Fed-inspired relief rally sends Hang Seng, STI to 19-month highs

Singapore

THE market asked and the Fed delivered.

Regional stocks rose sharply on Thursday, as the US Federal Reserve lived up to expectations by raising its short-term interest rates by 25 basis points on Wednesday to 0.75 per cent; more importantly, it provided guidance that there will probably be only two more raises this year.

In response, Wall Street rebounded from several days of listless trading with a large relief rally, with the spillover buying sending Hong Kong's Hang Seng Index up 495.43 points or 2.1 per cent to a 19-month high of 24,288.28; the Straits Times Index rose 26.09 points or 0.8 per cent to 3,163.52, also a 19-month high.

The Dow futures on Thursday traded 80 points higher at 5pm local time, suggesting a firm follow-through for Wall Street.

Prior to Wednesday's meeting, the Fed had signalled that it would raise rates this week, but the markets had been concerned that the Fed might also communicate a faster-than-expected pace of tightening than the three it had previously indicated.

Rabobank, in its commentary "Fed Up", said the US central bank seemingly got tired of waiting for clarity from the Trump administration on a detailed plan for fiscal stimulus and went ahead with its hike.

"Interestingly, the vote wasn't completely unanimous. One member, Kashkari, dissented and voted against raising rates at this point in time," said Rabobank, referring to Neel Kashkari, the president of the Federal Reserve Bank of Minneapolis.

It also said paradoxically, the US dollar and US bond yields fell.

"We still have our doubts about the Fed's plan to hike three times this year (including this week), but the markets had perhaps anticipated an upgrade of the Fed's dot plot, and hence the dollar lost some ground against the euro."

Lee Ferridge, head of multi-asset strategy for North America at State Street Global Markets, said attention will now most likely shift to the June 14 meeting, when many expect a further increase in rates.

"However, with the much-talked-about Trump fiscal stimulus still some way away from fruition, the Fed will wish to see continued economic strength and, perhaps, signs of a pick-up in wages before committing to a June move.

"We expect little market reaction to Wednesday's decision, given it was widely priced into markets. It will take further positive economic news to continue the push higher in US bond yields and US dollar," he said.

Maybank Kim Eng's economist Chua Hak Bin, in his "Synchronization and Rate Hike Cycles", said a synchronised global recovery is underway and Asia is enjoying a robust recovery in exports, which is benefiting trade-dependent economies like Singapore's.

"Markets are nervous about rate increases, but past episodes suggests that Asian stock markets rise during the early phase of the Fed rate hike cycle. ...

"Historically, a Fed funds rate of 4.5 per cent and above is when the Asia ex-Japan equity market rally peaks and falters. A lower 'new normal' world could imply that a lower Fed funds rate of 3.5 to 4 per cent might be sufficient to trigger a financial event to derail stock markets. But such an interest rate threshold remains some years away, especially since the Fed rate path is more gradual."

Of relevant interest is that the Atlanta Federal Reserve's March 15 forecast for first quarter GDP growth was revised downwards on Wednesday - from 1.2 per cent last week to 0.9 per cent - after taking into account the latest consumer spending and retail sales figures.

READ MORE: