Markets in SGD, IDR, MYR are closed for a holiday Today
US Rate Hike Jitters Grip Markets
We could be on the verge of a powerful concurrence of factors as volatility takes grip. Traders have been quick to price in worst-case scenario as interest rate rise jitters start taking hold and has resulted in some fairly assertive moves in Bond, Equity, and Forex asset classes. At Friday’s close, the S&P 500 was reeling to the tune of -2.5 %; US Treasuries finished nine bps higher at 1.67 % while carry and risk-sensitive currencies like the Australian dollar sold with impunity.
There are two concurrent explanations for what is driving sentiment. One, The ECB did not extend QE provoking a selloff in Bund markets, which fed into the medium to long end US Bond curve. Two, traders have convinced themselves the Feds are marching out Leal Brainard, mega-dove, to bang the Feds September rate hike drum
Fed members Brainard, Lockhart, and Kashkari, are all talking Monday and the final speakers before the blackout period start at midnight on September 13. However, Brainard is the key piece of the September Jig Saw puzzle and will attract the most attention.
None the less, there’s a consistent undertone building among the Fed Board that delaying rate hikes will hinder rather than assist the economic recovery. However, as the market comes to grip with this real possibility and prepares for currency market turbulence, what is important to remember is that September or December timing is secondary to that actual pace of US rate hikes. IN which case, it is equally important the Feds clearly communicate their intentions to help minimize market volatile.
Australian Dollar
The Australian dollar has run out of gusto as ECB hawkishness, and US rate-hike jitters have taken hold of currency markets. Moreover, to what extent the carry trade unwind has run its course will likely come down to the market perception of September 21 Federal Open Market Committee meetings. It’s boiled down to a crystal ball session at this stage.
Dollar-Yen
USD/JPY could be the real beneficiary of the US Fed rate-hike euphoria as a surprise US September Hike coupled with the Bank of Japan diving further into negative territory could certainly derail those sub ¥100 calls. However, none of this is central bank policy guidance is very clear at this stage, and the guessing game continues.
But the JGB curve was not immune from the recent Global Bond movements as there has also been a rise in long-term JGB yields with ongoing speculation the Bank of Japan plans to change its asset-purchase strategy takes hold. Bond markets pressure appears to be building globally but what unclear is if we’re entering the next taper tantrum. Indeed a scary proposition.
A perfect storm is brewing as the credit-fuelled mainland economic recovery clashes with the prospect of higher US interest rates. This dynamic will weigh negatively on the Yuan but with the PBoC, intervening in Money Markets with punitive overnight funding cost as offshore nears 6.70, traders may move to other proxy trades as opposed to testing the PBoC iron fist. This type of intervention discredits a market trying to gain international credibility and loses favor with traders and investors alike.
One significant problem when USD interest rates go is is that with massive amounts of EM debt issued in dollars over the last decade servicing that debt becomes increasing more expensive as the US dollar strengthens.
More problems are brewing for the MYR after the IMDB fallout hits PM Najib’s who reportedly went on a tidy 6 million dollar credit card spree in recent years.
With the MSCI APAC Index falling near 1.25 % on Friday, we could be in for a bumpy ride the next few weeks if US rate-hike fever continues to climb. So time to buckle in.