Stocks restoring some lost ground.
According to Moody's Analytics, the Federal Reserve’s decision last week to keep up its current pace of asset purchases prompted investors to jump back into Asian markets.
Stocks and currencies have restored some lost ground, while bond yields have fallen as demand strengthens.
Still, it seems clear that the days of cheap money are nearing an end. In that light, it is instructive to look back at Asian markets' performance during previous U.S. tightening cycles in 1994, 1999 and 2004 and after the Fed's earlier quantitative easing programs in the wake of the 2008-2009 recession.
The comparison has limitations: Monetary policy has evolved since the 1990s, and conditions over the last four years have been without modern precedent.
The global economy has also changed significantly over the past two decades: Financial markets and economies are more closely integrated, while exchange rates in Asia float more freely than before.
Notwithstanding all this, Asian markets tend to react negatively during U.S. monetary tightening cycles.
Stocks suffer heavily
Asia’s tight trade and financial links to the U.S. make it susceptible to changes in U.S. monetary conditions.
Many factors affect financial markets, which can make it difficult to determine the direct impact of tighter U.S. policy on Asian markets, yet some broad conclusions can still be drawn.
Asian equity indexes declined 30% peak-to-trough on average during the 1994 and 1999 U.S. rate hike cycles.
Asian stocks shed around 15% during the 2004 tightening campaign, and by a similar amount after the Fed's first two rounds of quantitative easing after 2008. Recent stress in Asian equitymarkets indicates that the impact of U.S. policy remains significant.
Speculation about the Fed's plans to taper its asset purchases this month prompted sharp capital outflows from Asia, driving double-digit declines in most equity markets since June.Asian markets vary in their degree of sensitivity, however.
For example, a 1% fall in U.S. stocks correlated with nearly a 4% decline in Chinese stocks, on average, during the six tightening periods since 1994.
Sensitivity appeared high for Thailand and Indonesia, and lowest in Hong Kong, Japan, Malaysia and Singapore.
The results reflect the greater susceptibility of emerging Asian markets to investors’ changing risk appetites than more mature markets with deeper capitalisation and better-functioning financial systems.
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