Investment bulletin weekly week 34

Central banks, AI earnings and oil in focus ___________

Central banks are likely to tighten policy Vis Nayar Chief Investment Officer Central Banks in Asia and the US as well as Artificial Intelligence (AI)-related Eastspring Investments earnings are set to dominate markets this week, with the Iran-US conflict remaining a potential negative surprise. Ray Farris We expect the Bank of Korea (BoK) and the Bangko Sentral ng Pilipinas (BSP) to Chief Economist Eastspring Investments raise their policy rates 25bps this week. Both potential hikes have been well telegraphed by the respective central banks. The BoK is responding to higher inflation, continuing discomfort with rising household debt, and a robust Viola Wang economy. The BSP’s motivation comes mainly from higher inflation due largely to Economist the Iran War and a need to support a weak peso. In contrast, Thailand’s central Eastspring Investments

bank is likely to keep its policy rate unchanged thanks to low and subdued inflation.

However, the greatest potential for central bank surprise lies with Federal Reserve (Fed) Chairman Warsh’s speech to the Fed’s Jackson Hole conference on Friday. Markets expect Warsh to discuss his plans for changes in the Fed’s approach to monetary policy, which inflation metrics it deems most important and its balance sheet management.

Warsh needs to give markets a greater degree of confidence that he is willing to tighten policy to contain US inflation than what his speech at the ECB’s Sintra conference and his July post-FOMC press conference delivered. A failure to support market expectations for at least one 25bps Fed rate hike in the next several months would risk a further sell-off in US Treasuries and the USD.

Crucially, the dollar’s failure to rally meaningfully recently despite the market’s hawkish repricing of the Fed, higher US yields, and geopolitical shocks that

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historically have generated safe-haven flows into the USD suggests that Q1 2025 may have marked the peak of the dollar cycle and the beginning of a structural move back to trend.

If correct, this would point to a recovery over the next year in most Asian currencies.

Our belief in the strong outlook for the earnings of Asia’s AI hardware and AI- related infrastructure producers will face a test this week as Nvidia, the leading US producer of Graphics Processing Units reports earnings. We expect it to signal a still robust outlook for AI capex spending and provide an explanation of the recent financing of its customers. To be sure, consensus earnings estimates for Asia’s leading AI hardware markets continue to rise rapidly.

Energy supply and prices remain key risks

The US government is scheduled to announce new sanctions on Iran today. These may entail new constraints on Iran’s exports of oil. Any further reductions in energy supply into global markets, either through reduced Iranian exports or disruption of shipping through the Strait of Hormuz, would create risk of higher energy prices. Importantly, if these disruptions were to extend through September, a jump in energy prices could be possible in Q4 as two of the main buffers to the loss of energy supply from the middle east are approaching an end.

First, the release of oil from the US Strategic Petroleum Reserve is likely to halt by early October.