Markets cheer softer US Federal Reserve tone

"We have seen the economy progress over the last several months in exactly the way we anticipated," Yellen said in a press conference(pic) following the end of a two-day policy meeting. "We have some confidence in the path the economy is on." - Reuters

PETALING JAYA: The FBM KLCI rose to its highest in more than one-and-a-half years yesterday, following the United States Federal Reserve’s (Fed) move to raise interest rates as well as Fed chair Janet Yellen’s (pic) commitment to maintain a stable rate hike trajectory.

The benchmark index rose 19.78 points to close at 1,737.14 points, the highest since August 2015. The gains were fuelled by strong buying activity across the board, with 28 out of 30 of the KLCI component stocks reporting increases.

The gains were seen in other parts of the region as well as across asset classes. Hong Kong’s Hang Seng Index led regional indices with a 2% gain, while Singapore’s Straits Times Index and Indonesia’s Jakarta Composite Index both rose by 1% on an intraday basis.

Meanwhile, the US dollar weakened despite the interest rate hike, suggesting that currency markets may have fully factored in the Fed’s rate adjustment schedule.

The ringgit rose to a one-month high of RM4.4375 against the greenback as at 4pm yesterday from RM4.4488 on Wednesday.

The Bloomberg Dollar Index, which tracks the greenback against 10 leading global currencies, fell further to 1,229.54 points, capping off a year-to-date decline of 3.61%.

Experts said local equities could be up for further gains, given the continuing positive sentiment and buying appetite for sectors that were considered unfavourable amid a tepid stock market over the past two years.

“Markets have factored in the Fed-related developments and Yellen’s tone was the key for the rally. We see further upside for the FBM KLCI, especially in terms of capital appreciation.

“We continue to favour the construction and property sectors,” said Philip Capital Management Sdn Bhd chief investment officer Ang Kok Heng.

While the increase in the benchmark US rate by 0.25 basis points to a range of 0.75% and 1% was widely expected, markets were buoyed by the Fed’s reaffirmation of two more quarter-point increases this year and three in 2018 as opposed to a more aggressive timeline.

Following the announcement, Yellen told reporters that the Fed was willing to tolerate a temporary overshooting of inflation beyond its 2% goal in order to ensure that its policies remain accommodative for some time for the US economy, Bloomberg reported.

“This mild Fed stance will likely dispel the fear that a stronger dollar or higher rates pose a headwind to emerging markets (EM). Instead, recent indications of a broadening and strengthening of the EM recovery, especially in Asia’s more manufacturing-export economies, is likely to now become the principal driver of investment decisions,” said Citi Research in a note.

On the other hand, the trajectory of future rate hikes could mean that the ringgit will be vulnerable to downward pressure by the second half of this year. The markets expects the next US rate hike in June.

According to Kenanga Research in another report, despite the possibility of a lower ringgit, it expects Bank Negara to step in to defend the currency in the case of higher exchange rate volatility.

“Moving forward, the ringgit will likely be tested further on the toss up odds of a June rate hike, likely testing the RM4.60 level. For now, our year-end target for the ringgit remains unchanged at RM4.35,” it said.

This week will also see much focus on monetary policy, with the Bank of Japan keeping the benchmark interest rate steady following the Fed’s rate hike.

The decision was expected but showed the divergence of major central banks.

Other central banks expected to keep rates unchanged include the Bank of England and the Swiss National Bank. The People’s Bank of China increased the rates for open-market operations and on medium-term lending facility.