The Federal Reserve raised interest rates by three-quarters of a percentage point for the fourth straight time on Wednesday, extending its most aggressive tightening campaign since the 1980s1. On the assumption that the Federal Reserve would continue to raise interest rates aggressively, Treasury yields are on the rise. The Fed rate hike coincides along with the anticipation of a future slowdown in the Fed’s tightening of policy as it evaluates the economic pressures of tighter credit with the risk of persistently rising inflation2 .
Recently in its October report, IMF had reduced its growth forecast for Asian markets to 4% for 2022 and 4.3% for 20233 amidst a tightening of global economic conditions, rising bond yields and currency depreciation.
Asian shares have underperformed in October as investors stress about a looming recession. Hong Kong stocks ended the month of October with a loss of more than 14% and are currently trading near their lowest levels since April 2009. The Shanghai Composite fell by 4.33% in October, while, stocks in Japan and South Korea posted single-digit gains. With majority of the Asian indices slipping, the overall market continued to slow down4.
The Fed hike is likely to be followed with similar hikes by Asian central banks which would result in an increase in dollar funding costs and rise in local borrowing costs in Asian markets. In light of alarming economic data from around the world combined with the announcement of the Fed interest rate hike, Asian currencies are expected to lose value relative to the U.S. dollar as investors get ready to flee to the safe haven. Financial conditions are also expected to be tightened across Asia which would result in further slowdown of economic growth.
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