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In Asia: Free Fall

Grab a parachute.

It all hangs on Amazon and Alphabet now (and we’ll get Draghi on Thursday as well), but on the off chance the market isn’t rescued by the Bezos and Google, you should note that the rout in Asia deepened substantially on Thursday.

Wednesday’s brutal selloff on Wall Street rippled through beaten down Asian shares, delivering a fresh blow to risk sentiment just 48 hours after the region’s benchmarks sank in a Tuesday bloodbath.

First of all, the MSCI Asia Pacific index (the regional benchmark) finally slipped over the edge, falling into a bear market for the first time since 2016.

Japanese shares were the hardest hit on Thursday. The Nikkei, which sank 2.7% during Tuesday’s rout, fell a truly dastardly 3.7% on Thursday. This was the third time this month the benchmark has fallen >2.5% in a single session. It’s now in correction territory.

Nikkei

October is on pace to be the worst month for the Nikkei since that month (i.e., since October 2008).

Nikkei2

Meanwhile, in Hong Kong, the Hang Seng is of course in a bear market and while October’s 10% slide actually doesn’t count as particularly anomalous for the gauge, what is out of the ordinary is for the benchmark to fall for six consecutive months. Specifically, this would be the first time the Hang Seng has logged a six-month losing streak since 1982.

HangSeng

Here’s another fun factoid: Hong Kong shares have fallen 2% or more in a dozen sessions this year. That only happened a pair of times in 2017.

HangSeng2

In South Korea, the Kospi is in a bear market and was butchered on Thursday after GDP came in below expectations. This is on pace to be the worst month for South Korean shares since the crisis.

Kospi

Obviously, the more the Fed hikes the worse this is likely to get and the South Korea GDP miss underscores the dilemma for emerging markets the world over: You can hike rates to try and guard against capital flight if you want, but doing so risks undermining the domestic economy at a time when trade frictions are already weighing on the prospects for global growth.

With all of the above in mind, recall this from a Nomura note dated August 13:

In Asia, there may be some short-term BOP-related contagion but, from a fundamental standpoint, we believe the bigger vulnerability for Asia in coming months stems from domestic credit stress and evaporating market liquidity, not balance of payments or currency pressures, and the economies most exposed are China, Korea, Taiwan, Hong Kong, Singapore and Malaysia. There are three pressure points, all of which we expect to intensify. One is increasing US trade protectionism squarely focussed on China, to which Asia’s export-orientated economies – which are large suppliers of parts and components to China for assembly and re-export – are highly exposed. Another is DM monetary policy normalisation. Thanks to late-cycle fiscal stimulus, the Fed is firmly on course to hike rates in September and again in December, while we also forecast G4 quantitative easing to switch to tightening next quarter, as the Fed increases its balance sheet roll-off to USD50bn/month and the ECB ends its Asset Purchase Programme in December. Just as QE pushed investors into riskier EM assets, DM monetary policy normalisation stands to have the opposite effect, refocussing investor attention from EM yields to EM risks. The third pressure point is increasing evidence that Asian growth is slowing  partly because of weakening Chinese demand, but also from tightening domestic financial conditions, still-high oil prices and nascent signs that the electronics upcycle is nearing completion.

Right. And then have a look at foreign ownership of domestic bonds and equities in developing Asia:

NomuraAsia

(Nomura)

This is why it’s precarious for Jerome Powell to get too aggressive – he has the weight of the world on his shoulders (figuratively and literally) and you should also note that Trump isn’t helping.

What the President doesn’t seem to realize is that the more political pressure he piles on Powell, the less scope Powell has to lean dovish, because any relent that doesn’t come as a result of an outright meltdown in global markets will be seen as the Fed bowing to the White House in the eyes of Trump’s political opponents.


 

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