The Federal Reserve’s first interest rate rise in nearly a decade was met by thunderous applause in Asia-Pacific equity markets, as the US central bank signalled it was optimistic about the prospects for economic growth heading into 2016.
Japan’s Nikkei 225 rose 2.4 per cent in early trading, while Australia’s S&P/ASX 200 added 1.8 per cent, Hong Kong’s Hang Seng Index gained 1.3 per cent, Taiwan’s Taiex climbed 1.1 per cent and the Shanghai Composite added 1.2 per cent.
Even in emerging markets, which are expected to struggle from capital outflows as the Fed continues to raise rates, drawing investors back with the lure of higher yields, reaction was positive. Malaysia’s benchmark rose 0.6 per cent, the Philippines’ index jumped 1.9 per cent and Indonesia’s Jakarta Composite added 1.3 per cent.
“This initial reaction suggests that the Fed did a good job in telegraphing the hike,” said analysts at Barclays. “The improvement in risk appetite following the Fed hike also helped emerging market currencies to absorb the hike easily. In the near term as trading winds down for the year and flows thin, there may be further respite for EM Asia currencies, but we do not expect this to persist into 2016.”
Anders Faergemann, senior sovereign portfolio manager for emerging markets debt at Pinebridge Investments, said the decision was a relief because it provided some clarity for investors in those markets.
“Emerging market economies broadly require interest rates to remain low for longer to support economic growth and to fight persistently low inflation,” he added. “The question everyone needs to answer is: Can the US economy drag emerging markets economies out of their growth slump?”
The US central bank announced a quarter-point increase in the target range for the federal funds rate to 0.25-0.5 per cent, lifting it from the historic lows it has occupied since December 2008, when the US was mired in an economic crisis that would ultimately drive unemployment to 10 per cent.
“This action marks the end of an extraordinary seven-year period,” said Janet Yellen, chair of the Fed. “It also recognises the considerable progress that has been made toward restoring jobs, raising incomes and easing the economic hardship of millions of Americans.”
The move coincided with signs of a steady US recovery, as consumer spending growth holds firm and unemployment stands at just 5 per cent, lower than the 5.3 per cent rate that was prevailing when the Fed last kick-started an interest rate raising cycle in 2004.
The focus on the Fed will now turn to how quickly it plans to normalise interest rates. Policymakers expect only “gradual” future increases in the federal funds rate after Wednesday’s move, the Fed said in a statement.
“There is still a significant wedge between where the Fed is telling us it sees rates going and what the market is pricing in,” said Andrew Colquhoun, head of Asia-Pacific Sovereigns at Fitch Ratings. “An out-turn closer to Fed guidance would be a substantial shock for a region where private sector debt levels have risen rapidly and where capital flows have already started to reverse. This uncertainty puts a premium on credible and coherent policy responses by authorities in buffering sovereign credit profiles.”
In the US, the two-year Treasury yield rose to more than 1 per cent for the first time since 2010. The S&P 500 stock market index extended its gain to 1.5 per cent for the day, bringing it back into positive territory for the year.
The dollar originally slipped against multiple currencies but in Asia hours its surged. The dollar index, which measures the currency against a basket of global rivals, rose 0.9 per cent to 98.763. The euro fell 0.6 per cent to $1.0852 and the yen weakened 0.3 per cent to 122.55 per dollar.
As the dollar gained, the People’s Bank of China weakened the renminbi yet again. The PBoC set the fix, or mid-rate around which the renminbi is allowed to trade each day, 0.2 per cent weaker at 6.4757 per dollar. That 5.88 per cent softer than where the renminbi was valued before the bungled mid-August “devaluation,” and it’s also the weakest fix since mid-July 2011.
Beijing has already allowed the tightly-controlled currency to fall for six consecutive weeks and last Friday it opened the door to further depreciation when it released a new index that gauges the renminbi’s value against a basket of currencies instead of just the US dollar.
The price of gold fell 0.5 per cent in early Thursday trade to $1,067.33 an ounce. Brent crude oil, the international oil benchmark, rose 0.2 per cent in Asia to $37.28 a barrel, after tumbling by 3.3 per cent on Wednesday. West Texas Intermediate, the US benchmark, fell 4.9 per cent on Wednesday and extended the decline another 0.1 per cent in Asia to $35.50 a barrel.
“A potential further decline in oil prices from current levels remains the biggest ‘known unknown’ and has the potential to weigh on EM assets globally, especially on the commodity exporters,” said the Barclays analysts.
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