Bond, Stock markets adjust to foreign capital outflow

 To tackle this crisis and achieve economic turnarounds, many countries have attempted to stimulate their economies by injecting money into their financial systems. As a result, a large amount of foreign capital has flowed into emerging countries’ financial markets, including Thailand’s. These foreign-capital flows into both stock and bond markets in Thailand have led the baht to appreciate rapidly, causing concerns about the currency’s stability in the event that this capital should suddenly change direction and start flowing outward.
Along with the uncertainty in the global economy, concerns over baht volatility emerged when a large amount of foreign capital start to flow out, seeing the baht depreciate sharply from 28.66 per US dollar on April 22 to 31.18 per US dollar on June 28, a drop of 8.7 per cent in just two months. The baht weakened significantly after Ben Bernanke, chairman of the US Federal Reserve, announced to Congress that the Fed would continue its stimulus programme of purchasing US$85 billion (Bt2.64 trillion) per month in securities. However, the Fed plans to taper the quantitative easing (QE) plan down by moderating the size of asset purchases this year before ending the purchasing programme at the end of 2014 if the US economy is performing in line with its economic outlook.
Global financial markets have fluctuated heavily due to concerns about a loss of liquidity, which has resulted in foreign investors selling various types of assets and turning to hold cash instead, as well as taking money back to invest in the United States. This situation has also occurred in Thailand, as can be seen from net selling by foreign investors in both stock and bond markets. The capital outflow of foreign investors has caused the price of securities to fall sharply.
To get a clear view of foreign capital movements, all of the relevant figures are illustrated as follows: In the Thai bond market from April 22 to June 28, foreign investors were net sellers to the tune of Bt19.4 billion in the bond market (Bt15.95 billion in short-term bonds and Bt3.45 billion in long-term bonds). In addition, Bt64.3 billion worth of bonds expired during the period. Considering foreign net trading and bond expirations together, more than Bt83 billion worth of foreign capital flowed out of the bond market, causing the yield on government bonds to head up (as bond prices fell) by approximately 50-70 basis points (depending on the maturity of the bond) in just two months. Similar to the bond market, foreign investors net sold to the tune of over Bt67 billion in the stock market during the same period.
All of these factors lead to the conclusion that, throughout the past two months, uncertainty over whether the Fed will repeal economic-stimulus measures has led foreign capital to flow out of the financial markets of Thailand to the tune of Bt150 billion in aggregate. No matter how this outflow affects Thailand’s financial and economic circumstances and which direction the QE measures take in the near future, investors need to monitor these situations closely.