investors' attention.

A raft of purchasing managers index reports is also on deck,

offering investors the first glimpse into how many of Asia's

biggest economies, including China's, closed out 2024.

The global market backdrop looks relatively bright after

Friday's rebound on Wall Street, and equity and bond market

volatility seems well-contained.

But emerging market currencies and assets are on the

defensive, thanks to elevated U.S. Treasury yields and a soaring

dollar. The greenback softened a bit on Friday, but it hit a

fresh two-year high the day before and has rallied almost 10% in

the last three months.

Much of the dollar's appeal comes from the surge in

long-dated U.S. Treasury yields since the Fed began cutting

interest rates in September. The central bank's 100 basis points

of easing has been met with a rise of 100 bps in the 10-year

yield, a remarkable turn of events that has bamboozled most

investors - and likely policymakers too.

The picture in China could not be more different. As

investors position for a year of policy easing and liquidity

provision from Beijing, the yuan and bond yields are coming

under heavy downward pressure.

Attention is focusing on the short end of the Chinese curve,

with the two-year yield on the brink of breaking below 1.00%. It

is already the lowest on record, having tumbled 50 bps in the

last two months and 100 bps since last March. The psychological

1.00% barrier could break on Monday.

In this context, Chinese inflation data later this week will

take on even greater significance, and a Reuters poll suggests

annual consumer inflation in December held steady at 0.2%.

Although China's economic surprises index has been rising in

recent weeks, markets will be highly sensitive to added

deflationary pressures.

The spot yuan on Friday slid to a four-month low, breaking

through the 7.30 per dollar level that the People's Bank of

China had appeared to be defending. A move through 7.35 per

dollar would signal a fresh 17-year low.

Selling pressure on the yuan looks pretty strong, as

evidenced by the spread between the spot dollar/yuan rate and

the central bank's daily fixing. It is now the widest since last

July, hovering around its widest levels on record.

Are authorities in Beijing getting nervous? The central bank

on Friday warned fund managers against slamming bond yields even

lower, amid worries that a bubble in bonds might undercut

Beijing's efforts to revive growth and manage the yuan.

Here are key developments that could provide more direction

to markets on Monday:

- China, Japan, India, Australia services PMIs (December)

- Thailand inflation (December)

- Vietnam GDP (Q4)