Asian markets are following Wall Street’s lead – but why?

Asian markets are following Wall Street's lead - but why?

Asian investors typically take their cue from what share prices do in America, as many Asian countries still depend on the US economy for growth.

But analysts say the sharp falls, while dramatic in themselves, should be seen in perspective.

Economic fundamentals in the US, and in many Asian countries, are still stronger than they have been since the global financial crisis.

It seems counter-intuitive, but as Dheeraj Bharwani, an independent wealth strategist said to me in the wake of the initial falls on Asian shares, “it’s actually positive economic news coming out of the US that has caused the Asian market falls”.

The US economy is growing, and that means inflation expectations – how much things will cost in the future – are going up.

And that means the US Federal Reserve may raise interest rates faster and at a steadier pace than they were expected to, in order to stabilise the economy.

That’s the job of central banks, to tweak and adjust interest rates to make sure the economy doesn’t grow too fast, or too slow.

(Think of the economy like the perfect bowl of Goldilocks porridge, and it might become a little clearer.)

This is what’s causing some investors in the US and Asia to pull their money out of the stock market.

Because when the cost of borrowing rises, investors worry about the impact of that on the growth outlook of companies that might find it more expensive to build new factories or expand.

So investors now have “a choice about where to put their money”, says David Kuo of Motley Fool. “With US interest rates rising this year, they don’t have to invest it in shares to get a return.”

Asian markets have also benefited from US interest rates being at record lows over the last decade because a lot of that money has come into Asian markets to look for better returns.

But now with US interest rates expected to rise, traders say many Asian investors are feeling anxious that the US stock market rally may be winding down, and that could drag Asian stocks lower too.

Source: BBC News

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