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Asia greets Fed taper with calm

Publication Date : 20-12-2013

 

After months of fretting over when the US would start to trim its market-boosting monetary stimulus, Asia on Thursday greeted the actual event with a calm that was almost anti-climactic.

Stock markets rose in unison in their first hours of trading, following news overnight that the US Federal Reserve would reduce, or taper, its extraordinary stimulus scheme starting from next month.

The Fed will cut its asset purchases by US$10 billion monthly to $75 billion, with a view to tapering further next year, although there is no "pre-set course", it said after a two-day policy meeting.

This removal of uncertainty over the Fed's taper timing - most analysts had tipped a January or March decision - sparked Asia's knee-jerk rally, as did the cautious pace of the scheme's withdrawal.

Stocks were also buoyed by the Fed's pledge to maintain low interest rates for some time, a move that will keep borrowing cheap and spur spending.

ABN Amro economists Nick Kounis and Georgette Boele dubbed it a "sugar-coated taper". They added: "Policy will remain accommodative for a very long time, so it will be a long, slow, goodbye."

Thursday's sanguinity was a stark contrast to just four months ago, when Asian markets seized up on expectations that the Fed would taper in September.

Fears of impending higher interest rates triggered outflows from the region, where several countries have racked up debts or current account deficits in recent years on the back of low borrowing costs and huge capital inflows.

As some of these concerns resurfaced on Thursday, not all Asian markets held on to their gains.

China and Hong Kong closed 1 per cent down, after liquidity conditions tightened in China's domestic market and on fears the tapering could lead to an outflow of deposits from Hong Kong banks.

India, Thailand and Malaysia also dipped back into the red. They had been among the worst-hit markets in the summer due to weakening current accounts and rapidly growing debt levels.

But Indonesia, another economy that had been rocked by tapering turmoil in August, eked out a 0.9 per cent rise on Thursday.

Tokyo also soared 1.7 per cent, while Sydney added 2 per cent. Singapore rose 0.3 per cent and Seoul inched up 0.1 per cent.

Bank of America Merrill Lynch economist Chua Hak Bin said Northeast Asia and Singapore will likely weather the taper better as they have current account surpluses, low external debt and less dependence on capital inflows.

The bigger action on Thursday was in regional currencies, which sank against the greenback.

The South Korean won fell the most in six months, while the Indonesian rupiah touched a five-year low and the Malaysian ringgit and Philippine peso hit three-year lows.

Asian regulators prepared for more market volatility, with South Korea saying it would act to dampen currency fluctuations if necessary. But officials in Indonesia, Thailand, China and Japan told Bloomberg they welcomed the Fed's tapering.

Kenny Kan, a market analyst at trading firm CMC Markets, expects the subdued response in Asian markets to continue until the end of the year, as investors "need to realign their objectives".

But they will return early next year, once it sinks in that the taper indicates US economic strength and bodes well for companies, he said. "I see buying activity picking up in January leading up to Chinese New Year."

 

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