Hawkish Fed spooks Asian markets

Singapore

WHERE Asian markets failed to react to the US-North Korea summit earlier in the week, they more than made up for it - in an adverse way - on Thursday on the back of rich pickings of red flags, chiefly concerns over the US Federal Reserve's signal that interest rates are heading north faster than expected.

Prospects of higher US interest rates reawakened fears of capital outflow from emerging markets while adding salt to injury were "shockingly weak" data out of China and trade fears as a crucial deadline for US to unveil the list of Chinese goods to be hit with higher tariffs approaches.

None of the major bourses were spared with South Korea's Kospi tumbling the most by 1.8 per cent, followed by Taiwan's Taiex which slipped 1.4 per cent. Benchmark indices in Singapore and Japan lost 1 per cent while China, Hong Kong, Australia and Malaysia also declined but by a lesser degree.

Most Asian currencies edged lower against a volatile US dollar which saw some softness led by profit taking except for the Malaysian ringgit that rose. The Singapore dollar eased 0.04 per cent against the greenback while the South Korean won was the top loser among Asian currencies, shedding about 0.5 per cent on Thursday.

Safe-haven assets such as gold and the yen advanced.

"There is a suspicion that the yellow metal's appreciation could be off the back of dollar weakness. With investors simply engaging in a bout of profit-taking on the greenback following the US interest rate increase, gold could appreciate further in the short term," said FMTM research analyst Lukman Otunuga.

As predicted, the Fed raised its key interest rate by 25 basis points for the second time this year. More interestingly, however, was that the dot plot looked more hawkish as the projection involved two additional rate hikes in 2018; this implies four hikes this year versus three hikes.

Even so, some analysts have decided to stick with their three-hike expectations for this year with the third one expected to happen in September.

"At closer inspection the shift in the dot plot does not seem significant, and the fourth hike for 2018 is still hanging in the balance," said Michael Every, Rabobank's senior Asia Pacific strategist.

"While the change in the forward guidance of the FOMC statement is significant, it reflects the fact that we have moved closer to neutral. Meanwhile, we have our doubts about the Fed's optimism on inflation . . . Therefore, for now, we stick to our call for three hikes this year," he added.

The latest hike represents the seventh one since the cycle began in December 2015 with the current rates at their highest level since October 2008.

Overall, the Fed was pleased with the strength of the US economy, particularly the robust labour market and inflation was close to target which allows for a more aggressive approach towards monetary policy normalisation. That's not good news for currencies and stocks in emerging markets.

Societe Generale said in a note that it expects the euro and the yen to outperform the dollar - the European Central Bank and Bank of Japan are also "tip toeing" towards monetary policy normalisation - while all three currencies are expected to outperform the majority of emerging market currencies in the months ahead.

"Cheap money has fuelled a rise in global debt levels and a fall in the cost of funding for many economies, both developed and emerging, in recent years. Weaning the global economy off that cheap funding, without causing undue market turmoil, will be a delicate process that probably sees some currencies fall sharply," it added.

Conflicting signals from two of the world's largest economies could also hurt risk appetite further.

As the Fed boasted about the strength of the US economy, China released weak retail sales and industrial output that signalled a slowdown. China's central bank also held off from raising borrowing costs on Thursday, contrary to wide expectations, following the Fed's hike which economists say reflects a cautious tone given the "deceleration of Chinese key economic data".

READ MORE: News Analysis: Faster US rate hikes to have mixed impact on Singapore