Source: Wall Street See
Author: Huang Wenwen

The financial market is holding its breath for the upcoming interest rate decision by the Federal Reserve, with global funds eager to seek new growth opportunities. The prospects of the Asia-Pacific market may be multi-tiered.

The yen continues to rise, causing fluctuations in investor sentiment.

Some analysts believe that if the Federal Reserve cuts interest rates, it may cause the yen to rise, which could worry investors in emerging markets, especially given the vivid memory of the collective sell-off on 'Black Monday' in August.

Last month, the unwinding of yen arbitrage caused by Japan's interest rate hike once dominated market sentiment, leading to the Nikkei 225 index experiencing its most severe crash since 1987, compounded by the additional factor of the United States.Non-farm employmentSignificant decline, heavy slump in US technology stocks.

Analysts point out that there may be similarities in this scenario. As the Federal Reserve's first interest rate cut cycle in years is about to begin, there is still divided opinion on whether the rate cut will be by 25 basis points or 50 basis points.

On one hand, a 50 basis point rate cut could raise doubts about the health of the US economy, leading to a sell-off of emerging Asian assets. This could also strengthen the yen and prompt investors to unwind risk positions financed by yen-based carry trades.

On the other hand, a 25 basis point rate cut could benefit the stock market, with Southeast Asian markets potentially being the main beneficiaries.

The trend of the yen is closely related to the expectation of a rate cut by the Federal Reserve. On Monday, as the expectation of a "rate cut of 50 basis points" increased, the yen against the dollar broke through the 140 mark, reaching the highest level this year.

As of now, the exchange rate of the Japanese yen against the US dollar is 141.66, with a narrowing increase.

US commodities.Futures Trading Commission (CFTC)'s latest data shows that investors are significantly reducing their net short positions in US soybean, corn, and wheat contracts, easing bearish sentiment in the market.According to data from the Commodity Futures Trading Commission (CFTC), as of September 10th, asset management companies' bullish sentiment towards the Japanese yen has reached its highest level since March 2021.

Some analysts point out that this also causes panic among Japanese investors. If the Federal Reserve chooses a larger rate cut, the yen may further strengthen, which will put pressure on Japanese companies that rely on exports.

Southeast Asian markets have benefited, with India being elected as the "pillar".

Unlike Japan, Southeast Asian markets seem to respond positively to the Federal Reserve's rate cut decision. Stocks in the region have easily outperformed other stocks in emerging markets. Four out of the top five performing Asian stock benchmarks this month come from Southeast Asia, with Thailand performing the best.

The smaller scale Southeast Asian markets have become the preferred choice of fund managers to prepare for the change in Federal Reserve policy. In the past two months, fund managers have consistently increased their holdings of sovereign bonds in Thailand, Indonesia, and Malaysia. They have been net buyers of Indonesian, Malaysian, and Philippine stocks for three months. The inflow of these funds has helped Southeast Asian currencies become the best-performing currencies in emerging markets this quarter.

India plays a "pillar" role in emerging markets. Analysis suggests that the possible rate cut by the Federal Reserve may prompt the Reserve Bank of India to cut interest rates, attracting foreign funds to pour into the local stock market and pushing major stock indices to reach historic highs on Tuesday. Sumeet Rohra, a fund manager at Smartsun Capital Pte. in Singapore, said,

"The rate cut by the Federal Reserve will have a positive impact on its valuation and may open India's own rate cut cycle in a lagging situation. India's economic growth rate will help attract more capital inflows."

Analysis points out that after the rate cut by the Federal Reserve, India's increasing proportion in the allocation of emerging markets may also receive a boost. With its strong economic growth, growing middle class, and thriving manufacturing industry, India has become a favorite of investors.

Australian bond market facing challenges

However, not all Asian markets can benefit from the rate cut by the Federal Reserve. Momentum indicators show that the rising momentum of the Australian bond market seems to have been overextended. Earlier this week, the yields of the three-year and ten-year Australian government bonds, which are sensitive to policy, fell to the lowest level since June.

National Australia Bank Limited Sponsored ADR stated that the sustainability of the rise in the Australian bond market will depend on whether the Federal Reserve is gentle enough to meet the market's expectation of a terminal interest rate around 2.75%. Kenneth Crompton, a senior fixed-income strategist in Sydney, said,

"August employment data in Australia may also prompt the market to lower its expectation of a rate cut by the Reserve Bank of Australia in the next six months. Compared with the expectations of the Reserve Bank of Australia, short-term Australian government bonds appear to be too loose, and I don't think longer-term Australian government bonds have much value."

Editor/rice