It looks like Asian equities agree with the “hawkish hold” interpretation of the May Fed statement.
There was considerable debate stateside about just what to make of the Fed’s effort to upgrade the inflation outlook without going overboard while delivering a more muted assessment of the growth picture. The initial reaction in markets conveyed some disappointment from the hawkish contingent as the dollar knee-jerked lower, while bonds, equities and gold were all bid. Those moves were faded entirely into the close and the weakness in stocks spilled over into Asia where investors are displaying a palpable sense of angst about what the Fed’s inflation outlook will ultimately mean for the rate path.
Hong Kong shares dove the most in two weeks on Thursday and you’re reminded that there are concerns about capital flight there.
“Expectations for the Fed to hike interest rates in June have heightened after it kept rates unchanged, which will continue to boost the U.S. dollar and pressure Hong Kong’s currency and stocks,” KGI Securities’ Ken Chen said today.
H shares were down sharply for the second straight day:
On the mainland, it looks stocks got some state support amid the trade meetings as everything reversed declines to close higher – the ChiNext was down nearly 2% at one point before rallying to close up by 1.4%:
Speaking of trade talks, that got off to a rather inauspicious start on Wednesday when Beijing pledged not to bow down to Mnuchin, who arrived on Thursday with Ross, Kudlow, Navarro, and Lighthizer. In short: whatever a “dream team” would be, that’s the opposite of it.
Investors are fleeing other EMs. This is starting to look like trouble, for instance:
“History suggests that wealthy Indonesians don’t hang around long to find out why the rupiah is weakening, they just get on with moving money out of the country,” Bloomberg’s Mark Cranfield wrote overnight, adding that “the interest rate cushion for IDR is just too thin [as] even though IDR 10-year yields may appear inviting at 400bps above Treasuries, it typically takes a spread of at least 600bps to turn the rupiah’s direction.”
This looks really dicey right here:
“Who wants to buy stocks in a country where the currency is weakening?” Oanda’s Stephen Innes, asked Bloomberg, over the phone. “We seem to be moving from what appeared to be a synchronized global growth narrative only a few weeks ago to a synchronized global downturn,” he continued.
Well, tell us what you really think Stephen.