HSBC’s chief Asia economist, Frederick Neumann, has issued a warning about the stock market, drawing parallels between current conditions and those leading up to the 1997 Asian financial crisis. Notably, the 10-year US Treasury yield has climbed to approximately 4.79%, a significant increase that echoes the dramatic rate hikes of the early 1990s.
Rising US Treasury Yields: A Familiar Threat
The current trajectory of US Treasury yields is reminiscent of the conditions that led to financial turmoil in the 1990s. Back then, rates surged from about 5% in October 1993 to nearly 8% by November 1994, causing distress in emerging markets heavily reliant on dollar-denominated capital. Today, the 10-year yield has risen sharply from approximately 0.5% in August 2020 to its current level of 4.79%. This increase has fundamentally altered the cost of dollar funding globally, posing a potential threat to economies that depend on these capital flows.
The Yen’s Decline and Competitive Pressure
The yen’s persistent weakness is another factor echoing the prelude to the 1997 crisis. Before that crisis, the yen depreciated by about 55%, moving from 80 to 130 against the dollar. This devaluation made Japanese exports more competitive, placing pressure on other Asian economies. Although today’s yen hasn’t fallen as dramatically, its ongoing depreciation could similarly disrupt regional trade balances, complicating the economic landscape for neighboring countries.
The AI Boom: A Double-Edged Sword
Tech optimism is once again at the forefront, but this time it’s driven by artificial intelligence (AI) rather than the internet. The AI investment cycle is channeling substantial demand into semiconductor and electronics exporters like South Korea, Japan, and Singapore. While this boosts growth, a potential downturn in US demand for AI infrastructure could have severe implications. Neumann suggests that if this demand falters, it could directly impact Asian economies, which are significantly exposed to the AI supply chain.
Structural Changes Since 1997
Unlike the 1990s, when many Asian economies were net capital importers with current account deficits, today’s Asian markets are generally net capital exporters. They maintain current account surpluses and have built robust foreign exchange reserves. These structural improvements, along with enhanced regulatory frameworks, have reduced the region’s vulnerability to capital flow reversals. However, as Neumann points out, the real risk now lies in a potential US demand slump for AI hardware.
US Treasury’s Response to Yield Surge
The US Treasury is aware of the rising yield situation and plans to double liquidity-support buybacks for longer-dated debt, increasing operations from $2 billion to at least $4 billion per session starting September 9. This move aims to stabilize the market and prevent further ripples that could affect global economies.
What to Watch Next
- September 9, 2026: The US Treasury will increase liquidity-support buybacks, an event that could influence market sentiment.
- US Tech Capex Trends: Monitoring shifts in capital expenditure within the US tech sector will be crucial for predicting demand for AI infrastructure.
- Semiconductor Order Books: Fluctuations in semiconductor demand could signal changes in the tech cycle, affecting Asian exporters.
- Yen-Dollar Exchange Rate: Continued monitoring of the yen’s performance against the dollar will be vital in assessing competitive pressures in Asia.
Key Takeaways
- US Treasury yields have surged to 4.79%, echoing 1990s rate hikes that unsettled emerging markets.
- The yen’s depreciation and tech-driven capital flows draw parallels to pre-1997 crisis conditions.
- Current structural strengths in Asian economies reduce vulnerability, but AI demand fluctuations could pose new risks.
- Upcoming US Treasury actions and tech capex trends are critical factors for market stability.
Risk Disclaimer: This analysis is for informational purposes only and should not be considered financial advice. Investment decisions should be based on individual circumstances and market conditions.
