Global equities rallied on Thursday, cheering the Fed’s decision to raise interest rates by 25 basis points (bps) as it not only provided certainty around monetary policy but also strengthened investors’ confidence in the US economic outlook.
The US dollar, however, slumped over 1.55 over the last two days, fuelling the rally in commodity prices.
As commodity prices rebounded sharply, energy stocks were among the best-performing sectors in the market yesterday. Singapore’s oil and gas stocks led the rally in the Straits Times Index (STI) as crude oil rebounded.
Yesterday, China’s central bank People’s Bank Of China (PBOC) raised the short-term lending and borrowing facility rate by 10 bps, moving in line with the Fed in monetary tightening.
The rationale behind this is that a stabilised Chinese economy and factory reflation gave it a reason to shift toward a more neutral, or even tighter monetary stance.
That would help the Chinese government defend its currency from falling too fast against the USD and ultimately kerb capital outflow. USD/CNH fell sharply to the 6.87 area from 6.90 after the announcement.
Smaller economies like Hong Kong and Singapore are likely to follow the US with rising interest rates as well. In Singapore, the short-term interest rates have already gone up quite a lot over the last two years.
Monetary tightening is probably an inevitable trend in the US, China, Europe and even Japan. Europe and Japan have already pushed quantitative easing (QE) to the extreme and there is not much room for further easing. Last week, the European Central Bank (ECB) Governor Draghi also hinted to the market that the ECB will start tapering soon, along with rate normalisation.
So in the future, money will become more and more expensive to borrow. House owners will see their mortgage rates rise but, at the same time, banks will pay more interest on their deposits.
Separately, Singapore’s non-oil domestic exports (NODX) rose 21.5 percent year-on-year in February, beating the estimates of 12.8 percent. The surge in both electronic and non-electronic exports reflects improvement in external demand. This strengthened the country’s economic outlook. NODX to all 10 major markets is on the rise, led by China (+65 percent), EU (+28.7 percent) and Taiwan (+54 percent).
Hong Kong 50 – Cash
By Margaret Yang (CMC Markets) in Singapore
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