More important drivers for Asia rates than seasonal risk aversion

In line with so-called summer shakeout.

It has been noted that summer shake out Asia has historically been dominated by seasonal bouts of risk aversion during the summer months.

According to a research note from HSBC Global Research, perhaps this underscores the old adage ‘sell in May and go away’ to avoid a decline in equity markets and potentially other riskier asset classes.

In HSBC Global Research’s view, though, there are more important drivers that could contain any bouts of volatility and it still broadly advocates a long duration stance and receive swap positions in Asia.

Here’s more from HSBC Global Research:

Tactically, there are some exceptions such as CNY5-1yr NDIRS and MYR5-1yr NDIRS steepeners. More in keeping with our strategic stance are receive INR1yr ND OIS, long 10-year India government securities, long 10-year Indonesia government bonds, receive/long 10-year KRW IRS/Korean Treasury bonds and receive 5yr THB NDIRS.

There has been much evidence over recent years of a summer shake-out in Asia and the PBoC’s shift towards a market-based yuan exchange rate on 11 August last year is a vivid reminder. Not only did this reverberate across Asia, it also had a magnifying impact globally, triggering additional EM FX volatility. In June 2013, there was also a record spike in China’s overnight money market rates and in summer 2014 real estate prices in China slumped due to property cooling measures.

As much as history suggests that a traditional bout of risk aversion could come in the coming months, we do not believe this will be the case at least through to June/July. The more important impetus for Asia is likely to come from a chorus of central bank easing with the Bank of Japan ready to provide additional stimulus on 16 June or 29 July, and numerous other central banks in the region are lowering policy rates and/or providing further liquidity.

HSBC Economics expects policy easing in Q2 by Bank Indonesia, Bank of Korea and Central Bank of China (Taiwan). We have also made the case for effective easing via liquidity measures by the Reserve Bank of India and Bank Negara Malaysia. The Federal Reserve is also set to delay tightening, which is likely to be confirmed at the next FOMC meeting on 15 June.