US Fed rate pause keeps Asian markets steady, but watch out for tariffs: market observers

[SINGAPORE] The US Federal Reserve keeping rates steady is a plus for stability in Asia’s financial markets, but trade uncertainty from tariffs remains a key risk for equities and bonds in the region, said market observers.

The Federal Open Market Committee (FOMC) on Wednesday (May 7) agreed to leave the central bank’s benchmark interest rate unchanged in the 4.25 to 4.5 per cent range, citing higher inflation risks and increasingly uncertain economic outlook.

In a press conference, Fed chair Jerome Powell noted that trade policy remains a source of uncertainty that affirms the Fed’s need to be in a wait-and-see mode.

He warned that the significant tariff hikes that have been announced could lead to a slowdown in economic growth and an uptick in long-term inflation.

Asian markets mostly traded higher – mirroring Wall Street gains overnight – following the FOMC decision, which was largely expected.

South Korea’s Kospi ended 0.2 per cent higher, while Japan’s Nikkei 225 added 0.4 per cent. Hong Kong’s Hang Seng Index finished up 0.4 per cent, while China’s Shenzhen Component Index rose 0.9 per cent.

In contrast, the Straits Times Index closed down 0.4 per cent.

Plus for bonds, nuanced equities take

Market observers said the Fed’s move will be generally constructive for bonds and equities in Asia.

Simon Ree, founder of online trading academy Tao of Trading, said Asian bonds could see steady yields, which is “good news for investors looking for safety” as pressure comes off central banks in the region to hike rates.

The effect of the Fed standing pat is more nuanced on equities. “Steady rates can be positive for sectors like real estate – cheaper financing, higher property values – and this is big in Asia,” said Ree.

If rates trend lower, consumer stocks may also get a lift.

However, as Asia “lives and breathes global trade”, the heating up of trade tensions could hit export-heavy sectors such as technology and manufacturing, he said.

Ray Sharma-Ong, South-east Asia head of multi-asset investment solutions at Aberdeen Investments, said China equities should be resilient relative to Fed policy decisions.

“In addition to fiscal and monetary support, China’s activity growth, as shown in hard data, remains resilient, and China has the added lever of its stock market support programme,” he said.

He noted that the US and China have both acknowledged that the current level of tariffs between the two nations is unsustainable. “We expect a slow but eventual de-escalation in US-China trade tensions, which will be welcomed by the markets,” he said.

Back home, Singapore’s real estate – both developers and real estate investment trusts (Reits) – could see some upside as financing stays cheap and property values hold firm, Tao of Trading’s Ree noted.

However, the steady rates could be a drag on the Reit sector, said Phillip Securities research analyst Zane Aw, due to interest expenses staying elevated for a longer period of time. This would prolong recovery time from the downturn over the past few years when rates were high.

Meanwhile, banks are “a mixed bag” as steady rates indicate their interest spreads may not budge much, while their ties to global trade and capital flows make them dependent on current trade tensions.

Charmaine Tan, research analyst at FSMOne Singapore, said Singapore’s financials may see mixed impacts concerning steady rates, while lending margins might not expand further.

However, “the steadier environment can improve asset quality and loan demand if the macro backdrop remains resilient”, she said.

Said Ree: “Cyclical and export-driven sectors like industrials or consumer discretionary could stumble if trade uncertainty drags on.”

Rate cuts, if any?

Phillip Securities’ Aw said while the steady rates provide a degree of short-term stability, “the Fed’s lack of clear guidance on the appropriate rate path ahead means that broader uncertainty remains, especially given ongoing trade tensions”.

Tai Hui, Asia-Pacific chief market strategist at JPMorgan Asset Management, said a rate change appears unlikely at the June meeting, but July presents “a realistic window for the Fed to consider rate cuts, contingent on further data and policy developments from the White House”.

In his view, investors of US Treasury bills may focus on potential bond yield declines and corresponding bond price increases.

DBS senior rates strategist Eugene Leow said the Fed is likely to remain reactive instead of pre-emptive in the current environment, as US President Donald Trump’s trade deals will take centre stage.

With “a lot of attention” being placed on the upcoming China-US talks, he believes that the “range of possibilities can be pretty wide, which probably accounts for the considerable Fed easing priced into US dollar rates”.