HOW DOES THE FED’S INTEREST RATE CUT EFFECT ON THE VIETNAMESE SECURITIES MARKET?
The US Federal Reserve (Fed) cut interest rates by 0.5% on September 18, which has been a notable topic in global financial markets. Interest rates on savings accounts and money-market funds will gradually decrease in the near future.
The first impact of the U.S. interest rate cut is the reduced depreciation pressure on the Vietnamese dong. Although this provides strong support for the Vietnamese stock market, we believe that the market had already priced due to earlier predictions before information disclosure. In the short term, the impact on the stock market is positive, but the long-term effects are uncertain. The rate cut itself is beneficial, but we need to monitor the subsequent economic conditions in the U.S. If the U.S. achieves a soft landing, it will be positive for Vietnamese stocks. However, if the U.S. economy experiences a hard landing, the dollar may strengthen again. During a U.S. recession, the dollar typically strengthens as investors prefer to hold high-quality, low-risk assets. In this scenario, defensive and quality stocks should be better targets.
The focus of observation will shift from the exchange rate of the Vietnamese dong to the U.S. economic situation. Since 2021, we have tracked three events when the Fed started a rate-cutting cycle (in early 2001, 2007 and 2019). The US economy entered a recession shortly thereafter. The Vietnamese stock market, during this period, responded positively within the first month after the Fed’s initial interest rate cut but then fell sharply. However, whether the US economy once again enter a recession as it did is still a big question. Some argue that the U.S. economy will not fall into recession this time due to productivity gains from AI development, potentially leading to a soft landing like in 1996. This remains to be seen.
Politically, the rate cut increases the likelihood of a soft landing, which is favorable for Kamala Harris’s election prospects. Her policies are more beneficial to export-oriented Asian countries like Vietnam.
Due to the reduced depreciation pressure on the exchange rate, the SBV will be able to implement more favorable monetary policy measures. We believe that the likelihood of a rate cut is low, as the current interest rate levels in Vietnam are already at historical lows.
Source: PHFM