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- Equity and bond markets have sold off, credit spreads have widened
- Cost of funding has gone up, several EM economies have fallen into balance of payments crises
- Yield curves have shifted up substantially, flattening along the way
- We foresee companies and individuals cutting back on consumption and investment
- North and East Asia may have buffers to deal with the rate hike cycle, but going will be tough
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Commentary: Mounting market stress
Rising rates amid high inflation and various points of stress, including the war in Ukraine and China’s pandemic struggles, have pushed global markets in a risky zone. Already, equity and bond markets have sold off, credit spreads have widened, cost of funding has gone up, several emerging market economies have fallen into balance of payments crises, and currencies have turned volatile. Yield curves have shifted up substantially, flattening along the way, reflecting nervousness about the outlook.
Looking at the US and Singapore long-term government bond yields, near doubling of yields in the span of just four months is dramatic and potentially disruptive for market pricing of financial products, including mortgages. As firms and individuals consider the substantially higher cost of borrowing for at least the next year or two, their consumption and investment decisions are likely to be impacted profoundly. The higher yields in the public debt space are spilling over into the private sector, especially in the pricing of credit risk in the emerging markets. 
Having gotten used to long-term negative real interest rates and ample liquidity, markets are struggling to adjust to the fast-changing reality where the opposite is the case. The prospect of large interest rate increases in the US have caused the greenback to soar, causing sharp depreciation in both DM (Yen down 20%ytd, Euro, 12%) and EM (Korea Won down 13%, baht 12%) currencies. For companies that have USD payables, whether in the form interest payments or import bill for inputs, the cost increase, and resulting margin compression, would be substantial. 
From the early 1980s debt crisis to the 1997 Asian financial crisis, emerging markets have seldom fared well around a pronounced US rate hike cycle. We remain confident that North and East Asian economies are largely capable of handling the forthcoming shock, but the stress is mounting in parts of South Asia, Eastern Europe, Middle East, Africa, and the Americas. In a world with a great deal of turbulence, the waves of financial market stress are bound to disturb even the most tranquil shore.
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