Asian markets down on Fed interest rate cut worry

Stocks down: An investor looks at computer screens showing stock information at a brokerage in Shanghai. Asian markets fell yesterday, led by Hong Kong

PETALING JAYA: Equity markets appear to be bracing for a disappointment and are expecting a smaller interest rate cut by the US Federal Reserve (Fed) come the end of this month.

Asian markets fell yesterday, following lowered expectations against the backdrop of developing tensions between the US and Iran with the continuing US-China trade war.

This comes after market expectations, mainly in the United States, were building up for a deeper rate cut of a half per cent until the end of last week.

Socio-Economic Research Centre executive director Lee Heng Guie told StarBiz that the markets are pinning hopes that the Fed would deliver a big dose of monetary easing of a 50-basis-point (bps) cut when the Federal Open Market Committee meets on July 30-31.

“But recent data such as the unexpectedly strong US employment data pares down expectations that the Fed might not aggressively cut interest rates, as the US economy is still looking good amid the trade tension uncertainty,” Lee said.

“But can the Fed really lift equities higher with monetary easing down the road? While the expected interest rate cuts can provide a floor to equity markets, the persistent drag from the unresolved trade disputes, political uncertainty (US presidential election in 2020) and geopolitical risk would cause market volatility,” he added.

Lee noted that the frothy and rich valuation of the US markets remained a “potent risk”, especially if corporate earnings disappoint amid a slowing economy.

At home, Bursa Malaysia saw a majority of counters falling, with losers outnumbering gainers. There were 508 losers against 297 gainers at market close, with some 2.65 billion shares worth RM1.54bil changing hands.

The benchmark FBM KLCI clawed back most of its intra-day losses and closed 2.79 points, or 0.17%, lower to 1,655.40.

Asian markets fell, led by Hong Kong’s Hang Seng Index which lost 1.37% at press time, followed by the Shanghai Stock Exchange that declined 1.27%.

Malaysia’s neighbour down south, Singapore’s Straits Times Index, fell 0.70%, the Stock Exchange of Thailand lost 0.45% while the Jakarta Composite Index fell 0.42%.

The US stock exchange futures, however, indicated a slightly higher opening at press time.

Commenting on the market performance, Vanguard Market’s managing partner Stephen Innes said in a note that the markets continued to trade as participants are expecting a 25-bps interest rate cut at the Fed’s next meeting.

Innes noted that the civil unrest in Hong Kong markets added to the global geopolitical risk premium.

“But if I had to quantify the equity market risk, it’s 90% Fed policy and 10% geopolitical worries as investors remain wholly captivated by ‘the looser the policy, the better the risk opportunities’,” he said.

Meanwhile, in commodities, gold continued to rise amid uncertainties with the continuing US-China trade war. The yellow commodity added on to recent gains and had risen 0.1612% as at press time to US$1,429 per ounce.

Oil prices rose with stronger gains on concerns that Iran’s seizure of a British tanker last week may lead to supply disruptions in the Middle East and after Libya reported the shutdown of its largest oil field.

Wire reports quoted analysts as saying that while the oil charts looked bearish, high tensions in the Middle East could reverse the trend.

Brent crude oil had risen 2.45% to US$64 per barrel as at press time.

Commenting on interest rates further, Schroders in its report yesterday said that interest rates were still at record lows for many developed markets due to the long and shallow recovery from the Great Recession.

It noted that central banks have “limited room” to cut interest rates, moving forward.

“The exception is the US, where the Fed has conducted a hiking cycle, which, even then, has been cut short relative to expectations,” Schroders said.

The research house said another option to boost liquidity in the markets was by restarting quantitative easing (QE).

“Large-scale purchases of government bonds lower bond yields as well as boosting the price of financial assets, generating a wealth effect. QE can also impact interest rate expectations through a signalling effect, by the commitment to easier monetary policy,” it said.

“At their peak, the Fed and the European Central Bank balance sheets were at 25% and 40% of gross domestic product (GDP), respectively. The Bank of Japan and Swiss National Bank show that central bank balance sheets can rise a lot further, exceeding 100% of GDP,” it added.