VN-Index Wave Resistance

USD and rising interest rates

The most-watched information last week was the sharp rise in the USD Index (DXY). There is an inverse correlation between this index and the stock market index. Although many stock codes remained green on Thursday (September 15), some experienced brokers advised clients to sell when looking at the DXY index.

The appreciation of the USD will also affect the price movements of some basic raw materials, making it more difficult to forecast the input costs of some businesses, which means increased risks for investors in the stock market.

Data shows that the DXY index rebounded quite strongly at the beginning of September, surpassing past figures, while many other currencies worldwide such as EUR, JPY, GBP… significantly depreciated against the USD. VND was also affected, but it was more stable compared to other currencies. Overall, the State Bank of Vietnam has proactively used foreign exchange reserves to ensure the stability of VND against the USD.

In the past few days, the DXY index has shown signs of cooling down, which fundamentally reduces the pressure on the USD/VND exchange rate and the domestic foreign exchange reserves, thereby easing liquidity pressure in the system.

Although the information about the US Federal Reserve (Fed)’s interest rate hike had been anticipated and reflected in stock prices, as the official decision-making time for the Fed’s meeting on September 20-21 approaches, the market experienced another correction, reflecting investors’ cautious sentiment towards unfavorable news.

After the US August inflation data was announced on September 13, global stocks experienced a turbulent session as the Fed is almost certain to raise interest rates by another 0.75% this week, with some organizations even estimating a potential increase of up to 1%.

The impact of the US continuing to pursue an inflation control policy through interest rate tools is gradually shifting from forecast to a clearer reality. Capital flows in developing countries are strongly affected, with foreign capital tending to slow down and withdraw from the market. These factors will strongly impact the foreign exchange reserves of central banks.

Exchange rates will tend to increase if the central bank does not meet the market’s foreign currency demand. Additionally, interest rates are also under upward pressure as the spread between foreign currency interest rates and domestic currency interest rates widens. The stock market always reacts negatively to interest rate hikes, and this trend has been and will continue to be observed domestically.

Currently, interest rates in Vietnam have increased by 1-2% compared to early 2022 and are likely to rise further in the coming period, as businesses are still in great need of capital. The USD/VND exchange rate has increased by 1.4% since the beginning of Q3, after rising by 1.9% in Q2.

Ms. Nguyen Thi Phuong Lam, Head of Analysis and Investment Advisory Department at R?ng Vi?t Securities Company, stated that the VND depreciation is lower, and domestic macroeconomic data shows that Vietnam’s economy remains quite stable, inflation is kept within target, and economic growth indicators are positive.

Nevertheless, the room for domestic monetary policy management is quite limited, mainly due to external fluctuations.

The inflation developments in the US and the Fed’s interest rate decisions could affect exchange rate movements as well as money supply policy in the final months of the year. Specifically, compared to July, the US August headline inflation only increased by 0.1%, but core inflation rose by 0.6% (double the market’s expectation of 0.3%).

Therefore, the probability of the Fed raising interest rates by 0.75% at its September 21-22 meeting is becoming higher. With core inflation rising more sharply than anticipated, inflation developments in the coming months need to be observed more closely, as they could influence the Fed’s interest rate decisions in its year-end meetings.

Furthermore, the issue of stagflation in the European region and China’s Zero-Covid policy could indirectly affect Vietnam’s trade activities.

Given the unpredictable factors mentioned above, Ms. Lam commented that the State Bank of Vietnam will maintain a cautious monetary policy stance, making it difficult to expect strong money supply growth. The central bank may not raise policy interest rates, at least in 2022, but the actual interest rates in the economy will establish a new, higher level. Capital flows into the stock market will be somewhat more restricted, and a score-based market boom is unlikely in the final months of the year.

In the short term, Mr. Dinh Quang Hinh, Head of Macroeconomics and Market Strategy at VNDIRECT Securities Company, believes that the market’s concerns about the Fed’s interest rate hike have largely been reflected in market developments recently. Therefore, the market’s cautious sentiment may be somewhat alleviated after the Fed’s interest rate meeting on September 20-21, and market capital flows and liquidity are likely to recover in the last week of September.

Money is “flowing” but not “loose”

One piece of information considered good for the market, the allocation of credit growth limits (room) to banks, paradoxically caused psychological disappointment among stock market investors. This is because after a long period of credit disbursement suspension, market demand was high, but only an average of 3% of the credit room was granted, meeting only about one-third of the demand.

Mr. Tran Minh Tuan, Vice Chairman of the Board of Directors of Smart Invest Securities Company, analyzed that despite positive domestic macroeconomic factors such as strong GDP recovery, money circulation in the economy is not truly free-flowing, the interest rate support package is still facing implementation issues, and most types of businesses are struggling to access loan capital for their operations.

These factors are also adversely affecting the stock market’s operations, both in terms of market liquidity and the operational quality of listed companies. From now until the end of the year, the market will continue to face pressure from capital flow factors.

Real estate, a large market after stocks, is showing signs of “feeling the pinch” from tighter credit control. Many “distressed” properties (needing urgent capital) have appeared for sale, especially in large-scale housing projects launched last year, or high-value resort villa projects worth tens of billions of VND per unit.

F1 property owners are selling to recover capital, selling at the contract purchase price or just for transaction fees, or selling because they cannot manage to pay bank loan interest rates after the grace period ends. Some even accept selling at the 2020 purchase price for properties in ordinary locations.

Quiet signals from the secondary real estate market, warnings about the corporate bond market, especially real estate bonds, forecast that capital flows from other markets will continue to indirectly affect liquidity in the stock market.

In the context of the market being pressured by external information and domestic capital flows, even stocks that attract capital are very cautious when increasing in price, as investors rotate very quickly among groups of stocks such as fertilizers, steel, oil and gas, seafood… as seen in the past 2 weeks.

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