(Bloomberg) – Asian assets come in on the back Monday following the Federal Reserve’s hawkish tilt at the Jackson Hole symposium, which has investors seeking safe havens.
Beyond the immediate weakness in the region’s currency and equity markets, analysts are also warning of longer-term risks to funds exiting Asia and further erosion of the rebound seen in risk assets since June.
Here are some comments on next steps for Asian markets:
Manish Bhargava, fund manager at Straits Investment Holdings in Singapore, said foreign flows to emerging markets could reverse as Powell disappointed some investors who expected a shift to a more dovish stance. Powell was “really warmongering. I think there is going to be a lot of red on Monday even in Asia,” Bhargava said. “Clearly the Fed’s number one goal is to fight inflation and they’re going to go for it. So you know the summer rally you’ve seen is going to run out of steam. It’s really showing signs of a downturn. ‘inversion.
“The inflows were because people were expecting the pivot from the Fed to come sooner rather than later,” said Grace Tam, chief investment adviser at BNP Paribas Wealth Management in Hong Kong. “But for now, it will come later than sooner,” she said, adding that the dollar will remain strong and “we could see exits in emerging markets.”
Yen at 140
“USD/JPY is the most obvious way to play for an increasingly determined Fed, with 140 likely to break ahead of the September FOMC meeting,” said Sean Callow, senior currency strategist at Westpac Banking Corp. . “This is another adrenaline rush for the US dollar.
“The interest rate differential will always put pressure on the yen. So we actually see 140 yen,” BNP’s Tam said. “A weak yen is actually positive for Japanese equities, but obviously in terms of of local currency. For foreigners who buy Japanese stocks, they have to hedge the currency risk,” she added that the problem is that hedging costs are not cheap.
“Early trading in Asia could be very ugly given the scale of the US equity market correction,” said Gary Dugan, managing director of the Global CIO Office in Singapore. “Our quantitative model gives a short-term sell signal in equity markets with the risk of a complete unwinding of the market rally we experienced from mid-June.”
Pepperstone Group Ltd. sees Powell’s speech as intended to dispel any doubt about the Federal Reserve’s commitment to being tough in its fight against inflation. “We enter the new week with risky assets hitting Friday and expect Asian stocks to open 1% to 1.5% lower,” wrote chief researcher Chris Weston in a note. “Equities were where the volatility was most visible and we are spilling into the new week with a downside bias.”
EM Pain FX
“Depreciation pressure on Asian currencies is likely to persist,” said Divya Devesh, head of ASEAN and South Asian currency research at Standard Chartered Bank in Singapore. “Weakness in global risk assets will likely also have a negative impact on Asian currencies. Markets would be watching if the PBOC continues to build on CNY weakness via a strong fixation.
Malayan Banking expects emerging market Asia FX to tip “cautious” as markets open on Monday. “Still, the recent lows should be strong support levels and some resilience can still be displayed as long as Treasury yields continue to move away from the highs of the year,” said Yanxi Tan, an equity strategist. exchange based in Singapore.
According to Galvin Chia, EM FX strategist at Natwest Markets in Singapore, there is room for the dollar to remain supported in the near term. “There could be some softness for emerging markets FX if the Fed pushes more aggressive hikes, although price action from late last week suggests investors are looking beyond the broad USD for opportunities. in the local FX.”
Chinese stocks could see sentiment impacted by Fed policy, but Hong Kong-listed Chinese stocks “could be more resilient” amid talks of a potential resolution to issues over US certificates of deposit between US officials and Chinese, said BNP’s Tam. “The radiation risk is decreasing and I think that’s a catalyst to support the Hong Kong market.”
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