Asian markets slide on the Fed’s caution

Asian markets slide on the Fed’s caution

Mumbai: Even as the money market regulator of the world’s largest economy announced a quarter-point cut in its key interest-rate on Wednesday, a move that means increased capital inflow to emerging markets such as India, Sensex, the benchmark index of the Bombay Stock Exchange (BSE), along with key Asian market indices, clocked a slide on Thursday’s trade.

According to global equity market analysts, the Fed’s announcement was in line with market expectations, however, its cautionary statements on inflation and economy—an indication that it may not cut rates any further in December —induced the bearishness.

The Federal Open Market Committee (FOMC), the US Federal Reserve’s 12-member body, which sets policy on credit and interest rates, had lowered interest rate by 25 basis points (bps) to 4.5%. The committee pointed that “the pace of economic expansion is likely to slow down in near term, reflecting the intensification of the housing correction."

In addition, the committee, while acknowledging inflation risks, noted that it will continue to monitor inflation developments closely.

“Fed took a neutral stand on interest rate cuts in the future," said Mamoun Tazi, a UK-based financial services analyst at MF Global Ltd, the brokerage arm of listed Man Group Plc. “The concerns on economic growth and inflation, which means that there may not be another interest cut in December." All major European indices were on the red during mid-day trade.

Most Asian market indices including that of China, India, South Korea, Taiwan and Singapore ended the day with losses.

The Hang Seng index was the only exception as it gained about 140 points after the Hong Kong Monetary Authority, the money market regulator, cut its base lending rate from 6.25% to 6% on Thursday.

“With the Fed rate cut being in line with expectations, markets in the region [Asia] have nothing to look forward to or celebrate in terms of global cues," said Kingston Lin, a senior investment manager at Hong Kong’s Prudential Brokerage Ltd. “The only event to to look for, is the US employment data that may impact Asian markets next week." The US federal government will release the October job data on Friday morning.

Apart from Hong Kong, the oil exporting countries that comprise the Gulf Cooperation Council (GCC), including Saudi Arabia, had also announced a quarter-point cut in their prime lending rates on Thursday, as follow-up to the action taken by US Fed. Indian bond and currency markets also ignored the rate cut of the US Federal Reserve.

The 10-year benchmark government security paper moved in a narrow range from 7.84% to 7.85%, as traders felt that there was a clear indication of no further rate cuts by the Fed going ahead.

Foreign exchange dealers said there was heavy intervention by the public sector banks buying on behalf of the Reserve Bank of India (RBI). Speaking to the media on Thursday, Robert Prior Wandesforde, senior Asian economist at UK-based HSBC Bank Plc., said although RBI may further raise cash reserve reserve ratios and try to exercise capital controls, the rupee is likely to appreciate to the level of 37.50 by the end of 2008-2009.

Other experts at the media conference said the US dollar may revive by the middle of 2008, as the valuations will be cheap by then.

“The Fed may not be alone in cutting rates," said Stephen King, HSBC Bank’s group chief economist. “By February 2008 we are expecting UK and Europe to cut rates as well".