Powell causes a stir in global markets

The Federal Reserve (Fed) chairman told Congress that policymakers will discuss whether to wrap up bond purchases a few months earlier and retired the word “transitory” from his commentary on inflation. (File pic shows traders watching Powell speak during one of the previous appearances)

WASHINGTON: Jerome Powell sent a stir through global markets, paving the way for quicker-than-expected hikes, not least in rate-sensitive Asia.

The Federal Reserve (Fed) chairman told Congress that policymakers will discuss whether to wrap up bond purchases a few months earlier and retired the word “transitory” from his commentary on inflation.

Higher US rates would have a significant impact on Asian assets if capital flows to America. A stronger greenback has implications for Asia’s export-heavy companies and economies and the dollar-denominated debt of the region’s sovereign and corporate borrowers.

Still, Asia stocks and currencies were rallying yesterday with some strategists saying Powell’s comments about a faster taper weren’t unexpected.

His nod toward the uncertainty caused by the Omicron variant has also blunted the hawkish tone, according to Tomo Kinoshita, global market strategist at Invesco Asset Management.

“Prospects of quicker taper and higher US rates will stress test the allure of higher returns in emerging markets in Asia and as a consequence the ‘stickiness’ of funds parked in this part of the world,” said Vishnu Varathan, head of economics and strategy at Mizuho Bank Ltd in Singapore.

“We have long maintained that the outcome will be ‘Kokomo Fed,’ that gets there fast and then takes it slow after,” he said. “And this in turn will prompt a ‘Kokomo dollar,’ whereby the bias is for the dollar to be skewed to strength.”

“The threat of faster tapering is bad news for high-beta markets such as emerging markets,” said Sue Trinh, managing director for global macro strategy at Manulife Investment Management in Hong Kong.

“Yet we have been of the view that Asia is well-placed within emerging markets to withstand any potential monetary volatility - inflation in Asia more contained and Asia is less reliant on foreign capital than other emerging markets,” she said. “The not-so-good news for Asia is that the region is far too reliant on foreign demand to absorb its exports.”

“Expect more pressure on risk assets in general, including Asian equities,” said Alvin T. Tan, head of Asia FX strategy at RBC Capital Markets in Hong Kong.

“However, Asian FX have held up really well in this latest risk-off bout, and that was because the whole market was furiously loading up on United States dollars right into the Omicron news,” he added.

“So it is United States dollars that are being unwound this time. In that way it has been an unusual ‘risk-off’ experience, though JPY has behaved more conventionally.”

“We expect the Thai baht to be most at risk, especially since it has an additional negative that the re-emergence of Covid-19 concerns will potentially further set back the return of tourism,” said Terence Wu, a foreign-exchange strategist at Oversea-Chinese Banking Corp in Singapore.

“More importantly, we will be watching closely developments in the yuan. The yuan has been strong on a basket basis, and that has sheltered the Asian currencies.

“Should the yuan start to show signs of weakness, expect the flow-through of dollar strength to the emerging markets Asian currencies to be stronger.”

“Extreme dollar strength because of higher United States interest rates is a headwind for Asia and emerging markets equities, but China and large Asean markets such as Indonesia could still outperform western markets in 2022 because of reversion to mean,” said Michael Rainer Preiss, portfolio strategist at Golden Equator Wealth.

“China already had a big correction and the valuation argument for China equities is getting stronger.”

“While Powell’s comments suggest the Fed could bring forward their rate hike to as soon as the middle of 2022, the dollar failed to rally on the back of this.,” said Khoon Goh, head of Asia research at Australia & New Zealand Banking Group in Singapore.

“This is likely because the Fed chair’s statement is only matching market expectations.”

“The impact on Asian FX will likely be mixed. With export growth still strong in the region, as shown by today’s stronger than expected South Korean numbers, currencies of export driven economies will fare well.

The spread cushion on Asian dollar bonds from rising Treasury yields is “thin at best” with valuations near multi-year tights, with the exception of China’s property issuers, according to Ek Pon Tay, BNP Paribas Asset Management’s senior portfolio manager in Singapore.

Tay recommends investors overweight investment-grade rated China property credits as these issuers are likely to survive in the event of a prolonged sector downturn and valuations offer ample spread cushion versus others. — Bloomberg

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