What Powell means for Asian markets

Jerome Powell caused a stir in global markets Tuesday, which paved the way for faster than expected U.S. hikes, which would ripple through rate sensitive Asian assets.

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The Federal Reserve Chair told Congress that policymakers will discuss whether to wrap up bond purchases a few months ago and he retired the word transitory from his commentary on inflation. If capital flows to America are affected, higher U.S. rates would have a significant impact on Asian assets. A stronger dollar has implications for Asia's export-heavy companies and economies and the dollar-denominated debt of the region's sovereign and corporate borrowers.

Asia stocks and currencies are rallying Wednesday, with some strategists saying Powell's comments about a faster taper weren't unexpected. Tomo Kinoshita, global market strategist at Invesco Asset Management said that his nod toward the uncertainty caused by the omicron variant has also loosened the hawkish tone.

Here are the thoughts of Asia watchers on what Powell's shift means for the region s markets:

The allure of higher returns in EM Asia and the stickiness of funds in this part of the world will be stressed by the prospect of quicker taper and higher U.S. rates, said Vishnu Varathan, head of economics and strategy at Mizuho Bank Ltd in Singapore.

He said that the outcome will be Kokomo Fed, that gets there fast and then takes it slow after, referring to a Beach Boys song. In turn, this will prompt a Kokomo dollar whereby the bias is for the dollar to be skewed to strength. The threat of faster tapering is bad news for high-beta markets, such as EM, said Sue Trinh, managing director for global macro strategy at Manulife Investment Management in Hong Kong.

She said that Asia is well placed within EM to withstand potential monetary volatility in Asia and that Asia is less dependent on foreign capital than other EM. The not-so good news for Asia is that the region is too dependent on foreign demand to absorb its exports. According to Alvin T. Tan, head of Asia FX strategy at RBC Capital Markets in Hong Kong, expect more pressure on risk assets in general, including Asian equities.

Asian FX have held up very well in this latest risk-off bout, and that was because the whole market was charging up on U.S. dollars right into the omicron news, he said. The U.S. dollars are being unwound this time. It has been an unusual risk-off experience, though JPY has behaved more conventionally. The re-emergence of Covid 19 concerns could potentially lead to the return of tourism, said Terence Wu, a foreign-exchange strategist at Oversea-Chinese Banking Corp. in Singapore.

We will be watching closely the developments in the renminbi. The Asian currency has been sheltered by the RMB on a basket basis. According to Michael Rainer Preiss, portfolio strategist at Golden Equator Wealth, said that extreme dollar strength is a boon for Asia and EM equities, but China and large Asean markets such as Indonesia could still outperform western markets in 2022 because of the reversion to mean. The valuation argument for China's equity market is stronger and China already had a big correction. Powell suggested that the Fed could bring forward their rate hike to as soon as the middle of 2022, but the dollar didn't rally on the back of this. Head of Asia research at Australia New Zealand Banking Group in Singapore, said Khoon Goh. The statement of the Fed Chair is only matching market expectations. The impact of Asian FX will likely be mixed. With export growth still strong in the region, as shown by today s stronger than expected Korean numbers, currencies of export driven economies like KRW, CNH and SGD will fare well. There's a chance that higher U.S. yields could weigh on IDR due to reduced foreign bond inflows. THB will be influenced by how the Omicron variant may affect Thailand's tourism reopening. The spread cushion on Asian dollar bonds from rising Treasury yields is thin at best with valuations near multi-year tights, with China s property issuers being the exception, according to Ek Pon Tay, senior portfolio manager at BNP Paribas Asset Management in Singapore.

Tay recommends investors overweight investment grade rated China property credits as they are likely to survive in the event of a prolonged sector downturn and valuations offer a spread cushion versus others.

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