Equities in Asia face further headwinds and the yen may find fresh support as investors look beyond the Federal Reserve’s Wednesday interest-rate increase to what may be peak of its tightening cycle, according to strategists and fund managers.
(Bloomberg) — Equities in Asia face further headwinds and the yen may find fresh support as investors look beyond the Federal Reserve’s Wednesday interest-rate increase to what may be peak of its tightening cycle, according to strategists and fund managers.
The US central bank hiked its benchmark by a quarter percentage point as economists forecast, and hinted it may be the final move in tightening campaign as economic risks mount.
News late Wednesday in the US that PacWest Bancorp was considering a potential sale sent its shares plummeting in after-hours trade, reigniting US banking worries and weighing on risk sentiment.
Matthew Haupt, a fund manager at Wilson Asset Management in Sydney:
“Markets will be softer today with no soothing or calming words by Powell. The market was looking for some certainty but it wasn’t forthcoming. The regional bank slow train crash continues so that is overhanging the market post Fed press conference.”
“Markets went risk-off as the stress continues with PacWest the next likely bank to need rescuing post raising the white flag.” The US banking crisis is “systemic now, versus idiosyncratic as first thought,” he said.
Jayati Bharadwaj, FX and emerging market macro strategist at Barclays in New York:
“The Fed indicated a data dependent pause with the removal of language around further increases being appropriate. We saw that rates rallied. I would expect that to continue in the Asia session.”
Jian Shi Cortesi, a fund manager at GAM Investment Management:
“If this indeed turns out to be the last rate hike in this cycle, it should be positive for Asian equities in our view. Interest-rates hikes were a major headwind for Asian equity last year. This year we are seeing signs that interest rate hikes could end in Asia, with South Korea and Indonesia having paused interest rate hikes recently.”
Brendan McKenna, emerging market strategist at Wells Fargo in New York:
“I tend to lean toward the idea the Fed is on pause now. In that sense, EM Asia assets can do well. FX should do well and yields across EM can come down as regional central banks may not feel the pressure to keep tightening.”
“EM Asia can continue to underperform relative to the rest of the EM complex, but I do think upside exists for most of Asia. Real rates in Asia are not as elevated compared to Latam and most of EMEA, while the China recovery may be starting to lose a bit of steam as well.”
“We still like the high beta countries, so in that sense IDR, KRW and PHP,” he said, referring to the currencies of Indonesia, South Korea and the Philippines.
Yen Strength
Vassili Serebriakov, FX and macro strategist at UBS in New York:
“JPY seems to be the biggest winner, with USD/JPY dropping along with US front-end yields.” UBS anticipates the yen to strengthen to 120 per dollar by year-end, he said.
“The market will be looking for signs that credit tightening is starting to impact activity and labor market data. And since the Fed hinted at a pause today, any weakness in the data would reinforce the view that the tightening cycle is over.”
Rodrigo Catril, strategist at National Australia Bank Ltd. In Sydney:
“Our outlook for USD/JPY is for lower levels over 2023. This view is largely driven by our expectations of a lower USD as the Fed eventually ponders a lower funds rate. Near term, the ebb and flow of US data releases are likely to keep USD/JPY in a range, largely contained in a 133-to-136 band.”
Brad Bechtel, currency strategist at Jefferies in New York:
“With the Fed at or near the end of its tightening cycle we are likely to see idiosyncratic drivers take over for currencies with the USD stepping back as your daily driver of FX moves. Within the Asian region, it’s going to be hard for the funders like JPY and TWD to rally unless there is a material uptick in inflation or growth for either one.”
“South Korea seems to be on the right path but global growth uncertainty will still weigh on the currency. Those with higher carry like the PHP or IDR might attract more attention from the carry growth and idiosyncratic drivers like tourism growth might help the likes of THB,” he said.
–With assistance from Ruth Carson and Abhishek Vishnoi.
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