Market Commentary: Global Market Movements Post-Labor Day Holiday
This week marks the first trading period following the May Day holiday, encompassing eight global trading days since the beginning of May. The Hang Seng Index has been noteworthy, rising from 17,000 points to near 19,000. The core market logic behind this performance lies in the relative advantage of Hang Seng stock prices. Concurrently, the A-share market has gradually climbed above 3,100 points, reflecting overall stability in China’s stock markets. Globally, stock markets have remained relatively stable over these eight trading days.
In our previous report, we indicated that these eight trading days presented a good buying opportunity (see “Is Stagflation Ahead? Analyzing Q1 Underperformance in the US”). The US April CPI data, set to be released next Wednesday, is likely to be less than favorable. However, unless there is a significant uptick in the US CPI, the market has largely priced in the expectation of persistent inflation. The prevailing market consensus is that US inflation will remain sticky, with the Federal Reserve refraining from further rate hikes but maintaining restrictive rates for an extended period. This suggests a period of relative stability for global stock markets, providing a favorable environment for adopting wave-trading strategies. Investors can start locking in profits from prior buy-ins and wait for opportune moments to re-enter the market post-CPI data release.
Volatility in the Global Forex Market
Since the start of May, the global forex market has experienced significant volatility. We have consistently viewed the US Dollar Index as a critical indicator of global economic conditions. Not long ago, the dollar index peaked at 106 without causing substantial global currency fluctuations, particularly in Asia, which remained relatively stable. This stability was partially due to end-2023 expectations of the Federal Reserve entering a rate-cutting cycle. Even with the dollar index at 106, international capital flows were not rapid enough to trigger significant outflows from the residential sector.
However, systemic changes in overall expectations, driven by the aforementioned consensus, have led to dramatic fluctuations in Asian forex markets. The Korean won and Japanese yen have depreciated continuously. Despite the Eurozone entering a rate-cutting cycle, Asian currencies have also depreciated against the euro. Indonesia has even raised rates by 25 basis points, while Vietnam has mobilized substantial foreign exchange reserves to support its commercial banks, preventing a financial crisis. The renminbi has remained relatively stable, holding steady beyond 7.20 against the dollar. The battle to protect currencies under the shadow of a strong dollar has resumed.
Insights from the FOMC and Powell's Remarks
In his press conference following last week’s FOMC meeting, Powell addressed several key issues, emphasizing that the Federal Reserve would not raise rates. This week, numerous Fed officials confirmed his stance, leading to positive performances in the Dow Jones and S&P indices. Two points stand out from his remarks. First, despite a low quarter-over-quarter annualized rate in Q1, Powell expects the US to maintain around 3% year-over-year growth in 2024, considering inventory and trade perspectives. Second, he noted that emerging markets have remained stable during this rate hike cycle, even when the dollar index exceeded 110. This implies that these markets might withstand pressure and maintain stability as the dollar cycle peaks and potentially declines, though the timing is uncertain.
During the dollar’s upward trajectory, Asian currencies did not experience a crisis, with the renminbi being the only notable exception. At that time, the consensus was that US economic growth peaked in 2023 and would decelerate in 2024, with a corresponding decline in the interest rate curve. However, US economic growth in 2023 and 2024 has far exceeded expectations, while Asian markets have weakened since entering 2024. This discrepancy is the root cause of forex market turbulence. Although the Eurozone’s rate-cutting cycle has widened the interest rate differential with the dollar, its overall economic upswing has bolstered its tolerance for forex volatility.
Future Economic Growth and Forex Market Stability
Looking ahead, economic growth remains a crucial concern for all countries. The strong US Dollar Index, backed by robust US economic performance, poses challenges for Asian countries, as slower growth might deplete their forex reserves, hindering currency stabilization efforts. Vietnam, once a significant growth point in Asia during 2020-2021, is now mired in a financial crisis, casting a shadow over Asian currencies. China’s economic performance thus becomes even more critical in this regional context.
On Saturday, China will release its April CPI and financial data. In line with PMI figures, prices and financial metrics have remained stable, with growth momentum still weak but overall panic subsiding. For China, price stability is crucial, and real estate plays a central role. This week, national real estate policies have been significantly relaxed, and we need to monitor the ensuing data. Media reports indicate an accelerated reduction in second-hand housing inventory, which is a positive signal. The capital market has also responded positively. Additionally, April’s M0 data exceeded expectations, potentially indicating renewed enthusiasm for the capital market.
As the A-share market reaches 3,100 points, certain sectors may have peaked. The next phase will focus on policy directions from the Third Plenary Session, locking in early gains and identifying new investment sectors. The fundamental health of China’s economy remains the most important factor, crucial for the entire Asian forex market’s stability and serving as the cornerstone of the region’s currency defense.
Special Note on the Japanese Yen
The yen’s performance in the Asian forex market is relatively unique. For instance, Toyota’s 2023 earnings exceeded expectations, primarily driven by its US market profits. Japan’s economic ties with Asia are weakening, suggesting that yen dynamics may hinge more on Japan-US trade relations. One factor to watch is the potential for accelerated inventory restocking by US companies to hedge against potential tax reforms under a possible Trump administration. This could temporarily stabilize Asian currencies.