THE assurance by Federal Reserve chairman Alan Greenspan that any increase in US interest rates would be “measured” has calmed the nerves of investors but is not expected to lead to much buying conviction in the immediate term, say analysts.
“People are waiting to see how things pan out and if the US economic performance agrees or disagrees with the expected hike in interest rates,'' said the head of research at a foreign stockbroking house. “Only then will investors know how to split their portfolios between equities, bonds and cash.''
Wall Street and the global markets have generally welcomed Greenspan's comments earlier this week that US interest rates would be raised gradually, taking the view that future increases would be small and not slow the pace of economic growth.
The latest data on core inflation in the United States have further eased fears of an aggressive rise in rates, but analysts say they will be paying close attention to the producer price inflation and weekly jobless claim figures there for indications of just how the interest rate scenario would unfold.
Other factors that are being closely monitored are the price of crude oil, which shot up after an attack on Iraq's oil infrastructure, and the cooling of China's over-heating economy.
Analysts say the magnitude and pace of increase in US interest rates are important to the local stock market because they would influence the appetite of foreign funds for stocks in emerging markets.
The head of research at a local stockbroking company noted that the reversal of a negative real interest rate situation in the United States in 1994 had a negative impact on the local stock market.
In that year, the Fed had aggressively raised interest rates on inflation fears. Core inflation during that time, however, fell.
“During an extended period of negative real interest rates, emerging markets rose. Then in 1994, when real returns in interest rates in the United States turned positive, liquidity in emerging markets dried up,” the research head said. “When it comes to liquidity, it can override fundamentals.''
The flow of funds from foreigners and its impact on the Kuala Lumpur Composite Index (KLCI) is something one technical analyst is keeping an eye on.
“The next three months are crucial for the market as the trend can set the tone for the next 12 to 18 months,'' he said.
He added that the real test would come in July and August, and if the KLCI held up well, then the market may have seen its bottom.
Some analysts, however, say concerns over the impact of US interest rate rises on the local stock market are overblown.
“Investors are currently preoccupied with what is happening overseas and not focusing on corporate earnings. When earnings come through, maybe then they will realise that things are not so bad,'' an analyst said.
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