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The rally in the past week has investors concerned whether it’s overbought. This is a valid concern as Asian equities have outperformed their US and European counterparts in the major exchanges by an average of 40% so far this month.
This will challenge the discussion of whether tapering has been factored in by the more vulnerable Asian markets which saw sell offs recently when tapering was announced. It is clear that investors are putting aside the implications of tapering by focusing on forecasting where growth will be for the rest of the year.
Flow to US-dollar assets
The flow towards US dollar assets has been evident since the start of this year; with net inflows into US ETFs amounting to $38.1 billion in the month of July. However, the latest economic reports indicate an uneven but gradual path, where businesses are confident in their outlook but cautious in spending.
Thus the recent shift towards Asian markets is due to the bigger picture, where growth in the developing space will outperform. This is being questioned as tepid growth in the developed nations like the US and China will weigh on growth in the smaller, developing countries.
The momentum of tapering expectation has come to a pivotal point. The Fed has to address this either with a timeline or by starting it light as most are expecting. Not addressing this or doing nothing next week might be seen as a negative in the market.
Fed Chairman Ben Bernanke will be leaving office at the end of the year; the market would like to see this process started. The other focal point next week would be on the FOMC statement. The expectation of a highly accommodative asset program remains, with low interest rates to remain until economic recovery strengthens. What does this mean for the rest of the world? We would expect volatility, especially in the Asian markets.
In Asian currencies, the Indian rupee continues to advance to 63, recovering 8% since 28 August while the Indonesian rupiah drops on the anticipation that Bank Indonesia will keep rates unchanged today. Both the RBI and BI are vying for investors’ confidence to keep the economy from stalling.
This uncertainty is also weighing on gold and crude prices. As the risk premium of the military strike against Syria becomes more and more unlikely, the reasons for the higher prices in the flight-to-safety assets are being questioned. Until we find out what happens next week, we should expect crude and gold to be range bound.