REGIONAL markets rallied on Thursday across key asset classes as investors saw signs of an unexpectedly dovish US central bank.
Asian stocks were mostly higher, government bond yields fell and currencies strengthened against the US dollar after a report by the US Federal Reserve showed that voting members of the Federal Open Market Committee (FOMC) had cut their views on the pace of interest rate increase that would be appropriate.
"The fear in some large emerging economies going into the FOMC meeting was a continuation of dollar buying against local currencies and all the unwanted effects in other markets spilling over from sharp currency weakness, as witnessed throughout February and early March," HSBC wrote in a note.
IG strategist Chris Weston said that while investors were expecting the Fed's dropping of its "patient" stance, they did not foresee the willingness for a slower pace of rate increases. The median view among FOMC members about the appropriate short-term interest rate by end-2015 was shaved to 0.625 per cent instead of the 1.125 per cent median view in December.
The MSCI All-Country Asia ex-Japan index, which tracks 10 equity indices in the region, rose two points, or 0.4 per cent, to 477.22.
HSBC reckoned that the short-term relief by the Fed's more accommodative stance did not actually improve the fundamental outlook for emerging markets.
"The global trade cycle is poor, capital flows are erratic, and there are daunting structural supply-side challenges, while political issues burden economic policies in some large emerging market (EM) countries (such as the fiscal policy in Brazil and monetary policy in Turkey)," HSBC wrote.
"Thus, a potential near-term relief rally aside, EM has to revitalise its own story by addressing domestic problems with a fundamental overhaul to improve competitiveness and reduce economic and financial imbalances. Very few countries are doing that. Hence, we remain selective when it comes to our EM investments."
Government bond yields also fell across the region, wtih the Singapore 10-year return slipping 9.8 basis points to 2.313 per cent.
OCBC economist Wellian Wiranto wrote in a note that a more dovish Fed makes it hard for certain regional central banks to resist rate cuts without getting some breathing room from the United States. South Korea and Indonesia, in particular, were singled out.
If US non-farm payroll data on April 3 turns out to be soft, that would validate the Fed's hesitation, "consolidate market expectation for a later and softer rate hike cycle in the US and, in turn, prompt a good chance of these two Asian central banks easing further", Mr Wiranto wrote.
The US dollar also lost ground against most Asian currencies on Thursday.
"The single most important global macro variable that has been impacting emerging markets (EM) negatively is the US dollar, due to translation and leverage impacts on earnings," Morgan Stanley wrote in a note. "To the extent the US dollar now has a counter-trend rally, EM equities - particularly the laggards this year, such as Europe, Middle East and Africa, Latin America and South-east Asia - can attract a counter-trend rally for a while. In Asia Pacific ex-Japan, we would also expect yield-sensitive Australia, Hong Kong and Singapore (equities) to rally."