Credit: An uneven Omicron sell-off

Shaken by Omicron but sell-off had been uneven in Asia
Chang Wei Liang03 Dec 2021
    Photo credit: Unsplash Photo

    The surprise threat of the Omicron variant has shaken credit markets far more than the Fed’s taper did. Gauging the credit sell-off across Asia is important, but has been complicated by Omicron appearing at the boundary of monthly rebalancing for our DACS indices. As such, the DACS values for Dec cannot be directly compared with their pre-Omicron Nov values due to their different basket compositions. We performed an alternative calculation for our DACS indices without rebalancing to specially address this. 

    Our DACS indices across 5 Asian economies show that the Omicron sell-off has fallen unevenly across Asian USD credit.  Negative sentiment may also have been exacerbated by risks of earlier Fed rate hikes after a hawkish testimony from Powell. The worst hit country is Indonesia, with its DACS index widening by 22bps compared to the previous week. India also saw a significant 7bps rise in its DACS. Such underperformance may reflect concerns that both Indonesia and India are susceptible to new infection waves from a highly transmissible variant, given that less than half of their population is fully vaccinated. Furthermore, fiscal space for both is more constrained today than it was pre-pandemic. Any further delay in fiscal consolidation due to new infection waves may also have negative implications for their credit ratings and external stability, and all the more with the Fed now set to hike rates in 2022.

    In contrast, China, Hong Kong SAR and Korea saw only a marginal widening in their aggregate credit spreads this week. China’s zero Covid strategy, replete with travel restrictions and widespread testing, means that reduced vaccine efficacy to Omicron is not necessarily a big worry for the Chinese. Korea and Hong Kong SAR are also more resilient, being advanced economies that can afford to increase stimulus if Omicron does lead to significant economic disruptions. The upshot is that risks of an Omicron-led resurgence may lead to a North-South divide in Asian credit performance again.


    Chang Wei Liang

    Credit & FX Strategist
    [email protected]
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