Many Asian markets slumped yesterday on fears over sliding oil prices and moves by the US Federal Reserve to sell off trillions of dollars of assets it has accumulated since the financial crisis.
While the Fed's decision to hike interest rates for the second time this year raised barely a ripple, its comments on the sell-off and the United States economy in general had a far greater impact.
"Markets don't like it when liquidity is taken out of the banking system. Today's slump is a knee- jerk reaction to uncertainty over the pace of the withdrawal. But if data on consumer spending and business investment is good over the next few weeks, then markets may take the tightening of US monetary policy in stride," CIMB economist Song Seng Wun said.
Sentiment was also hit by reports that US President Donald Trump was being investigated for possible obstruction of justice.
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The toxic mix all added up to a day to forget for investors, with the Straits Times Index shedding 0.7 per cent, while Hong Kong lost 1.2 per cent, South Korea gave up 0.46 per cent and Japan fell 0.26 per cent.
Shanghai and Shenzhen bucked the trend, closing slightly higher after the International Monetary Fund on Wednesday raised China's growth projections.
Markets don't like it when liquidity is taken out of the banking system. Today's slump is a knee-jerk reaction to uncertainty over the pace of the withdrawal.
CIMB ECONOMIST SONG SENG WUN
The greenback felt the effects of the uncertainty as well. It sank to a nine-month low against the Singdollar on Wednesday in the wake of poor inflation and retail figures, but strengthened a little yesterday after the Fed indicated that it viewed recent weak economic data as temporary.
The Fed's optimism was reflected in its move to raise its key interest rate by 25 basis points, as widely expected. The interest rate range is now 1 per cent to 1.25 per cent.
It hinted at more hikes to come, but some economists and traders expect yesterday's hike to be the last for the year.
"While a tighter US labour market could put upward pressure on wages and prices, there is uncertainty around the timing and the magnitude of this," said Ms Anna Stupnytska, a global economist at Fidelity International.
"Any acceleration in wages and inflation is likely to be gradual, meaning the Fed will be under little pressure to tighten policy in the next few months."
Expectations of a slow and measured pace of rate hikes kept local interest rates mostly flat to slightly lower, Bank of Singapore investment strategist James Cheo said.
The three-month Sibor (Singapore inter-bank offered rate), a key rate to price home loans, has been unchanged at 0.99455 per cent since Tuesday. The three-month swap offer rate, a benchmark used for corporate loans, fell to 0.73565 yesterday from 0.76764 per cent on Wednesday.
Weak oil prices also weighed on markets. Prices tanked by nearly 4 per cent yesterday to their lowest level since November after data showed the market remains awash in surplus oil.
That hit local shares, with Mr Kelvin Tay, regional chief investment officer for UBS Wealth Management, noting: "Energy and raw material stocks led the biggest declines as Brent prices traded below US$47 per barrel."