Geopolitical tension overshadows other news

The sell-off in the ASEAN region yesterday spilled over to the US and Europe as the world focuses on possible military strikes against Syria by the US and its allies.

While President Barack Obama and Prime Minister David Cameron speak of a need for a “response from the international community”, Syrian Foreign Minister Walid al-Muallem has retorted that the government will defend against any attacks.

Increasing tension

The increasing geopolitical tension overshadowed the surprise, better-than-expected US consumer confidence index figure. At 81.5 in August, this showed Americans are more optimistic about the outlook of the economy. The S&P/Case-Shiller report showed a rise in home prices of 12% year on year, while new home sales of properties in 20 cities slowed to 0.89% in June from 1.05% in May. These data were ignored as equities sold off, while crude and gold jumped up.

US stock indices declined by over 1%, Europe fell by over 2%, and Dubai fell by 7%. Unfortunately, investors continued to offload ASEAN ETFs in the US, with iShares of Indonesia and India hardest hit. This is becoming a vicious cycle with outflows during US and Asian hours.

In the past week foreign institutional investors have sold a total of $1.63 billion of Asian equities in India, Indonesia, Philippines, South Korea, Taiwan, Thailand and Vietnam, according to Bloomberg. ASEAN currencies are in free fall: the rupiah is at 2009 levels against the US dollar with a decline of 4.3% yesterday, the rupee is at a new low against the USD. India and Indonesia are at the greatest risk, followed by Thailand, Malaysia and the Philippines, as reflected in investor sentiment towards the countries’ stocks, currency and government bonds.

Indonesian officials said on the 23 August that the mineral export quota will be relaxed, and rules eased on foreign exchange transactions. These measures have not assuaged investors. Instead, the Jakarta composite has fallen by close to 5% since then.

India vulnerable

India’s economy is vulnerable in the current landscape as it is dependent on oil and the timing of the food bill, which will cost the government $19.5 billion in subsidies annually. This is not seen by investors as the best time, while the country battles a large current account deficit.

The weak underlying growth and lack of conviction in investor confidence on the outlook of ASEAN will continue to weigh on asset prices. Each ASEAN country is unique, as are their issues. Until policy makers address the underlying issues with meaningful intervention, the Fed’s scale back of stimulus will cause further volatility in the ASEAN markets.

This morning Finance Minister Chatib Basri will address the fiscal policy package to address the current account deficit.

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