Mar 09, 2015

    US rate-hike fears to weigh on markets

    FEARS of a possible impending rate hike in the United States look set to plague the local bourse when the market reopens today.

    With the conclusion of the financial reporting season in Singapore and a dearth of major corporate activities here to excite markets, attention has turned to the health of the global economy for clues on the direction of the stock market.

    Investors subscribed to the mantra that good economic news in the short term is bad for equities, which resulted in a sell-off in US markets last Friday. This is likely to cast a pall over the local and other Asian bourses.

    Stock indices in the US last Friday plunged on news that 295,000 jobs were added to the American economy last month, much better than consensus forecasts for an increase of 240,000.

    The unemployment rate also declined from 5.7 per cent in January to 5.5 per cent last month, falling within the range of what the Federal Reserve considers as reaching full employment.

    Consequently, the Dow Jones Industrial Average surrendered some 278 points or 1.5 per cent to 17,857.8, the S&P 500 lost 29.8 points or 1.4 per cent to 2,071.3 while the Nasdaq Composite dropped 55.4 points or 1.1 per cent to 4,927.4.

    "Any sign of undue strength will raise the spectre of rates climbing sooner than expected, and we were already expecting rates to rise this year," Bruce McCain, chief investment strategist at Key Private Bank, told Reuters.

    Richmond Fed president Jeffrey Lacker further stoked these concerns by saying he is in favour of a first rate hike in June as the jobs data showed the US economy is recovering well.

    Analysts were hoping that any interest rate hike - a bane for stocks as it becomes more attractive for investors to put their cash in money market investments - would be made only nearer the end of the year.

    Now, it seems that more are expecting the timetable to be shifted forward, as seen in the Fed fund futures market, which bets on the central bank's interest rate policy.

    Data by financial firm CME Group showed investors think there is a 22 per cent chance of a rate hike in June after the jobs report was out on Friday, compared with 16 per cent who believed so just a day before.

    "If you're a believer that part of the reason the equity markets have done so well is driven largely by the Fed's easy money policy, then your interpretation is that a rise in interest rates could slow down the equity markets," Randy Frederick, managing director for trading and derivatives at Charles Schwab, told Bloomberg.

    Markets will be looking out for more evidence of the US macroeconomic strength that could affect the Fed's rate hike schedule when last month's retail sales data is released on Thursday.

    One factor that could counter the downbeat sentiment and lift markets this week is the start of the European Central Bank's (ECB's) 1.1 trillion euro (S$1.6 trillion) quantitative easing programme.

    The ECB will start its 60-billion-euro a month bond-buying programme today, boosting liquidity in global markets.

    Other statistics that could sway investment sentiment include Japan's final gross domestic product numbers for the fourth quarter, out today.

    China will continue to be on investors' radar, as it reports its inflation and bank lending numbers tomorrow, while its retail sales and industrial production figures will be released on Wednesday.

    If the negatives outweigh the positives, the Straits Times Index (STI) could once again end below the 3,400-point mark this week. Last week, the STI ended at 3,417.5, up 14.7 points.