Asian equity markets remain weak

Investors are finally reacting to the long, drawn-out political theatrics in the US with a flight towards the safety of US Treasuries and an exit from equities.

fivehere’s a sense that the Fed will start to provide further support and investors are betting on longer-term government debt. The 10-year yield dropped four basis points at one point before settling at 2.63%. While the US political situation looks unlikely to progress to any conclusion any time soon, investors are selling out of the stock market. Both US equities and emerging markets are set to remain weak, with more pressure on the downside the longer this goes on.

Emerging markets in Asia

Interestingly, emerging Asian markets have held up well with their five-day performances still comparing favourably to those of their developed market counterparts. The main reason for this has been the confidence that when things do turn around, emerging Asian markets are likely to rebound further. The question now, with investors’ patience getting stretched, is how long can the EMEA markets hold up given the exit from equities is likely to continue?

Meanwhile, Asian central bankers should take this opportunity to implement policies that will shore up confidence in their economies. The Fed’s decision not to taper has helped stem the decline of emerging markets’ currencies, and bought some time. The shutdown is likely to push this decision to early next year as we lack data points to determine the health of the US economy.

RBI Chief Rajan is doing just that with a surprised market move yesterday, lowering the marginal standing facility rate from 9.5% to 9% in a bid to determine the availability of credit. The repurchase rate was left at 7.5%. The rupee has staged a comeback and appreciated against the US dollar, making it the best performing currency in September with a 9% gain, after RBI initiated a partial reversal of capital controls that limited capital outflows by NRI and investments abroad. Banks receiving dollars are encouraged to swap them with the central bank at favourable terms.

Indonesia

Bank Indonesia is expected to keep rates unchanged after raising its reference rate by 150 basis points in June to 7.25%, according to Bloomberg. The rupiah has outperformed the dollar by 1% in the past five days due to the dollar weakness. Investor sentiment towards the rupiah has not been optimistic, compared to the rupee. The rupiah is amongst the worst performers in the emerging markets’ currency space in September.

Inflation in Indonesia eased slightly from a three-year high last month, from 8.79% to 8.4%, and the trade balance returned to a surplus of $132m following a deficit in July. While investors shun the country’s currency, they are buying into their dollar bonds with a yield of 5.23%, taking the view that the country has long-term growth potential.

Gold is finally acting like the safe-haven asset class, jumping in the overnight session over 1%. The precious metal has defied logic and stayed relatively unmoved since the start of the government shutdown. The lack of interest from investors in the metal could see gold continue to remain range bound as it fails to take out resistance levels.

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