On Tuesday, the U.S. greenback held near a 14 year peak and Treasury yields prolonged their increase as investors supported for stronger inflation in the U.S during anticipations of expansionary fiscal policies in Donald Trump’s presidency.
The combination of both has disrupted Asian currencies and equities, mainly in South Korea, Taiwan and Indonesia, which have seen big inflows this year, specifically after the shock referendum vote by Britain to exit the EU in June.
MSCI’s largest index of Asia-Pacific shares outside Japan was generally flat after declining approximately 5% since the Trump’s shock victory at the U.S. presidential elections last week. European markets were anticipated to open steady.
Indian stocks and Australian shares led regional losers with drops of 1.4 and 0.4% respectively. Hong Kong stocks increase 0.5%, increased by expectations of strong earnings from index heavyweight Tencent.
“People are already pricing in the Trump presidency and the repercussions on their own economies,” said Joseph Roxas, an analyst at Manila-based Eagle Equities.
“The (regional) currencies are recovering, so the markets are recovering as well after quite a long down period. We should expect a little rally after such a big drop.”
On a trade weighted basis, the dollar index on Monday curved above its January high to hit 100.22, its highest since early December 2015.
On Tuesday, it was steady at 99.922.
Dollar strong point and increasing U.S. yields have fueled capital outflows from developing markets. “Foreign investors pulled out 950 billion won ($812.52 million) from Korean stocks and pumped in 397.4 billion won ($339.89 million) into bonds between Nov. 9-14,” according to sources.
Analysts anticipate additional gains for the greenback in the near term, resulting in additional headwinds for Asia.
However, emerging market equities have staged a comeback in the 3rd quarter, their performance abruptly diverged since last week, placing developed equities comfortably ahead.
“The immediate driving force is the anticipated policy mix in the U.S.,” Brown Brothers Harriman analysts said in a note to clients.
They said most economists are “focusing on either the higher U.S. interest rates and a likelihood of a somewhat more aggressive Fed tightening cycle, or the possibility of a dramatically more stimulative fiscal stance. We see the combination (the policy mix) as an exceptionally potent force that will continue to propel the dollar higher.”
Investors are observing some prospects like banking stocks in Hong Kong, which would benefit from any Trump-led deregulation in the financial sector, this is in spite of the general air of caution over Asian markets.
Some investors were also seeing the Indian rupee, which is fairly less exposed to any outbreak in global trade protectionism than others.
In currency markets, the greenback was trading at 107.88 yen after reaching its highest level in more than five months overnight. The less volatile Chinese yuan plunged to its lowest levels in approximately eight years to 6.8641 after a weak fixing.
The greenback has been on a tear ever since the Trump’s shock victory prompted a massive sell-off in Treasuries.
The big moves in the markets have been strengthened by anticipation that Trump’s guaranteed infrastructure spending and tax reduction will spur higher U.S. development, pushing up inflation and borrowing costs, as well.
Yields on the U.S. 10-year Treasury notes surges to their highest since January to 2.23% on Monday, while 30-year paper reached 3%.
According to Bank of America Merrill Lynch, “just two days of selling last week wiped out more than $1 trillion across global bond markets, the worst rout in nearly 1-1/2 years.”
In the oil market, Brent crude increases 1.6% to $45.14 a barrel, while U.S. crude increased 1.87% to $44.13 on expectations of declining shale production.
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