There is much uncertainty in Asia over what US President-elect Donald Trump will do when he takes office next year, but markets seem sure of two things–his policies will be inflationary, and there are unlikely to be any big winners in the trade-driven region.
US Treasury bond yields have surged to their highest levels since January on expectations Trump’s spending promises will push US inflation higher, and emerging Asian currencies have fallen, partly because uncertainty always prompts a flight to safer assets, but also because Trump’s campaign rhetoric has stoked fears of a more protectionist trade environment, news outlet reported.
“As the global opportunity cost of capital rises alongside treasury yields, and as the dollar surges simultaneously, investors once again will fear another exodus of capital from emerging markets,” Citi analysts said in a report, noting that the US 10-year treasury yield has risen by 45 basis points in less than two days on expectations of expansionary fiscal policy.
Currencies Plummet
Emerging markets in Asia sold off sharply on Friday after US Treasury yields rose overnight.
Indonesia’s Jakarta Composite Index was off 3%, the Philippines PSEi tumbled 2.9%, and Malaysia’s FTSE Bursa Malaysia KLCI sank 1%.
Stocks on the Shanghai Composite Index entered a technical bull market on Friday, closing 20% higher than a low reached on Jan. 28. Infrastructure-related stocks jumped, while smaller-cap shares in Shenzhen lagged.
Japan’s Nikkei bucked the regional selloff, rising 0.2%, even as the yen gained 0.3% against the dollar.
Elsewhere, Hong Kong’s Hang Seng Index was down 1.4%, South Korea’s Kospi closed 0.9% lower and Taiwan’s Taiex fell 2.1%.
Hong Kong and Singapore, Asia’s two city-state trading hubs, are among the most exposed, however, not only because of their big trade links with the United States, but also their use of the dollar in policymaking. Hong Kong has a direct currency peg with the greenback, while Singapore uses a currency basket in which the dollar forms a substantial component.
Not only is a rising US dollar equivalent to tightening monetary conditions in those cities, but if the Federal Reserve raises rates faster than had been expected, it will drain the cheap funding that has kept emerging markets flush with cash.
Protectionist Prospects?
Corporate leverage within Asia now accounts for half of the region’s debt to GDP, and companies in China and India have taken on the most debt, according to bond giant, PIMCO.
Moreover, rising interest rates on US debt will erode the relative appeal of higher-yielding debt in Asian countries, causing an outflow of capital.
For example, the yield gap between 10-year US debt and a simple average of the three highest yielding countries in Asia—India, China and Indonesia—has narrowed by 41 basis points to 350 basis points in just two days.
Taiwan and Indonesia have seen the biggest capital inflows so far this year, at more than $10 billion each, according to economists at Credit Suisse, which makes them most vulnerable to a rapid reversal.
Another Risk
Beyond the immediate market impact, there is another risk overshadowing much of Asia; how will Trump keep his campaign promises to rework trade deals and punish countries such as China?
While exports to the United States from Asia excluding China have fallen steadily in the last 15 years, China still accounts for half of the US trade deficit with the world, and any signs that Trump might follow through with protectionist policies could trigger a currency war.
On Friday, Beijing fixed the yuan’s daily midpoint at a six-year low, but on a trade-weighted basis it still remains near an all-time high hit last year.
Some economists say pursuing more protectionist policies may play into China’s hands to promote the use of its currency in international trade.
