YEREVAN, August 22. /ARKA/. Asian markets look set for a rough ride on Thursday after minutes from the Federal Reserve July policy meeting were taken as affirming the outlook for a near-term tapering in stimulus, sending Treasury yields to two-year highs.
Wall Street stocks sold off, the U.S. dollar surged and borrowing costs rose globally. All of which is bad news for emerging markets that have come to rely on cheap dollars to underpin domestic demand and fund current account shortfalls.
South America provided a taste of what was likely to come for Asia, with the Brazilian real tumbling 2.5 percent and the Mexican peso 2.2 percent. The turmoil was enough to make Brazil’s central bank chief cancel a trip to the United States.
Dealers said the violence of the market reaction was partly because some investors had hoped the Fed would lean against the recent climb in Treasury yields. Instead the minutes showed most Fed members felt the outlook for tapering had not changed.
“That does not smack of a Fed going out of its way to fight the back-up in bond yields at the time, which is partly why Treasuries have sold off,” said Alan Ruskin, global head of foreign exchange strategy at Deutsche Bank in New York.
“Most other asset markets are taking their lead from Treasuries, and the minutes provide no obvious relief for the stresses in the emerging market world.”
Markets from India to Indonesia have already been under intense pressure from expectations Western investors will repatriate funds now that yields at home are rising.
A confused policy response by some governments has only added to the sense of foreboding and sent funds fleeing the region.
Traders expected currencies and stocks in India, Indonesia and Thailand would be under particular pressure on Thursday, likely requiring more official action to support assets.
Investors also face an added hurdle in HSBC China Flash PMI for August due later on Thursday. A weak reading would give markets another excuse to push the currencies and shares lower.
Doing the most damage was a jump in 10-year U.S. Treasury yields to almost 2.9 percent, a level last seen in July 2011. This is a major chart level and a break could see the market quickly test 3 percent, which itself is a huge psychological marker. –0–
