Markets fragile with Fed set to lift rates

A man walks near cargo containers at a port in Tokyo, in this Jun 17, 2015 file photo.
A man walks near cargo containers at a port in Tokyo, in this Jun 17, 2015 file photo. PHOTO: REUTERS

Share and commodity prices drop amid fears that move may trigger turmoil

Global markets are in a fragile mood as the United States Federal Reserve prepares to finally pull the trigger on an interest rate hike.

Share and commodity prices are tumbling as jittery investors anticipate the first increase in rates since 2006.

Market watchers are all but convinced that the US central bank will lift rates from ultra-low levels tomorrow (Thursday morning Singapore time), as a mark of the economy's recovery since the global financial crisis.

Traders said many investors have already positioned their portfolios in anticipation of the widely expected move, and will instead be focusing on comments from Fed officials about the pace of future rate hikes, which is expected to be gradual. However, there are still fears that the hike could trigger financial market turmoil, and the uncertainty has led to volatility.

Singapore's benchmark Straits Times Index (STI) dipped 0.69 per cent yesterday, extending a fall of 1.54 per cent last week.

Hong Kong's Hang Seng Index slid 0.72 per cent after plunging 3.47 per cent last week.

Asian markets mirrored jitters on Wall Street: The Dow Jones Industrial Average declined 3.26 per cent last week, while the Standard & Poor's 500 plunged 3.8 per cent in its biggest weekly decline since August.

This turbulence was accompanied by turmoil in commodity markets, as oil prices once again went into free fall. Brent crude, the global benchmark, plunged 12 per cent last week to reach US$37 per barrel - under US$40 for the first time since 2009.

Rising interest rates increase the value of the US dollar. When the dollar rises, dollar-denominated commodities like oil suffer as they become more expensive to users of other currencies.

In addition to the impending Fed hike, there is also growing speculation that Iran is boosting oil production, which will only fuel the world's growing supply glut.

Meanwhile, the greenback has risen broadly as a rate hike is seen as a plus for the US currency.

The US dollar has appreciated about 1.15 per cent against the Singapore dollar since last week. One US dollar can now buy $1.41.

Mr Daniel Ang, an investment analyst at Phillip Futures, said the greenback is expected to continue strengthening and might go above $1.425 against the Singdollar if the rate hike happens.

Central banks in the region are keeping a close watch on stock market and currency movements.

South Korea's central bank said it will hold a meeting after the Fed's decision and be ready to implement market stabilisation measures if necessary, as per its usual practice.

The Bank of Korea added that it would undertake round-the-clock monitoring of global markets during and after the meeting.

OCBC Bank economist Wellian Wiranto said Asia might soon have to grapple with "a potential new reality of scarcer liquidity, higher rates and a stronger dollar in the post-lift-off world, which would continue to make the operating environment that much tougher".

"If the Fed manages to convince the market that even after the initial hike, it will not be in a big hurry to raise it much in a short time, that should help soothe nerves a bit," he added.

Mr Ang said the Singapore market could take a hit on Thursday if the rate hike does occur. This could bring the STI below 2,800, he added.

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A version of this article appeared in the print edition of The Straits Times on December 15, 2015, with the headline 'Markets fragile with Fed set to lift rates'. Print Edition | Subscribe