Asian markets take off on US rate-hike indications

[ ]The Fed minutes brought relief to emerging markets investors and a fillip to Asian bourses. Tokyo (above) gained 1.07 per cent to reach its highest closing level in three months.
The Fed minutes brought relief to emerging markets investors and a fillip to Asian bourses. Tokyo (above) gained 1.07 per cent to reach its highest closing level in three months.PHOTO: AGENCE FRANCE-PRESSE

STI leads rebound in S-E Asia as investors take cue from Wall Street's response to Fed minutes

Signals that the pace of United States interest rate hikes will be slow after a likely lift-off next month gave Asian bourses a fillip yesterday.

Investors in the region were responding to Wall Street's positive response to more hawkish minutes from the October meeting of the US Federal Reserve.

They suggested conditions for raising rates "could well be met" by next month, despite continued volatility worldwide, weak commodity prices and China's slowdown.

Fed officials also indicated that the pace of tightening will be gradual.

Markets have been whipsawed this year by uncertainty over the timing of the first rate hike in nearly a decade, but the odds appear to have firmed.

The Straits Times Index (STI) led the rebound in South-east Asia, jumping 1.17 per cent, after the minutes brought relief to emerging markets investors. Malaysia added 0.21 per cent and Jakarta rose 0.47 per cent.

Shenzhen outperformed North Asian bourses with a 3.07 per cent jump, while Shanghai climbed 1.36 per cent. Taiwan gained 1.64 per cent, Hong Kong rose 1.41 per cent and Tokyo put on 1.07 per cent to reach its highest closing level in three months.

Despite the growing likelihood of a rate rise next month, the US dollar weakened against Asian currencies, with the ringgit strengthening the most in a month to 4.3445 yesterday from 4.3680. The Singdollar recovered to 1.4153 from 1.4228. Against the greenback, the Australian dollar rose to 1.3944 from 1.4064; and the baht climbed to 35.879 from 35.985.

For many investors, the focus has shifted to how quickly the Fed will raise interest rates after the lift-off.

They will look for cues from Fed chair Janet Yellen's speech to The Economic Club of Washington on Dec 3, and the November US non-farm payrolls report on Dec 4.

ABN Amro senior economist Maritza Cabezas said the minutes showed most members of the Federal Open Markets Committee (FOMC), the Fed's policymaking arm, were positive about the strength of American domestic demand, which could shore up economic growth amid slowing foreign demand.

"We think that after the lift-off in December, the pace for rate hikes will be slow. Indeed, the divergence in policies across central banks and financial tightening in the US requires a cautious approach to ensure that the actions do not result in unnecessary tensions," she said.

The more hawkish Fed officials believe a delay in raising rates could "increase uncertainty in financial markets and unduly magnify the perceived importance of the beginning of the policy normalisation process".

A deferment could also be seen as signalling a lack of confidence in the strength of the US economy or erode the FOMC's credibility.

The dovish minority were concerned about a potential loss of economic momentum and the possibility that inflation may fail to increase as expected.

ABN Amro sees the Fed policy rate reaching 0.5 per cent in December, with the next hike likely next June, followed by hikes at every other meeting, reaching 1.25 per cent by the end of next year.

The main job for the FOMC next month is to convince financial markets that the pace of rate rises will be much slower than in past cycles, Citi Research economist William Lee said.

"We believe that the Fed's path of rate increases will begin in December, but will not reach above 2 per cent until 2018. The second rate increase will likely not occur until mid-2016," he said.

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A version of this article appeared in the print edition of The Straits Times on November 20, 2015, with the headline 'Asian markets take off on US rate-hike indications'. Print Edition | Subscribe