Mar 16, 2015

    Investors hold their breath for Yellen

    THE event most likely to rattle bourse sentiment across the world this week is the much-anticipated two-day meeting of the United States Federal Open Market Committee (FOMC) starting on Wednesday.

    The meeting, along with the continuing back-and-forth between the euro zone and Greece, will likely continue to underpin the greenback's strength and push the key Straits Times Index (STI) to test new support levels at 3,340 points, market participants say.

    The STI ended at 3,362.77 points on Friday, declining 1.6 per cent for the week.

    With consensus forecasts now predicting a possible US rate hike in June, any shift in language has the potential to drive market volatility. In focus is whether the word "patient" will be removed from the US Federal Reserve's guidance and whether there are any hints on when the first rate hike will occur - in June, July or later.

    "The US dollar's rally will likely continue because of speculative bets that the FOMC will raise rates sooner than later. This will continue until the outcome of the wording of (Federal Reserve chairman Janet) Yellen's statement on what the magnitude and timing of the hike will be," said remisier Alvin Yong.

    "If the Fed keeps harping on poor inflation data and maintains the word 'patient', then that would be good for the market. But if it removes the word and chooses to focus on employment data, then that would be hawkish.

    "There is some justification for a rate hike as long as employment data meets expectations, even if inflation data doesn't," he said.

    Based on the strength of the US dollar, the market seems to be anticipating a hike of between 25 basis points and 50 basis points, he said. "A 25 basis point hike is acceptable because it's very mild. If Dr Yellen does only a symbolic hike of 10 basis points, then that would be bullish for the market."

    Other key economic data includes Singapore's non-oil domestic exports for last month, which is due tomorrow and expected to sustain its first contraction in three months because of the slowdown in China, which is set to hit local exports of electronics and machinery parts.

    "The consensus is negative 0.4 per cent for February from a year ago. But if the number is better than that, it would help," Phillip Futures investment analyst Howie Lee said.

    The monthly Bank of Japan monetary policy statement and accompanying press conference tomorrow will be watched for signs of whether the bank's easing campaign is making headway against deflation.

    Thursday's report on US initial jobless claims will also be in focus as investors watch for more good employment data.

    Investors will also be watching for whether China comes out with additional new monetary stimulus programmes.

    "The STI is influenced by foreign funds' inflow and that is likely to come from the hot money coming from the European Central Bank's quantitative easing (QE) programme three to six months from now, assuming the Greek problem doesn't affect it. That's because investors will be seeking higher-yielding assets in Asia as the Singapore dollar appreciates against the euro," Mr Yong said.

    "The local bourse is also likely to be a beneficiary of hot money from Japan, which also has a QE programme, making it attractive for Japanese funds to buy Singapore dollar-denominated assets as the currency appreciates against the yen."