Trading should be fairly quiet for the week ahead as investors choose to remain on the sidelines ahead of the Federal Open Market Committee (FOMC) meeting on Wednesday, while at the same time the Chinese New Year holiday begins January 31.
At the conclusion of the January 28-29 FOMC meeting, many analysts expect another $10 billion reduction in its asset purchase programme to $65 million, with some predicting that the tapering process will be completed by mid-2014.
“We believe the committee will take this step because of stronger economic data, moderate reaction of financial markets to the December decision to taper, and comments from FOMC participants suggesting they are comfortable with the economic outlook,” said Lewis Alexander, US chief economist at Nomura.
For example, a report on January 23 showed applications for unemployment benefits held near a six-week low, showing firings remain muted following the holidays. Jobless claims rose by 1,000 to 326,000 in the period ended January 18, according to Labor Department data. The prior week’s 325,000 were the fewest since late November.
As a result, Asian currencies should be under pressure with heightened worries over an emerging market sell-off, according to Crédit Agricole in a report released on January 27.
Even the rally in US Treasuries have failed to provide any relief to risk assets given the weight of negative sentiment in the Asian region whether triggered by slowing Chinese growth, political tensions in Thailand or the anticipated Federal Reserve (Fed) tapering.
The US 10-year yield fell six basis points to 2.72% on January 24, after sliding to 2.7%, the lowest since November 26, according to Bloomberg Bond Trader prices.
Additionally, earnings and valuation concerns are acting to restrain equity markets, notes the French bank.
“The combination of these [factors] spells more bad news in the days ahead, with risk assets set to remain under pressure this week,” said Hervé Goulletquer, head of global markets research at Crédit Agricole.
Since the Fed announced its first cut in its asset purchasing programme from to $75 billion from $85 billion in late-December, there has been gradual investor sell-offs from emerging markets most notably in the equity sector, while the Asian debt capital market sector has been fairly resilient.
Global Emerging Market (EM) funds saw further outflows of approximately $2.4 billion the week of January 13, after $1.3 billion of outflows in the prior week, estimates UBS. This is the 13th consecutive week of outflows from EM funds, the longest such streak since 2002.
Sputtering domestic engine
The Association of Southeast Asian Nations (Asean) economies of Indonesia, Malaysia, the Philippines, Thailand and Vietnam have had a fairly good run since global financial crisis, supported by strong fundamentals and resilient domestic demand story.
More recently, however, the growth story has been a bit more mixed, with 2014 proving more challenging for some economies, according to HSBC in a report released on January 23.
“Fed tapering will continue to have implications for global financial conditions, which means that capital flows to the Asean-five countries will be less abundant and more selective than in the past, shying more away from economies with macro imbalances and where political uncertainty is high,” said Leif Eskesen, chief economist for India & Asean at HSBC.
“It also means that the cost of funding would be higher, which could, in particular, impact the more leveraged economies,” he added.
As Fed tapering gets further under way and if it is accelerated, there could be further spill-over through the capital flow channel, with Indonesia and Thailand relatively more at-risk due to the weaker external positions, notes HSBC.
However, further Bank of Japan and European Central Bank easing later this year may partly counter the impact from Fed tapering, adds the bank.
