Concerns raised over impact of US inflation on Vietnam's stock market

At a talk show about selecting stock portfolios hosted by VIR on July 15, Nguyen The Minh, director of the Analysis Division at Yuanta Vietnam said, “With the data of the inflation in June, it is clear that the Fed is under pressure to tighten monetary policy by raising its benchmark interest rate in the coming time.”

There has traditionally been a correlation between the inflation rate, commodity prices, and the fluctuations of the US stock market in past decades.

For most commodities, prices have been significantly higher in recent times, driving inflation to a high level. The growth rate of the consumer price index (CPI) in the US, calculated based on commodity prices, has surpassed that of commodity prices.

Normally, it happens vice versa when commodity prices increase faster than the CPI.

On July 13, the US market experienced a mild decline following the inflation figure updates, which shows that inflation has hit a 40-year high. In the first week of July, commodity prices had cooled down after signs of peaking.

Minh said that these factors have been reflected in the recent drop. The Dow Jones Industrial Average has fallen over 20 per cent since April, and some stocks have turned green while many stock groups have low valuations.

The Fed’s tightening in upcoming meetings after this month could be softer. According to CME Group data, it was estimated last week that there would be a near-80 per cent chance that the Fed would raise rates by one percentage point. Another scenario is that the Fed would raise rates by 0.75 percentage points.

Minh said that the Fed's rate hiking had an impact on emerging and frontier stock markets, causing those markets to tumble.

There is a large amount of money withdrawn from Asian markets, and it can be seen that the Fed's hiking will continue to affect the market.

"However, history shows that the Fed's interest rate hike will have the strongest effect on the stock market in the first stage. The impact will decrease gradually and become insignificant," Minh said.

This gives hope for a positive scenario for Vietnam’s stock market, he added.

In the second half of this year, the market is expected to enjoy positive growth but liquidity will not be as high as in 2021. The market would witness diversification instead of a simultaneous increase in stock groups, Minh concluded.