Having dumped Asian shares on resurgent worries about China’s economy, the specter of more aggressive U.S. interest rate rises is now forcing global investors to sell the region’s bonds and currencies.
A net $3.2 billion left Asian equity markets, excluding Japan, during the period May 1 to 24, the largest outflow since January, data from HSBC showed. Indonesia’s and South Korea’s bond markets, heavy recipients of foreign investment until March, are now seeing chunks of inflows reverse while Asia’s currencies have also fallen quite sharply.
Some market participants see foreign investment outflows across Asian asset classes as an overreaction, given the strides policymakers have made in shoring up capital flight defenses since the “Fed taper tantrum” in 2013.
But for others, the unease around the Fed’s policy deliberations twins increasing concerns around currency volatility with broader worries about the health of the China’s real economy.
“If the Fed hikes rates in June, it might come at a time when the Chinese economy weakens, and that could also mean that the Chinese currency starts to weaken again,” said Herald van der Linde, head of Asia-Pacific equity strategy at HSBC in Hong Kong.
“And that could lead to a scenario where everybody’s up and down and markets fall five to 10 percent.”
MSCI’s Asia Pacific ex-Japan index .MIAPJ0000PUS rose 19 percent between late January and end-April on the tailwinds of a dovish Fed, stabilization in commodity prices and hopes China’s economy will recover.
The fall – the index is down 5 percent since and touched a 12-week low on May 24 – is reminiscent of the selloff that followed the Fed’s first rate rise in a decade in December.
It also comes as a surprise for some, given the relative health of Asia’s economies compared with other emerging market blocs, such as Latin America.
And the downside could be limited given the broad dollar trade-weighted index .DXY has climbed 20 percent over the past two years, suggesting Asian currencies may have already priced in higher U.S. rates.