Fed's shift gives Asian markets surprise boost

News that United States interest rates will rise only at a moderate pace sent investors rushing into riskier assets yesterday, pushing Asian currencies, gold and oil prices higher and the greenback down.

The spark came after the US Federal Open Market Committee said they now expect to raise the benchmark rate just twice this year, down from the four hikes they previously predicted.

Remisier Alvin Yong said yesterday: "The markets were taken by surprise."

It proved a pleasant surprise: Hong Kong and Shanghai rose 1.2 per cent, Shenzhen jumped 3.6 per cent, Taiwan was up 0.4 per cent and Malaysia up 0.6 per cent.

The Straits Times Index soared as much as 1.4 per cent to 2,883.39 at the opening bell, but the downgrades of Singapore's gross domestic product growth just a week before the Budget reined in the rally.

GRIM OUTLOOK

The slowdown in China is structural in nature and the chance of a near-term improvement is low. Singapore's manufacturing sector is already in recession, while its services sector is losing steam. A forecast of 1.5 per cent for the year implies at least one quarter of contraction. And risk of a technical recession should not be discounted.

DBS SENIOR ECONOMIST IRVIN SEAH, on the challenges Singapore faces

But the STI still closed up 1.26 per cent or 35.96 points at 2,880.17.

Private economists polled by the Monetary Authority of Singapore tip GDP growth at 1.9 per cent this year, down from a forecast of 2.2 per cent in December and below last year's 2 per cent.

"That's partly why (the STI hasn't) hit 3,000 yet," Mr Yong said.

The Fed's dovish shift reflect the difficulties many economies face amid a slowing China and the uneven American recovery.

Singapore is facing growth challenges after deeper-than-expected manufacturing contraction and a slowdown in the finance and insurance fields.

"The slowdown in China is structural in nature and the chance of a near-term improvement is low," DBS senior economist Irvin Seah said. "Singapore's manufacturing sector is already in recession, while its services sector is losing steam. A forecast of 1.5 per cent for the year implies at least one quarter of contraction. And the risk of a technical recession should not be discounted."

Nonetheless, Dr Ernest Kan, chief of operations for clients and markets at Deloitte Singapore, called the Fed's move "responsible" as it helps lend stability to the global economy at a time of market volatility.

An immediate effect has been to send the greenback down against a range of Asian currencies and gold up to about US$1,269 an ounce from US$1,233 on Wednesday.

"Most central banks in Asia, including China, would welcome the weaker dollar, as it gives them further space to cut rates without corresponding negative impact on the currency," said Credit Suisse economist Michael Wan. "For Singapore, it will help support the economy and consumer demand by reducing the pace of Sibor hikes. However, a more dovish Fed, if sustained over the rest of this year, will likely lower the probability of property cooling measures being removed."

The interest rates that affect business loans and mortgages here have been sliding in the wake of the declining greenback.

The three-month swap offer rate slipped to 1.18441 on Tuesday, down nearly 33 per cent from a high of 1.76235 per cent on Jan 13. The three-month Singapore interbank offered rate (Sibor) is down at 1.24088 per cent yesterday, from a recent high of 1.2540 per cent on Jan 19.

A version of this article appeared in the print edition of The Straits Times on March 18, 2016, with the headline 'Fed's shift gives Asian markets surprise boost'. Print Edition | Subscribe