The impact of the Federal Reserve’s interest rate hikes is still causing turmoil in global capital markets. On Monday, September 26, after the continuous decline last week, the Asia-Pacific market continued to fall. The Nikkei 225 Stock Average Index fell 2.66%, and the Tokyo Stock Exchange (TSE) index fell 2.71%. The Korea Composite Stock Price Index (KOSPI) fell 3.02% on the same day, hitting its lowest point in 2 years and 2 months. Taiwan Weighted Index (TWII) fell 2.41%, Hong Kong's Hang Seng Index fell 0.44%, the A-share Shanghai Composite Index fell 1.20%, the Shenzhen Component Index fell 0.40%, and the CSI 300 fell 0.50%.
Stock indexes in Singapore, Vietnam, India, and other markets also fell by more than 1%, and the MSCI Asia Pacific index fell by 2%. As the New York stock market fell sharply in recent days, the Dow closed below 30,000 on Friday, and investors’ sentiments are clearly affected. Risk-averse selling has sprung up amid worries that a new wave of interest rate hikes will worsen the global economy. At the same time, with the rising U.S. dollar index, major Asian currencies such as the Chinese yuan (RMB) and the Japanese yen (JPY) continued to depreciate, causing new shocks to market confidence and causing the Asia-Pacific stock market to be in a state of turmoil.
If the Fed's continued interest rate rise and tightening of dollar liquidity are the root causes of capital market turmoil, then the economic stimulus plan launched by the new British government last week is the trigger for a new round of market volatility. The British government is expected to inject about GBP 161 billion into the market through plans such as tax cuts in the next five years. At the same time, the Bank of England (BoE) decided last week to raise interest rates by 50 basis points to curb inflation. In the case of the dislocation of fiscal and monetary policies, whether Britain can deal with the threat of inflation and avoid the economy from falling into recession has become a concern for investors who began to sell their pound assets. During the Asian Session on September 26, the GBP fell 4.6% against the USD at one point, falling to a minimum of 1.0349, below the previous low in 1985.
The impact of the GBP's depreciation has been shown in the Asia-Pacific markets. Although the overall fluctuation of A-shares and Hong Kong stocks was not huge, Hong Kong stocks fell to a near 10-year low last week. On September 26, its banks, real estate, shipping, and other stocks tumbled. The share price of Standard Chartered PLC slumped 7.14%. HSBC at one point fell by 8%, hitting the low since October 2021. Insurance stock Prudential also fell by more than 7% during the session. The shipping and port sectors of Hong Kong stocks fell as well, with China Merchants Port falling more than 8%, and Pacific Shipping falling more than 6%. Due to its large holdings of sterling assets, Li Ka-Shing’s Cheung Kong Group dropped by more than 10%, leading a number of blue-chip stocks and Hong Kong real estate stocks to fall. Cheung Kong Group closed down 8.63%. The drop in these traditional stocks is closely linked to the depreciation of the GBP and the outlook for the UK economy. At the same time, Hong Kong’s technology stocks rebounded, the technology index rose 1.61%; the state-owned enterprise index rose 0.38%. These changes show that Mainland Chinese companies are still resilient and favored by investors. This is also one of the factors that there is relatively lesser volatility in the Mainland’s stock market recently.
The Fed's strong interest rate hike and the resulting strengthening of the USD are the fundamental reasons for the turmoil in the Asia-Pacific markets this year. ANBOUND has previously pointed out that on the one hand, the Fed's accelerated tightening policy will have a huge negative impact on the capital market and the U.S. economy. On the other hand, the unpredictability of the Fed’s policy will be more obvious, in which risks and market volatility will increase. As the Fed continues to raise interest rates, global stock markets, including U.S. stocks, will continue to be in turmoil. For instance, the S&P 500 closed last week down 23% from its record of 4,796.56 set on January 3 this year. The situation is more pronounced in the Asia-Pacific region. Emerging markets, including Asia-Pacific, will be more severely impacted due to the return of U.S. dollar capital from hedging, making them more directly affected by the shrinking demand in the European and American markets.
In addition, as the main currencies in the Asia-Pacific region, the RMB and the JPY have depreciated successively under the strong USD, impacting the confidence of other emerging market countries. This is because such a situation may drive other currencies to fall further, which in turn may continue to promote international capital outflows. Some analysts believe that the currency devaluation of the region's two largest economies could turn into a full-blown crisis if it scares overseas funds to withdraw funds across Asia, leading to large-scale capital flight. Alternatively, a decline could trigger a vicious cycle of competitive devaluation, as well as a decline in demand and consumer confidence.
Under the circumstance of the strengthening of currency elasticity, we will not see an outbreak like the Asian financial crisis in 1997. After all, the economic scale of the countries in the region has increased significantly, and the foreign exchange reserves and foreign debt structure have improved significantly. Although Britain is far from the Asia-Pacific region, the British government's policies and the volatility of the GBP are providing typical policy cases for some small and medium-sized economies in the Asia-Pacific region. If Britain collapses, can the rest of Asia Pacific rely on fiscal and monetary policy to withstand the USD’s shock? At present, the market has not established sufficient confidence, and the risks of various governments still cannot be ruled out. With Britain serving as a lesson, governments still need currency devaluation to gradually release pressure so that the capital market will bear the double blow of economic downturn and external capital shock. Therefore, the impact of currency turbulence on the local economy and the stock market is increasing. Some countries have already defaulted on their sovereign debts, and it is not surprising that individual markets in the Asia-Pacific countries might collapse. The future policy direction of the Fed means that currency shocks are not one-off, and currency crises may produce more turbulent situations for countries with poorer economic foundations.
Final analysis conclusion:
As the Fed continues to hike interest rates and tighten the liquidity of the dollar, it has become the source of turmoil in the global capital market. In addition, the economic stimulus plan launched by the new British government is triggering a new round of market volatility. Among them, the Asia-Pacific markets also bear the brunt of the impact. Currency turmoil has an increasing impact on the local economy and stock market. Some underdeveloped countries have already defaulted on their sovereign debts, and it is not surprising that certain Asia-Pacific countries might experience stock market crashes.
