Stocks fall as markets digest Fed rate hike, further oil falls

23 Dec 2015 | Author: | No comments yet »

All Asian currencies seen down for third year.

Indonesia’s rupiah, South Korea’s won and the Singapore dollar are projected to decline the most in 2016, with India’s rupee seen depreciating the least. SINGAPORE/TOKYO — Asian shares took their cue from Wall Street and slipped on Friday, and Japanese stocks slumped after briefly jumping on the central bank’s statement that it would expand parts of its stimulus programme. While the US Federal Reserve on Wednesday indicated four interest-rate increases next year, Taiwan cut on Thursday and economists are forecasting reductions in China, South Korea, Thailand, India and Indonesia to spur growth. European shares were also poised to start lower, with financial spreadbetters expecting Britain’s FTSE 100 to fall 0.3%, Germany’s DAX to open down 0.8% and France’s CAC40 to begin the day off 0.55%. Federal Reserve, under the iron rule of Janet Yellen, has ended seven years of zero interest rates, thus completing a retreat from the global battle for cheaper currencies.

The divergence between US and other countries’ policies is already expanding, with Taiwan’s central bank unexpectedly cutting interest rates for the second time this year on Thursday. China’s slowdown is hurting Asian nations with strong trade linkages to the world’s second-biggest economy, and the Aug 11 devaluation of the yuan clouded the outlook for a currency that had been source of stability in Asia during past crises. People’s Bank of China Governor Zhou Xiaochuan, fighting weaker growth and falling inflation, senses an opportunity to fill the vacuum and turn the tables on the Bank of Japan Governor Haruhiko Kuroda and European Central Bank President Mario Draghi, who have been printing money using an unconventional policy dubbed quantitative easing to beat back the sinister forces of deflation. The bank also said it would keep monetary policy loose to shore up growth in the island’s trade-dependent economy as the global demand outlook worsened. Zhou unleashes a new weapon – the CFETS, or China Foreign Exchange Trade System, to target China’s largest trading partners’ currencies and break the yuan’s link to the U.S. dollar.

Faced with the prospect of a falling yuan, however, his move sets off a scramble among Asia’s other central bankers to make sure their own currencies don’t rise… We open on China’s coastline, nestled against which we see the island of Taiwan, a renegade province that nonetheless counts on its giant neighbor for roughly 26% of its exports. Ahead of the policy review, the dollar slipped about 0.1 percent against the Japanese currency to 122.46 yen, and was up over 1.2 percent for the week.

The dollar index, which tracks the greenback against a basket of six rivals, edged down about 0.3 percent to 99.968, after jumping 1.2 percent on Thursday, its biggest rise in over a month. A measure of swings in the currency reached the highest since August on Dec 14, after an arm of the central bank unveiled a new yuan index comprising 13 currencies, a development seen as setting the stage for a further depreciation.

Economists warn to expect more such rate cuts around Asia as central bankers try to fend off slowing growth and keep their currencies weak against the yuan. Indexes compiled by the Bank for International Settlements show the yuan is still the strongest among 24 emerging-market currencies in trade-weighted terms after adjusting for inflation, hurting China’s export competitiveness. “China is actually gaining some competitiveness on a trade- weighted basis” with the help from the weaker fixing, said Craig Chan, the Singapore-based head of foreign-exchange strategy for Asia ex-Japan at Nomura Holdings Inc.

As Deutsche Bank’s Head of Asia Macro Strategy, Sameer Goel, puts it: “The global axis of policy divergence has moved to Asia.” Asian interest rates will thus be heading lower even as U.S. interest rates head higher. With this week’s policy tightening by the Fed already priced in, going forward Asian currencies will be more sensitive to moves in the yuan, he said. Citigroup Inc, the world’s biggest foreign-exchange trader, Bank of America and Nomura recommend selling the won and Taiwan dollar against the greenback given their close economic ties with China. Asia’s largest economy accounts for 34.3% of South Korea’s total trade, according to the Japanese brokerage, followed by the Philippines at 25% and Thailand, Malaysia and Taiwan at about 22% each. Investors appear to be shifting focus back to some of the factors that pressured stocks in recent weeks, such as the effects of the strengthening dollar on commodity prices, like oil. “The implications of further energy price declines are clearly putting the brakes on equities at the moment,” wrote Angus Nicholson, market analyst at brokerage IG, in a note. “A wave of defaults and bankruptcies in the energy sector still looks likely to come, and these concerns are certainly weighing on markets.” The slide in oil refreshes worries that energy firms will have trouble paying their debts, after a rout in the junk-bond market rattled investors in recent days.

Brent LCOG6, +0.32% , the global benchmark, hit $37.06 a barrel on ICE Futures Europe, the lowest level since December 2008, before rebounding to rise 16 cents to $37.22 a barrel. China is likely going to favor macro-stability and the currency is part of it.” The IMF predicts growth in Asia’s developing economies will slow to 6.4% next year from 6.5% in 2015, with China’s expansion decelerating to 6.3% from 6.8%. Further easing is also forecast in Indonesia, Thailand and India. “This impending Fed tightening cycle is without a strong synchronized global recovery and export rebound,” said Bank of America’s Piron. “Typically this would be bullish for Asian currencies as they would appreciate as their current-account surpluses expand on improving exports.

Ultralow interest rates have boosted equity markets in recent years. “It’s a delicate balance” that the Fed faces in the coming months in pacing subsequent interest rate increases, said Andrew Swan, head of Asian equities at BlackRock Inc. While Philippine central banker Amando Tetangco was reluctant to raise interest rates in the face of rising inflation last year, for example, he has held off on cutting rates below 4% this year even as falling inflation – most recently at just 1.8% – has been pushing real borrowing costs higher. Swan said the firm shifted into Asian equities over the past month, expecting investors to move back into riskier assets as worries eased about the first rate increase by the U.S. central bank. A bigger potential victim, however, is Indonesia, which relies on foreign investment inflows to offset its persistent current account deficit and relatively high foreign-currency debt.

Even though inflation has dropped to 4.8% as growth and exports weaken, therefore Indonesian central bank govenor Agus Martowardojo this week held his own benchmark rate steady at 7%. Not because China’s rates will dictate the direction of capital into or out of Asia’s markets, but because they’ll determine exchange rates and the competitiveness of Asian exports. Zhou fought for more than a year to keep those outflows from pulling the yuan lower by buying yuan with the PBoC’s nearly $4 trillion pile of foreign-currency reserves.

With Zhou thus shielding China against efforts to use weaker currencies to gain an export advantage, Asian central bankers will need to lower rate even further to get results.

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