Stronger Asia Holding Firm Against Hawkish Fed

Is a more hawkish US Federal Reserve no longer perceived by international investors to be a threat to valuations in emerging markets?

The odds of a rate hike at the US central bank meeting that ends Wednesday began to rise sharply from late February, with the probability now seen as 95%. This has added to speculation about a faster pace of monetary tightening this year. But judging by the recent solid performance of Asia’s emerging markets, the Fed’s grip on developing economies is markedly weaker than before, Nikkei reported.

Since Feb. 27, when the yield on benchmark 10-year US Treasury bonds began to shoot up due to hawkish remarks from Fed policymakers, the main stock market indexes of India, Malaysia and Indonesia have risen 2.1%, 1.7% and 0.9% respectively.

The Malaysian ringgit, meanwhile, has barely moved against the dollar while the Indian rupee has gained 1.2% even while the dollar index, a gauge of the performance of the greenback against a basket of other currencies, has risen 0.6%. In the region’s local debt markets, the 10-year bond yields of Indonesia and India have stayed flat.

In stark contrast to the “taper tantrum” in mid-2013 when the unexpected decision by the Fed to begin scaling back its asset purchase program placed the entire emerging market asset class under strain, foreign investors are piling into developing economies.

If Fed Chair Janet Yellen strikes a distinctly hawkish note at her press conference on Wednesday, the Fed’s grip on emerging markets could become a lot tighter once again.

According to JPMorgan Chase, emerging market bond and equity funds have attracted inflows of $13.6 billion since the beginning of this year, nearly recouping the $13 billion of outflows seen in the seven weeks after the upset victory of Donald Trump in the US presidential election.

Asia’s emerging markets bore the brunt of the taper tantrum and saw $11 billion in bond and equity outflows due to the sharp rise in treasury yields following Trump’s victory.

China’s financial markets have been enjoying a period of calm over the past year. The Shanghai Composite Index has risen 2.9% since the US election, bringing its gains over the past year to more than 13%. The yuan, which lost 4.5% against the dollar in the last quarter of 2016, has been fairly stable since the start of the year as Beijing has taken measures to stem capital outflows.