SINGAPORE - A surprisingly dovish statement from the US Federal Reserve's rate-setting committee overnight sent Singapore shares rallying as much as 1.38 per cent at the opening bell on Thursday (March 17), but their upside was capped by gross domestic product growth downgrades just a week before the Government presents its 2016 budget.
As of 12.27pm, the Straits Times Index was up 1.04 per cent or 29.52 points to 2,873.73, after climbing as high as 2,883.39.
Other Asian markets also rallied. Australian stocks added 1 per cent, South Korea's Kospi rose 0.9 per cent and Shanghai was up 1 per cent. Japan's Nikkei pared earlier gains and fell 0.6 per cent as the US dollar slipped versus the yen.
"The market was taken by surprise after the Fed scaled back its projections for the rate hike and by dovish comments from Yellen," remisier Alvin Yong said, referring to Fed chairman Janet Yellen.
United States policy makers left short-term interest rates steady at 0.25 to 0.5 per cent and said they expect to raise their benchmark rate just twice this year, after the first hike in December, down from the four they previously predicted.
Fed officials see their benchmark federal - funds rate at 1.875 per cent by the end of 2017 and 3 per cent at the end of 2018 - lower than forecast in December. They expect the rate to reach 3.25 per cent in the long term, below the 3.5 per cent rate they had expected.
Fed officials also cut their expectations for US economic growth and inflation, The Fed also cut its GDP growth outlook for 2016 from 2.4 per cent to 2.2 per cent and reduced 2017's call from 2.2 per cent to 2.1 per cent.
In its statement, the Fed's Federal Open Market Committee said "global and financial developments continue to pose risks," language that contrasted to the December statement, which said the committee was only "closely monitoring" those conditions.
The upside on the STI was capped by persistent concerns over the outlook for the Singapore economy. Private economists polled by the Monetary Authority of Singapore (MAS) in a report out on Wednesday have lowered their GDP growth forecast for 2016 to 1.9 per cent from 2.2 per cent projected in December and below last year's reading of 2 per cent.
"That's why we can't hit 3,200 yet because this has been factored in," Mr Yong said. Resistance is seen at 2,880 for now, he said.
"Any further upside will now depend on the Bank of Japan, whether they will ease monetary policy further at their next meeting in April. That's a growing likelihood now that the Fed has delayed its rate hike," he said.
Meanwhile, most Asian emerging-market currencies strengthened and gold surged to US$1,255.12 from US$1,232.75 on Wednesday as the Fed statement weakened the greenback.
As at 12.20pm, the Singdollar was trading at 1.3654 to the greenback, up from 1.3809 on Wednesday. The ringgit was trading at 4.0900 from 4.1435 yesterday, while the Australian dollar was trading at 1.3162 from 1.3409. The rupiah was at 13,123, compared with 13,275 yesterday.
According to DBS Group Research, Singapore's GDP growth forecast downgrade was mainly driven by weak US recovery and China becoming a major drag for the region.
"Slowdown in China is structural in nature and chance of a near term improvement is low," it said. "Although a growth pace of sub-7 per cent is still fairly fast by global standards, the slowdown means a lot for Singapore.
"Singapore's manufacturing sector is already in recession while its services, it key pillar of growth for the past few years, is losing steam. A forecast of 1.5 per cent for the year essentially implies at least one quarter of contraction. And risk of a technical recession should not be discounted," DBS said.