The Fed's latest move to unanimously raise the interest rate another 0.25% to 1.75% saw Asian share markets gain temporarily on Thursday.
While Japan's Nikkei 225 rose 0.84%; South Korea's benchmark Kospi added 0.87%. The Hang Seng Index was up 0.45%, and the Shanghai composite tacked on 0.18%. In Australia, the S&P/ASX 200 reversed losses seen earlier to drift higher by 0.02%.
The excitement, however, was short-lived in the region. All markets went back in the red Friday morning following Trump’s decision to slap China with tariffs on up to $60 billion in imports.
Tai Hui, Asia Pacific chief market strategist of J.P. Morgan Asset Management said Asia equity and foreign exchange market reactions should be fairly muted given the lack of surprise in the Fed’s announcement.
He said, however, a number of money markets in the region - Hong Kong, Singapore and Australia - have seen their local interest rates surge in recent weeks due to higher rates in the US.
‘This rate surge is partly due to market expectations pricing in Fed action, but also due to other more technical factors such as a rise in Treasury bill issuance in the US that pushed up short term interest rates.’
Citywire + rated CIO for Asia fixed income, Endre Pedersen from Manulife Asset Management noted that Asia fixed income markets have already priced in a fair amount of the interest rate hike impact.
If the Fed adopts a more aggressive stance, it may result in a negative market reaction, but Asian countries are now generally better positioned to cope with higher US rates.
On the credit side, Pedersen expects default rates to remain low, and believes the development of a large local investor base will result in Asia credit outperforming other global markets over the medium term.
‘On the currency front, Asian currencies of countries with large trade surpluses have performed well in this environment; however, risks of increased protectionism and the prospect of trade wars could see these currencies come under pressure,’ he said.
According to the dot plot, 2019 will see another hike, pointed out Nick Peters, multi asset portfolio manager at Fidelity International. He said 2020 will see an additional hike or more, which implies that Fed policy will have to turn meaningfully restrictive at that point.
These later dots, Peters added, are most important for long-run funding costs, and in turn growth and investors. ‘We continue to focus on other questions.
‘Will higher US budget deficits combined with Fed ‘quantitative tightening’ put painful upward pressure on borrowing costs? Will China slow as its policy stimulus is increasingly removed? These will drive the economic outlook, and in turn Fed policy; it won’t be the other way around.’
Citywire + rated CIO for Asia equities, Ronald Chan from Manulife does not expect Asia central banks to follow suit – but he does, however, expect South Korea, Philippines and Thailand to have one rate hike this year.
‘[This will be] driven by a better domestic growth scenario, as opposed to being led by a US rate hike,’ Chan said.