This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.
Asian equities will open weaker after the Fed’s tapering decision and China’s manufacturing PMI. The final estimate of China’s HSBC/Markit manufacturing PMI for January will be this morning at 9:45am Singapore time. It would confirm the underlying slowdown in China’s economy.
The markets are no doubt digesting the Fed’s policy in reducing their stimulus for another $10 billion to $65 billion. Without question the market has not priced this in fully, despite the fact that the Fed’s decision wasn’t a surprise. There’s a difference between anticipating an outcome and liking it.
At this point, it is clear investors have decided to move away from risky assets into high quality sovereigns. The prediction by many analysts that the government bonds yield will jump when tapering occurs has instead had the opposite effect.
There are various moving parts at work and the weakness in the emerging markets currencies despite rate hikes by Turkey and India means that there are potential worrying signals and turbulence ahead. In the past five days, the Russian ruble has lost 2.7%, South African rand -2.6%, Brazilian real -1.4% and Indian rupee -0.6% against the dollar. The emerging Asian markets have held up so far during this EM sell-off; Philippine peso +0.23%, Indonesian rupiah +0.15% and Thai baht -0.22% over the same five day period. It would have been logical to expect the baht to be more affected given the long stretched out political crisis. The worst performers in Asian currencies are the Indian rupee, Malaysian ringgit and South Korean won.
While the Fed has been blamed for pushing investors off the risk curve and US equities is down for the year, Asian indices have fared better. The best performing index is the Ho Chi Minh stock index, with a 9.9% year-to-date return. There might be less foreign fund flows into Asian stocks so far this year and the recent sell-off has affected the region. However, on an aggregate level there are net inflows for Taiwan totalling $804.4 million, Indonesia $210.2 million, India $67 million and Vietnam $75.7 million. The surprising exodus has been South Korea with -$1.14 billion so far this month.
Going forward, global equities are likely to experience a marked slowdown and this will have an impact on Asian equities and currencies. The days where liquidity masks underlying growth are coming to an end, which leaves investors to focus on real growth; macroeconomics for a country and sales and earnings for corporates.