Asia Strategy: It will be alright on the night! - Nomura

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 Action
The Fed’s announcement of an additional US$600 billion in Treasury purchases
through to June 2011 was close to consensus although the absence of a specific
inflation target may disappoint some. The door has been left open for more
purchases after June although our economics team expects the Fed to then pause
if not before. We think the QE2 program is good news for risk assets and will keep
pressure on the dollar to weaken against its major G3 peer group who have yet to
undertake additional easing and against Asian currencies. Firmer oil prices, surging
agricultural and base metal prices will continue to raise inflation expectations in
Asia and keep real interest rates negative, in our view.




Anchor themes
The Fed reiterated its intention to keep the funds rate low “for an extended period”.
It said that growth “continues to slow” and that underlying inflation has moved
lower.
In contrast to the Fed statement in September, it highlighted today its mandate of
full employment for the US economy.



It will be alright on the night!
 The only game in town
While the US mid-term election results cast a shadow over Obama’s first half term
in office, investors were far more interested in the FOMC meeting which signalled
a shift from a “QE light program” to a “QE heavy” one once again. By undertaking
more Treasury bond purchases, the hope is that risk appetite will provide the
catalyst for people to spend, particularly corporates. In turn, higher risk appetite
has been implicitly linked to higher asset prices and therefore to improvements in
the real economy. In one sense, employment conditions have also become
inextricably linked to higher asset prices and increased risk appetite.

Since January 2009, we have run our suggested asset allocation with the idea that
inflation would be more likely to return than deflation in Asia. While a number of G3
consumer inflation gauges are indicating deflation, the spot CRB commodity index
hit a record high in US$ terms yesterday. With the majority of global trade and
services priced in US dollars and Asian central banks aside from Australia not in a
hurry to raise rates, the likelihood is that excess money will flow to the East from
the West in search of yield, growth and higher asset price expectations, in our view.
The latter would compound policymakers’ problems in maintaining competitive
exchange rates, low inflation and strong growth.

We believe investors have been positioned for a global double dip and deflation. The
overwhelming flows from money market funds to bonds during the last year are
testament to the search for yield and safety over growth and inflation. We expect
equities to remain well bid as the US QE program unfolds through June 2011.