Traders on the Argentine Stock Exchange are keeping an eye on October 27 trading figures as prices fall amid the international crisis that started with Hong Kong stocks. Argentina’s stocks fell 13.73%, the worst level in six years. AFP PHOTO/Daniel Luna (Photo by Daniel Luna/AFP) (Photo by Daniel Luna/AFP via Getty Images)
Daniel Luna | AFP | Getty Images
The 1997 Asian financial crisis culminated in a region-wide economic recession amid market turmoil characterized by currency collapse, capital flight, and bank failures.
HSBC chief economist Frederic Neumann said the financial environment in Asia now looks strikingly similar to the period just before the crisis.
Soaring U.S. Treasury yields, a weak Japanese yen and optimism in the tech industry dominated the financial environment leading up to the crisis, Newman wrote in an Aug. 31 memo.
What does Neumann think is similar?
Mr. Newman highlighted the rise in U.S. Treasury yields as an important similarity to the 1997 pre-crisis period. US benchmark 10 year bondFor example, it rose from 5% in October 1993 to about 8% in November 1994.
In April 1997, the yield was still about 7%, about 200 basis points higher than four years earlier, Neumann noted.
The 10-year Treasury yield has now risen from a low of 0.5% in August 2020 to about 4.79% as of early Tuesday.
“Yes, it took six years, but this year alone yields have risen about 80 basis points from 3.9% in February,” Newman said.
Last month, the U.S. Treasury announced that it would target the 10- to 30-year portion of the market for stock buybacks. The government plans to “at least double” the maximum size of its share buyback program from $2 billion to “at least” $4 billion, the ministry said.
Another similarity is the recent movements of the Japanese. circle. In April 1995, the yen was trading at a period low of 80 yen against the US dollar. By April 1997, it had risen to 130. This is a drop of approximately 55%.
Currently, the yen has fallen 57% from a low of about 103 yen in January 2021 to a high of 163 yen in July, after which an unusual joint intervention by Washington and the Japanese government caused the yen to appreciate to its current level of about 160 yen. The market is currently considering the possibility of further intervention.
Prior to the 1997 crisis, the market was dominated by optimism about technology amidst the advent of the Internet. Neumann noted that the AI boom is currently inspiring similar optimism.
From financial vulnerability to “demand vulnerability”
But Mr Newman argued that the differences between 1997 and 2026 “outweigh the similarities”.
Most importantly, he said, most Asian economies were capital importers in the 1990s, meaning they invested more from abroad than abroad, and had insufficient savings to meet spending commitments.
“Rising US dollar funding costs and a volatile yen that spooked investors were the main drivers of stress in the region,” Newman said.
Currently, Asian economies are capital exporters, so rising US financing costs and a weaker yen are not major pressure points.
However, this does not mean that the region is intact. Neumann said the most important issue for Asia is its dependence on the US AI hardware boom, which supports many economies in the region.
He noted that electronics exports related to the AI boom are supporting growth in South Korea, Japan, Taiwan and Singapore.
“Instead of financial vulnerabilities like in the 1990s, Asia now faces demand vulnerabilities,” Newman said.
He warned that if rising U.S. bond yields and funding costs weigh on the AI hardware boom, or if the yen’s strength destabilizes global funding markets, demand for products in the region could weaken and growth could slow.
