Most Asia markets fall as Fed relief rally fizzles; STI down 0.27%

SINGAPORE - What kicked off as a relief rally after the US Federal Reserve announced plans to ramp up its key lending rate by 75 basis points fizzled out by late afternoon as market players assessed the potential impact of a possible economic downturn, or even recession.

Singapore’s Straits Times Index rose by around 1.4 per cent to hit 3,150.11 points within the first half hour of the opening bell before tracking back to close at 3,097.43, a loss of 8.45 points or 0.27 per cent.

It was the same story across the region, with major markets like Tokyo and Hong Kong where markets initially climbed to higher ground before giving up all of much of their gains. 

Markets had initially brightened on Fed chair Jerome Powell’s comment that super-sized hikes will be rare after the United States central bank lifted borrowing costs the most since 1994.  

Analysts said the momentum could not be maintained as the initial enthusiasm was tempered by the realisation that the highest Fed hike in 28 years could be followed by several more interest rate tightening moves.

Also, Wall Street futures started turning southwards by late afternoon in Asia, after a positive close on Wednesday. Meanwhile, European stocks looked poised to start on a weak note.

Still, some market insiders took heart from the fact that Mr Powell seemed somewhat “less hawkish” than anticipated.

While reiterating that the US central bank would remain aggressive in addressing inflation, Mr Powell said he did not “expect moves of this size to be common.”

In Singapore, bank stocks gained slightly following the rate hike announcement.
DBS Bank and UOB were up some 0.5 per cent, while OCBC edged up nearly 0. per cent by late afternoon.

Banks are seen as the key beneficiary of any rate hikes as this would widen their net interest margins, and thus incomes. 

On the other hand, tech and high growth companies who tend to be highly geared and do not pay dividends, suffer when interest costs rise.

Given the current interest rate scenario, the outlook is not good for highly geared, high growth companies.

Mr Kelvin Tay, chief investment officer for Asia-Pacific at UBS, sees the Fed rate rising to 3.4 per cent by year end and to 3.8 per cent by the end of next year. But the rate will revert to 3.4 per cent by end-2024, he forecasts.

“The median dot plot of 3.25 per cent to 3.5 per cent implies 175 basis points of additional hikes over the next four meetings,” he said.

Across Asia, central banks are already following in the footsteps of the Fed in hiking up rates.

Many analysts also reckon inflation, coming from supply side factors such as the war in Ukraine and supply chain constrictions, may be impervious to rate hikes. They point out that rates damp down demand, while supply issues remain unabated.

The result can be a sharp slide in consumer spending and demand, the cumulative result of which could be a sharp slowdown in economic activity, and even lead to a recession.

Already, US consumer sentiment is at its lowest since 1952, according to a University of Chicago survey last week.

The days ahead are likely to remain choppy as the market adjusts to a new normal of rising interest rates and stubbornly high inflation. Geopolitical risks simply add to the brew, analysts noted.