Asian stocks rally as US Fed keeps interest rates unchanged

In a widely expected move, the US Federal Reserve kept its interest rate policy unchanged on the back of low inflation and sluggish growth.
In a widely expected move, the US Federal Reserve kept its interest rate policy unchanged on the back of low inflation and sluggish growth. PHOTO: AFP

S'pore shares down slightly, bucking trend; analysts say Fed also signalling rates will go up, likely in December

Asian markets rallied yesterday as uncertainties over key monetary policy decisions in the United States and Japan came to a close, although Singapore bucked the regional trend.

In a widely expected move, the US Federal Reserve kept its interest rate policy unchanged on the back of low inflation and sluggish growth in the world's largest economy.

However, the US central bank said in a statement on Wednesday following its two-day policy meeting that the case for a rate increase "has strengthened". Market watchers are interpreting this as a signal that rates will go up before the end of the year - likely in December.

The Fed added that it held off on raising rates "for the time being" until there is more evidence that the US economy is improving and the labour market is on the upturn.

THE TRUMP CARD

Polls suggest that it will be a close election, and markets may react quite adversely to a Donald Trump victory because he is seen as being less friendly towards trade and immigration, as well as the US pivot towards Asia. This will have greater ramifications for Asia and Singapore.

OCBC ECONOMIST SELENA LING, noting that the US Fed's announcement was largely in step with expectations and has not had a major impact on Singapore's markets or economic outlook.

The Fed's target rate for overnight lending between banks has been unchanged since December, when it increased rates for the first time in nearly a decade.

The Fed has appeared increasingly divided over whether interest rates should be raised sooner. Three out of 10 of its rate-setters voted against the decision, and called for an immediate increase.

US stock markets celebrated on Wednesday in the wake of the Fed's announcement - low interest rates have helped fuel the bull market.

The Dow Jones Industrial Average rose 163.74 points, or 0.9 per cent, to 18,293.7, and the tech- heavy Nasdaq Composite added 53.83 points, or 1.03 per cent, to 5,295.18 - a record high.

Markets across Asia tracked gains in the US - Hong Kong's Hang Seng Index rose 0.38 per cent to close at 23,759.80, while the Shanghai composite closed up 16.44 points, or 0.54 per cent.

The Fed decision followed an earlier boost to markets from the Bank of Japan, which launched a new form of monetary policy easing on Wednesday.

However, Singapore missed the boat, with the local benchmark Straits Times Index slipping 4.68 points, or 0.16 per cent, to close at 2,846.06 yesterday.

There were also some gyrations in currency markets, with the Fed decision pushing the US dollar down against its global peers.

The greenback weakened marginally against the Singapore dollar in the wake of the Fed announcement. One US dollar could buy S$1.35 yesterday, down from S$1.36 on Wednesday.

Higher interest rates are seen as positive for the US dollar, and vice versa. This is because higher interest rates prompt investors to move more money into US dollar-denominated assets, and bump up demand for the greenback.

OCBC economist Selena Ling said the Fed's announcement was largely in step with expectations and has not had a major impact on Singa- pore's market or economic outlook. "It is more like a waiting game," she said, noting that the Fed is expected to go through with one rate increase this year, likely in December.

The US presidential election in November will garner more attention from markets in the coming months, Ms Ling said.

"Polls suggest that it will be a close election, and markets may react quite adversely to a Donald Trump victory because he is seen as being less friendly towards trade and immigration, as well as the US pivot towards Asia," she added.

"This will have greater ramifications for Asia and Singapore."

SEE BUSINESS:

Indonesia cuts interest rate as Fed stays put

Local market shrugs off Fed rate delay

A version of this article appeared in the print edition of The Straits Times on September 23, 2016, with the headline 'Asian stocks rally as US Fed keeps interest rates unchanged'. Print Edition | Subscribe