Post-Fed Cut, SE Asia Stocks, Currencies Rise; Australia Bonds Face Challenges
Last Thursday, the Federal Reserve's long-awaited interest rate cut finally took place, marking the first reduction in nearly four and a half years with a cut of 50 basis points.
Asian stock markets responded swiftly, with a surge in values.
Most Southeast Asian stock markets recorded gains.
By the close of last Friday, the Kuala Lumpur Composite Index in Malaysia rose by 1.01% to 1,668.82 points; the Straits Times Index in Singapore increased by 1.74% or 62.11 points, closing at 3,624.76 points; the Manila Index in the Philippines closed at 7,252.32 points, up 3.27% or 229.47 points for the week; the SET Index in Thailand rose by 1.92%, closing at 1,451.69 points; the Ho Chi Minh Index in Vietnam fell by 1.62%, closing at 1,272.04 points; the Jakarta Composite Index (JKSE) in Indonesia slightly declined by 0.88% or 69.13 points, closing at 7,743 points.
The MSCI Asia regional stock index rose by 1.5% to 186.48 points for the week.
Other stock indices in the Asia-Pacific region also increased.
Looking at the week, the Nikkei 225 in Japan surged by 3.12% or 1,142.15 points, closing at 37,723.91 points; the KOSPI Index in South Korea rose by 0.7%, closing at 2,593.44 points; the S&P/ASX 200 Index in Australia increased by 1.35% or 109 points, closing at 8,209.5 points.
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In addition to the stock market surge, non-US currencies also rose.
On the day of the Fed's rate cut, Asian currencies rose strongly, with the Bloomberg Asia Dollar Index hitting a 14-month high.
Among Asian currencies, the Indonesian Rupiah and South Korean Won led the gains, while the Malaysian Ringgit climbed to its highest level since 2022.
Yang Delong, Chief Economist at Qianhai Source Fund, told 21st Century Economic Report that he expects the Fed to cut rates by another 25 basis points at the interest rate meetings in November and December, so the appreciation of non-US currencies in the Asia-Pacific region is expected to continue for some time.
If the rate cuts continue into next year, the appreciation of non-US currencies is also expected to continue into next year.
Although the appreciation of non-US currencies will be accompanied by some fluctuations, this trend will not change.
Jiang Han, a senior researcher at Pangu Think Tank, told 21st Century Economic Report that after the Fed's rate cut, non-US currencies, including the Japanese Yen, South Korean Won, Australian Dollar, and currencies of Southeast Asian countries, have risen one after another, mainly because the rate cut has reduced the attractiveness of US dollar assets, relatively enhancing the attractiveness of non-US currencies.
Most central banks in Southeast Asian countries have not yet cut rates, which to some extent increases the attractiveness of Southeast Asian assets.
On September 18, the Bank of Indonesia lowered its key interest rate to 6%, a decision lower than the market's expectation of 6.25%.
The central bank stated that the decision is in line with low inflation expectations.
Market analysis believes that central banks in Southeast Asian countries are on the threshold of the rate-cutting cycle.
Previously, the Philippines had taken rate-cutting measures in August.
Indonesia's real policy interest rate is about 4.1%, which provides ample room for further monetary easing.
Jiang Han believes that the unexpected rate cut by the Bank of Indonesia is likely to stimulate domestic economic growth and cope with the uncertainty of the external economic environment.
Lowering interest rates can reduce borrowing costs, encourage businesses and individuals to increase investment and consumption, thereby promoting economic growth.
Yang Delong said that after the Fed's rate cut, central banks in Southeast Asia are likely to usher in a wave of rate cuts to stimulate the economy.
However, at present, apart from the central banks of Indonesia and the Philippines, central banks of major Southeast Asian countries have not yet adjusted interest rates.
On September 20, the Governor of the Bank of Thailand stated that there is no need to cut interest rates after the Fed eases policy.
Focusing on the domestic economy, the outlook remains unchanged.
Due to the weakening of the US dollar, the Thai Baht is stronger and more volatile.
It is undesirable for the Thai Baht to be too volatile, and its trend will be closely monitored.
In addition, both the central banks of Malaysia and Singapore maintained a tight monetary policy in their interest rate decisions in July this year.
The Central Bank of Malaysia earlier predicted that the country's inflation level will remain controllable in the second half of the year.
The central bank expects that the overall inflation rate in Malaysia for the whole year will remain between 2% and 3.5%, and the core inflation rate will be between 2% and 3%.
The Monetary Authority of Singapore stated that maintaining a stable monetary policy will keep the Singapore Dollar in an appreciation channel to curb imported inflation.
The main policy tool used by the Monetary Authority of Singapore is the exchange rate, not the interest rate.
With the Fed's rate cut channel opening, bonds in Southeast Asian countries have also seen a surge in purchases.
Over the past two months, fund managers have been continuously increasing their holdings of sovereign bonds in Thailand, Indonesia, and Malaysia.
Over the past three months, they have been net buyers of stocks in Indonesia, Malaysia, and the Philippines.
These capital inflows have helped Southeast Asian currencies become the best-performing currencies in emerging markets this quarter.
BlackRock, a global asset management company, believes that the current market volatility provides investors with a good opportunity to buy government bonds in the Southeast Asian region.
Neeraj Seth, the head of Asian basic fixed income at BlackRock in Singapore, said that he is particularly optimistic about medium and long-term bonds in the Philippines and Indonesia because the central banks of these two countries have more room to cut interest rates.
Kenneth Tang, portfolio manager of Nikko AM Shenton Thrift Fund, said, "We are in the golden age of Asian fixed income, especially in emerging Asian markets."
He suggested that increasing the duration of the investment portfolio is an effective strategy in the face of market volatility.
Since July this year, the Japanese Yen has seen a sharp rise.
According to the reporter's statistics, from July 11 to September 20, the appreciation of the Yen against the US dollar has exceeded 9%.
The reason is that the Fed's rate cut has finally taken place, and the interest rate differential between the US and Japan will further narrow, which has driven changes in the exchange rate and strengthened the Yen.
On September 20, the Bank of Japan decided at its monetary policy meeting to keep the target for the "unsecured overnight call rate," as the policy interest rate, around 0.25% unchanged.
Bank of Japan Governor Haruhiko Kuroda said at a press conference after the meeting that there is "plenty of time" for a rate hike.
The expectation that the rate hike will be postponed has spread in the market, and the Yen exchange rate in the foreign exchange market has fallen, once entering the range of 143.5 to 144 Yen per US dollar.
Regarding the possibility of a subsequent rate hike by the Bank of Japan, Jiang Han analyzed for the reporter that whether the Bank of Japan will raise interest rates will depend on a comprehensive consideration of multiple factors, including the growth of Japan's domestic economy, inflation levels, employment market conditions, and changes in the international economic environment.
Regarding the market's expectation that the Bank of Japan will raise interest rates in October, he believes that this needs to closely monitor the policy trends and economic data performance of the Bank of Japan.
However, not all Asian markets can benefit from the Fed's rate cut.
Momentum indicators show that the upward momentum of the Australian bond market seems to have begun to overextend.
Earlier last week, the yield on Australia's policy-sensitive three-year and ten-year government bonds once fell to the lowest level since June.
The National Australia Bank stated that given the high correlation between Australian government bonds and US Treasury bonds, whether the upward momentum can continue will depend on whether the Fed's subsequent rate cuts are sufficiently moderate.
Sydney-based senior fixed income strategist Kenneth Crompton said that strong employment growth in Australia in August may lead the market to reduce expectations for rate cuts by the Reserve Bank of Australia in the next six months.
ANZ Bank's chief economist Adam Boyton said that the Reserve Bank of Australia may consider maintaining interest rates unchanged or raising interest rates, and retain most of the hawkish rhetoric in the August meeting and subsequent communications.
Jiang Han believes that Australia's economic situation is relatively robust, with relatively fast economic growth and a low unemployment rate, which provides room for the central bank to maintain interest rate stability.
Secondly, although Australia's inflation level has risen, it is still within the target range set by the central bank, so there is no urgent need for the central bank to raise interest rates.
In addition, Australia's balance of payments is in good condition, with ample foreign exchange reserves, which also provides the central bank with the ability to cope with external economic shocks.
However, some believe that in the context of a global trend becoming dovish, the Reserve Bank of Australia may have to accelerate rate cuts.
UBS currently expects that the terminal interest rate in the United States will be lower, and the federal funds rate will quickly fall to a level far below the official interest rate of the Reserve Bank of Australia.
He said that these factors mean that the Reserve Bank of Australia may have to start easing monetary policy earlier.
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