US Yields Spike, $4.3B Outflow Hits Indonesia Stocks

Key Takeaway

• Rising US Treasury yields are causing significant capital outflows from Indonesian blue-chip stocks, with net outflows in Southeast Asia reaching $4.3 billion this year.
• Asian currencies face increased volatility due to a selloff in US Treasuries and upcoming key events like the US CPI data and FOMC meeting.
• The strong US dollar is pressuring Asian currencies, while China's domestic tourism spending shows robust growth, offering some hope for economic recovery.

Rising US Yields Impact

Rising US yields and currency volatility are posing significant challenges to Indonesian equities, particularly affecting highly-liquid blue-chip stocks. The increase in US Treasury yields has led to a capital flight from emerging markets, with Indonesia experiencing substantial outflows. According to Bloomberg Intelligence analyst Sufianti Sufianti, Indonesian banks saw large outflows in May, with Bank Rakyat Indonesia facing the weakest foreign appetite since April.

The broader Southeast Asian region has also been impacted, with net outflows reaching $4.3 billion this year. Indonesia has been the hardest hit, followed by Vietnam and Thailand. The region's lack of equity-market liquidity and limited direct plays in trending sectors like artificial intelligence (AI) have driven foreign capital towards tech-heavy markets such as Taiwan and South Korea. In contrast, Malaysia saw net buying of equities last month, supported by a relatively more resilient currency.

Asian FX Volatility

Asian currencies are expected to struggle this week due to a selloff in US Treasuries, which has increased volatility across the region. The upcoming US Consumer Price Index (CPI) data and the Federal Open Market Committee (FOMC) meeting are key events that traders are closely monitoring. The market is now leaning towards a potential US interest rate cut in December, and the Fed's dot plot will reveal how recent data has influenced official thinking.

European political developments are also contributing to the volatility. Voters in France and Germany delivered a significant blow to their leaders in European Parliament elections, prompting French President Emmanuel Macron to call a snap legislative ballot. In Japan, the yen remains vulnerable as the Bank of Japan (BOJ) may discuss scaling back bond-buying operations and hint at a possible rate hike in July. However, the yen's trajectory will ultimately depend on the FOMC's decisions.

Regional Currency Pressures

The US dollar's strength, driven by rising US yields, continues to exert pressure on Asian currencies. The anticipated weaker Chinese yuan (CNY) fixing, as Chinese policymakers return from holidays to address recent market shifts, is expected to further amplify regional currency weakness. The Mexican peso (MXN) has also slid following comments from President-elect Sheinbaum, highlighting the risks for various currencies as traders look ahead to the US CPI data and Fed policy decision.

Despite these challenges, there is a silver lining for China's equities. Reports indicate robust growth in domestic tourism spending over the recent three-day holiday, offering a glimmer of hope for domestic demand recovery. However, a sustained revival among consumers will depend on addressing issues in the property sector. For lasting positive sentiment, policymakers will need to follow through on their recent announcements.

Street Views

• Sufianti Sufianti, Bloomberg Intelligence (Bearish on Indonesian equities):

  "Rising US yields and currency volatility could erode foreign funds’ investment in Indonesian equities, with highly-liquid blue-chip stocks likely to suffer most if capital flight persists."