Strong dollar puts pressure on Asia stocks
> Greenback hovering near a 14-year high, investors brace for higher inflation under Trump presidency
HONG KONG: The US dollar hovered near a 14-year high yesterday and Treasury yields extended their rise as investors braced for higher inflation in the US amid expectations of fiscally expansionary polices under Donald Trump’s presidency.
The combination of the two have derailed Asian currencies and equities, particularly in South Korea, Taiwan and Indonesia, which have seen big inflows this year, especially after the shock referendum vote by Britain to exit the European Union in June.
MSCI’s broadest index of AsiaPacific shares outside Japan was flat in early trade after falling nearly 5% since Trump’s shock victory at the US presidential elections last week.
Australian stocks led regional losers with the broader index down 0.5%. Hong Kong stocks edged higher, boosted by expectations of strong earnings from index heavyweight Tencent.
“Hong Kong like other emerging markets will continue to underperform developed markets in the near-term because the rising value of the dollar shrinks the value of overseas investments,” said Alex Wong, portfolio manager at Ample Capital based in Hong Kong.
On a trade-weighted basis, the dollar index vaulted above its January peak to hit 100.22 on Monday, its highest since early December last year and hovering near its December 2015 peak of 100.51. A rise beyond that would take it to its highest level since 2003. On Tuesday it eased 0.2% to 99.915.
That rise and higher US yields have fuelled capital outflows from emerging markets. Foreign investors have pulled out 950 billion won (RM3.52 billion) from Korean stocks and pumped in 397.4 billion won into bonds between Nov 9 and 14.
Analysts expect more gains for the greenback in the short-term, resulting in further headwinds for Asia.
Though emerging market equities have staged a comeback in the third quarter, their performance has sharply diverged since last week, putting developed equities comfortably ahead.
“The immediate driving force is the anticipated policy mix in the US,” said Brown Brothers Harriman analysts in a note to clients.
Despite the general air of caution over Asian markets, investors are eyeing some opportunities such as banking stocks in Hong Kong, which would benefit from any Trump-led deregulation in the financial sector.
Some investors were also considering the Indian rupee, which is relatively less exposed to any flareup in global trade protectionism than others.
In currency markets, the dollar was trading at ¥107.88 after hitting its highest level in more than five months overnight. Even the less volatile Chinese renmimbi plunged to its lowest levels in nearly eight years to 6.8641 after a weak fixing. The dollar has been on a tear since Trump’s shock victory triggered a massive sell off in Treasuries.
The large moves in markets has been stoked by expectation that Trump’s promised infrastructure spending and tax cuts will spur higher US growth, pushing up inflation as well as borrowing costs.
Just two days of selling last week wiped out more than US$1 trillion across global bond markets, the worst rout in nearly 1 years, according to Bank of America Merrill Lynch. – Reuters