Strategists were taking stock of their best trade ideas after Federal Reserve Chair Jerome Powell gave officials more flexibility on future rate hikes amid signs of an economic slowdown.
They warned not to expect an inflection point for the dollar and saw the euro remaining under pressure into the winter and the yen trading around its recent range. They reminded Asia investors that Chinese assets should be less exposed to US rate hikes, with Indian and Southeast Asian markets more vulnerable, but suggested that as the Fed’s decision was broadly as expected much of the impact should be priced in.
However, the lack of clear guidance opens the door for uncertainty and points to the potential for increased volatility, they said.
“We think it is too early to signal an all clear,” said Marvin Loh, senior macro strategist at State Street Global Markets. “Expect that volatility will return, possibly in the fall, when inflation comparables would expect a rapid decline in prices.”
Asian stocks edged higher after a strong session Wednesday for their US counterparts. Treasuries held gains while the dollar pared an overnight decline.
Here are some comments on what’s next for Asian markets after the Fed decision:
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Staying Defensive
“Within Asia, we are still in defensive mode, partly on policy tightening, but also a negative capital flows backdrop,” said Dwyfor Evans, head of Asia Pacific macro strategy at State Street Global Markets. “For equities, we have growth concerns on Korea, one to avoid, and we favor Taiwan on strong earnings, but we hedge out the TWD currency exposure and remain biased towards long USD vs Asia.”
“For the next 6 months I would certainly agree that need to be a bit defensive asset classes across Asia,” said Hartmut Issel, head of Asia Pacific equities and credit at UBS Wealth Management. “The region will probably follow mostly what the US does also in terms of more tightening.”
Asean Recovery
“The fact that investors could start to see the end of the hiking cycle could prompt some optimism. This was reflected by growth stocks outperforming value stocks overnight,” Tai Hui, chief market strategist for Asia Pacific at J.P. Morgan Asset Management said. “Bond yields have also declined with curve flattened. We expect this would also be positive for Asian assets in general given the potential improvement in risk appetite in the short term.”
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“We remain optimistic on the domestic recovery story in Asia, especially in Asean, from COVID restrictions. We are also optimistic on Chinese equities. Admittedly, how the authorities handle the latest round of outbreak and investor caution towards the real estate market would require investors to take an active approach, and focus on sectors that do not have a strong link with the property market.”
China Story
“China is less vulnerable to US rate hikes. For China, we see domestic policies as a much more important driving force than the US rates,” said Jian Shi Cortesi, a Zurich-based investment director at GAM Investment Management.
“India is vulnerable to higher US interest rates, which could lead to capital outflow, depress the Indian rupee further, prolong imported inflation and prompt more domestic rate hikes. Southeast Asian markets tend to underperform in the rate hike cycles, but undemanding valuations could limit the vulnerability.”
Yen Comfort Zone
“As for USD/JPY, we think the pair is finding a comfort zone between 135-140. It remains sensitive to Fed terminal rate pricing but the jury is still out on where that might finally land,” according to TD Securities strategists, including Oscar Munoz and Priya Misra. “We do not think that there is significant downside risk yet given the rate differential backdrop remains strongly in the USD’s favor. We would not look for topside USD/JPY at this time however.”
“For the dollar, we think it is appropriate to adopt a neutral stance for now. We think this is more of a dollar on pause than an inflection point however. We are inclined to view EUR/USD rallies as limited with 1.0280 and 1.0340 as lines in the sand that are faded. And, if the Fed cannot maintain a robust pace of tightening, there is little hope that the ECB can deliver much either.”
Korea Rebound
“I think that there would be a slight improvement in investor sentiment and any rebound will not be sustainable in the long term,” said Heo Pil-Seok, chief executive officer at Midas International Asset Management in Seoul.
“It’ll be a short rebound at best, because second-quarter corporate earnings results were not great and third-quarter could even be worse with macroeconomic data set to deteriorate further. So investors should not cheer the Fed’s decision too much. It can be best described as that extremely bad investor sentiment has slightly improved.”
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“We now have a trigger for stocks to further rise from here,” said Jung Sang-Jin, chief equity manager at Korea Investment Management. “But a long-term rebound is too early to discuss.”
Aussie Range
“Aussie is still seen in a range near term, risk assets still need to navigate a tricky landscape of more Fed hikes and a slowing global economy with geopolitical tensions not going away either, so a 0.65-0.70 likely to contain most of AUD moves over coming months,” said Rodrigo Catril, strategist at National Australia Bank Ltd. In Sydney. “We still like AUD outperforming against the crosses though targeting 1.13 for AUDNZD, 0.69 for AUDEUR and 0.59 for AUDGBP”
Kiwi Potential
“The shift in stance implied by Powell -- slower rate hikes -- will weigh on the dollar near term, and lift NZD/USD further to beyond 0.6300,” said Imre Speizer, strategist at Westpac Banking Corp. In Auckland. “But over the next month or two, there remain many global risks (e.g. China, Ukraine/Russia/European energy, Italy) which should limit the dollar’s fall, so not getting too carried away by the recent kiwi rise. Still looking for a dip to buy, but see that level below 0.6000, targeting year-end around 0.6800.”
Credit Check
“Risk assets, including Asian credit, could benefit as the fixed income markets may gain favour again,” said Thu Ha Chow, head of Asia fixed income at Robeco Singapore.
“With the recent spread widening in the Asian credit market, we see value in some of the Indian High Yield issuers in the Renewable Energy, Steel, and Telecom sectors. We view these sectors as more resilient to an economic downturn but also have the capacity to pass on price increases. We continue to be cautious on Sovereign issuers, particularly in the frontier space as the strong dollar and inflationary pressures will continue to weigh on both internal and external balances.”
EM FX Risk
“A strong dollar and higher rates in the US tend to cause EM currencies to depreciate,” said Nancy Davis, founder and portfolio manager at Quadratic Capital Management. “That could be negative for Asian counties with high USD denominated debt. It could favour countries that have strong exports as those will tend to be more competitive.”
