Thursday 05.10 BST Asian stocks latched on to a positive lead from Wall Street and rallied in the wake of the Federal Reserve’s decision to stand pat on monetary policy and hints that it would lift interest rates by the end of the year.
The Fed’s decision came amid a busy 24 hours for central banks, commencing on Wednesday with the Bank of Japan’s myriad tweaks to monetary policy, and continuing into Asia on Thursday with decisions from the Reserve Bank of New Zealand and the central banks of Indonesia and the Philippines.
On Wednesday, the Fed held short-term interest rates but said the case for a rate increase “has strengthened”, providing markets with a strong hint that the December policy meeting was in play. However, the Fed’s so-called dot plot suggested the number of rate rises in 2017 has been scaled back to two rather than the three pencilled in June.
The chances of a 25 basis point increase in the federal funds rate is now 61.2 per cent, up from 52.3 per cent a week ago, according to Bloomberg calculations.
Markets now need to weigh up a likely rate rise in the near-term with a slower path in the medium-term.
“As we have argued, a necessary condition for the dollar to rally is a more consistent pick-up in US data so the market can price a faster pace of hikes in 2017/18. Until then any rallies will seem shallow particularly with the market already pricing a 60 per cent chance of a hike,” said analysts at Bank of America Merrill Lynch.
“The dollar will remain supported with the Fed on course to increase in December, but the magnitude of moves will be hindered by the slower pace of increases implied by the lowering of the 2017/18 dots in [Wednesday’s statement of economic projections],” they added.
The dollar index, a measure of the US currency against a basket of peers, was 0.2 per cent weaker in Asia on Thursday at 95.468, having fallen 0.4 per cent on Wednesday. As well as the slower path for future US rate rises, a rally in the yen also kept a lid on the greenback.
Gold, which is sensitive to monetary policy expectations, was down 0.2 per cent at $1,332.84 an ounce on Thursday, but gained 1.4 per cent on Wednesday.
From a more local perspective, the gradual approach to raising US rates, the slower path over the medium-term and the backdrop of moderate growth and well-contained inflation should prove a positive for riskier assets, said Brian Martin at ANZ Banking Group.
“Accompanied by exceptionally loose monetary policy in other developed economies, Asia/Pacific markets should continue to be attractive to overseas investors especially given the improving growth backdrop in the region,” he said.
The Japanese currency was 0.1 per cent weaker on Thursday at ¥100.38 per dollar, but surged 1.4 per cent on Wednesday after the Bank of Japan kept interest rates unchanged but introduced a number of tweaks to monetary policy.
The adjustments, which included capping yields on 10-year Japanese government bonds at zero per cent and allowing inflation to overshoot the BoJ’s 2 per cent target, met with a strong reaction from stocks on Wednesday, but an adverse one from the currency market.
“It’s all a bit disappointing,” said Frederic Neumann at HSBC. “Investors have started to doubt the sustainability and scalability of the central bank’s monetary framework, in particular the quantitative increase in the monetary base. We believe nothing unveiled [on Wednesday] will remove those doubts,” he added.
The Japanese stock and bond markets were closed on Thursday for a public holiday, but the broad Topix benchmark rallied 2.7 per cent on Wednesday after the BoJ news.
Australia’s S&P/ASX 200 rose 0.9 per cent, with strong performances by gold miners. Hong Kong’s Hang Seng gained 1.1 per cent, while on the mainland, China’s Shanghai Composite and the Shenzhen Composite were both up 0.8 per cent.
The New Zealand dollar fell 0.2 per cent — the worst performing Asian currency on Thursday as the country’s central bank kept interest rates on hold as expected. The kiwi rallied 0.5 per cent on Wednesday, however, and most analysts still think the Reserve Bank will cut rates again in November from their current level of 2 per cent.
The central banks of the Philippines and Indonesia are due to deliver decisions on interest rates later on Thursday.
Oil prices were buoyant in Asia, building on overnight gains of more than 2 per cent as inventories data showed US stocks decreased last week versus an expected increase. Brent crude, the international benchmark, was up 0.8 per cent at $47.22 a barrel while West Texas Intermediate was 0.9 per cent higher at $45.74.
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