US Fed's dovish stance lifts stocks as dollar falls

US central bank expected to keep rates low amid slow inflation

Singapore shares jumped to a fresh two-year high yesterday on hopes that the United States Federal Reserve will keep its loose monetary policy in place for longer.

The Fed acknowledged early yesterday Singapore time that US inflation had undershot expectations. Traders took this as a sign it would keep interest rates at low levels and its bond-buying programme in place until the year end - or even later.

The blue-chip Straits Times Index climbed 0.54 per cent to close at 3,354.71, after trading above the 3,300 level last week for the first time since July 2015, helped by a stronger Singdollar that kept stocks attractive.

The greenback fell against all major currencies as traders responded to the Fed's dovish tone. It was sold down to a 10-month low to the Singdollar, erasing all its gains against the Singdollar since late September last year.

The Singdollar was trading at about $1.357 to the US dollar as at 5pm yesterday. The US dollar has weakened about 6 per cent against the Singdollar so far this year as President Donald Trump's plans to stoke the economy - and thereby nudge up inflation - got slowly battered.

In Asia, indices in Hong Kong, Shanghai, Japan and Korea all closed higher as the Fed's dovish stance and another record-breaking Wall Street session lulled the bulls back into risk-on mode.

The STI has shot up 16.5 per cent so far this year, led by strong buying in real estate and banking stocks.

OCBC yesterday smashed analysts' forecasts with a 22 per cent jump in net profit from a year earlier. United Overseas Bank reports results today and DBS next Friday.

The market still expects the Fed to unwind its crisis-era stimulus starting in September, but the central bank has said that quantitative tightening will be paced slowly so as not to roil the calm. This refers to the Fed reducing the balance sheet it has built up buying bonds.

The Fed has also acknowledged that US inflation is weak, and some are betting this will get in the way of further interest rate hikes.

"The probability of a December rate hike, according to Bloomberg's interest rate forecast, has dropped to about 40 per cent, from 50 per cent only three weeks ago," said CMC Markets analyst Margaret Yang. That suggests that the status quo will prevail until the US inflation picture changes, but Singapore home owners should not count on interest rates here standing still.

Singapore's Sibor rate closely tracks US rates, and OCBC's year-end Sibor forecast is 1.25 per cent, with one more Fed rate hike priced in before the year is up. UOB is eyeing 1.4 per cent.

The three-month Singapore Interbank Offered Rate (Sibor), a key benchmark used to price many home loans, crept up to 1.1195 per cent yesterday, from 0.996 per cent at the start of the month.

DBS rates strategist Eugene Leow said the sharp jump earlier this month was the result of the market getting wary about liquidity tightening across developed markets.

Although the European Central Bank ultimately kept to its ultra-easy money pledge last week, the markets are forward-looking, Mr Leow said.

A version of this article appeared in the print edition of The Straits Times on July 28, 2017, with the headline 'US Fed's dovish stance lifts stocks as dollar falls'. Print Edition | Subscribe