Asian markets dip on Fed's 8th hike since 2015

Singapore

ASIAN markets struggled to keep their heads above water on Thursday with declines in key equity benchmarks in Japan, Hong Kong, China and Australia, while Singapore and Malaysia were little changed in the wake of the US Federal Reserve's widely-expected rate hike as investors processed how far the Fed could go with its tightening cycle.

Asian stocks also took their cue from overnight losses in Wall Street following the Fed's eighth hike since the tightening cycle began in late 2015 and after Fed chief Jerome Powell indicated that the interest rate path has not changed.

Following a two-day policy meeting, the Fed raised its policy rate by 25 basis points to a 2-2.5 per cent range with most expecting another hike at the December meeting.

Going by the Fed's forward guidance, most analysts have pencilled in expectations for three more hikes next year and up to two more in 2020.

Japan's Nikkei 225 was hardest hit among regional peers with a nearly 1 per cent loss which analysts also partly attributed to investors cashing in after an eight-day winning streak, while China's Shanghai Composite fell 0.5 per cent.

Hong Kong's Hang Seng slid 0.4 per cent after its top banks including HSBC said they would raise prime lending rates for the first time in 12 years after the Hong Kong Monetary Authority moved to raise the base lending rate earlier in the day in line with the Fed's move.

The main equity indices of Taiwan and South Korea were outliers finishing the day in positive territory by 0.6 per cent and 0.7 respectively.

While Mr Powell downplayed the risk of trade war, such concerns for Asian markets remained a focal point given the rising combative rhetoric from US President Donald Trump.

Phillip Futures investment analyst Samuel Siew said: "With so much unpredictability happening with regard to trade, we expect indices to remain volatile and react to any sudden updates in relation to trade".

Compared to the August statement, the US' Federal Open Market Committee (FOMC) this time dropped the key sentence "the stance of monetary policy remains accommodative". Analysts said this could mean that the Fed may believe the policy rate is getting closer to neutral, which in turn denotes a less hawkish posture.

On the back of this, OCBC Research said: "The (US) dollar may continue to spin its wheels in the mud given that the outcome proved to be less hawkish than some quarters in the market had expected".

Mr Powell said the US economy is strong and that dropping the accommodative language in the FOMC statement did not signal change and that the interest rate hike will be done gradually.

"Watch what I do, not what I say", goes the old adage. But this wasn't the case this time.

"We think words yesterday spoke louder than actions in the FOMC's statement," said Rick Rieder, BlackRock chief investment officer of global fixed income.

"While we know today that the Fed did (and should have) raised policy rates by 25 bps, and is very likely to do so again at its December meeting, it is when and where they stop raising rates that we think is much more interesting for markets," he added.

Most Asian currencies firmed amid key central bank meetings in the region and as US debt yields declined after the Fed's rate hike.

The Singapore dollar currency could get some support as some market participants are pricing in a further tightening move by the Monetary Authority of Singapore at the October meeting on inflation concerns (due to elevated global oil prices) and rising global interest rates, said Maybank FX Research.

The Indonesian rupiah - the region's second worst performing currency after the Indian rupee - inched up marginally after the central bank raised rates for the fifth time since May to prop up its battered currency that has lost nearly 9 per cent this year amid an emerging market selloff.

Its counterpart in Philippines also hiked rates on Thursday to shore up the waning peso - its third hike since May - and to curb inflationary pressures.

The Fed's dot plot on the tightening cycle could likely prove too much for the rest of the world, said Fidelity International global economist Anna Stupnytska.

She said: "Emerging market economies have already been facing tighter financial conditions this year, which have resurfaced some vulnerabilities as capital flows started reversing. With the trade war rhetoric unlikely to de-escalate any time soon, the overall risks to US and global growth are clearly skewed to the downside.

"This means the Fed will have to strike a more cautious tone, slowing the pace of tightening next year, but we are not there yet."

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