Geopolitics, uncertainty to cap markets
GEOPOLITICAL tensions, especially related to North Korea’s firing of a powerful missile that can hit the US, and uncertain US rate direction, are likely to cap markets in the near term.
“Temporarily, there will be an impact. Markets do not believe the unthinkable will occur,’’ said Pong Teng Siew, head of research, InterPacific Securities.
“It will make investors more cautious. I don’t foresee any selldown but the upside is definitely capped for now,’’ said Vincent Khoo, head of research, UOBKayhian.
“Unless a real war breaks out, the impact should be limited,’’ said Chris Eng, head of research, Etiqa Insurance & Takaful.
The US had cautioned that it was ready to use force, if need be, to stop North Korea’s nuclear missile programme.
But it preferred global diplomatic action against North Korea that had launched an intercontinental ballistic missile that could hit Alaska and intercontinental US, said Bloomberg.
US Ambassador to the United Nations Nikki Haley told a meeting of the UN Security Council that North Korea’s actions were “quickly closing off the possibility of a diplomatic solution” and the US was prepared to defend itself and its allies, Bloomberg reported.
“One of our capabilities lies with our considerable military forces. We will use them if we must, but we prefer not to have to go in that direction,” Haley was quoted as saying. She had urged China, North Korea’s only major ally, to do more to rein in Pyongyang.
Tensions have escalated after North Korea conducted two nuclear weapons tests last year and carried out a steady stream of ballistic missile tests.
“Uncertainties surrounding North Korea will have a short-term impact on Asian markets but investors should focus on the core fundamentals and economic data of these markets, which have shown improvement since the start of the year.
“However, if tensions continue to rise, investors will be more likely to switch into safe haven assets like the yen and precious metals, and this could be a drag to Asian markets,’’ said Thomas Yong, CEO, Fortress Capital.
Fed officials split
“(With the disagreement among US Federal Reserve officials over the timing of rate hikes), the interest rate outlook appears more confused.
“The Fed wants to create room for them to drop rates so as to have ammunition to fight the next recession. But weak inflation and weak hard economic data are not consistent with the narrative that rates need to be raised.
“Yet asset price inflation is also worrying the hawks despite scant evidence of consumer price inflation. Super strong equity and property prices seem to be at odds with humdrum business conditions in retail and commercial real estate.
“It is, therefore, not surprising that the Federal Open Market Committee members are split right down the centre,’’ said Pong.
US central bankers are divided over the near-term risk of inflation and disagree over the timing of interest rate hikes into next year, said AFP, quoting minutes of the last Fed meeting.
The committee’s projections call for steady interest rate increases through next year, but some members of the meeting “were less comfortable with the degree of additional policy tightening through the end of next year,” said AFP.
Some committee members were worried that Wall Street rallies had overshot the market, which argues against maintaining low interest rates, and “a build-up of risks to financial stability.”
“US rate hikes are well expected. Of more concern is the reduction of the Fed balance sheet, which is more uncertain,’’ said Eng.
The minutes showed that Fed policymakers were also divided on the timeframe for winding down its multi-trillion-dollar investment holdings, with some arguing the central bank should announce this within “a couple of months.”
The Fed’s swollen balance sheet of US$4.5 trillion, comprising large scale purchases of US treasuries and government-supported mortgage-backed securities, is to be gradually unwound following its move to raise interest rates.
Yoyo market
“(Amidst conflicting signals),’’ we have a yoyo market with no clear direction. US markets are also going through a painful spell due to the drop in their technology sector,’’ said Pong.
“Markets are displaying calm, complacency and confidence, shrugging off geopolitical tensions and an uncertain US rate outlook.
“This is premised on optimism over better economic prospects ahead, underpinned by President Donald Trump’s reflationary policies.
“Markets also expect the Fed to steer rate hikes gradually amid its guidance to pare down its balance sheet, probably starting end of the year,’’ said Lee.
But they should be wary of the impact of the Fed’s balance sheet reduction as well as the increased cost of borrowing on global financial conditions and capital flows.
“Hopes on Trump’s reflationary policies may fizzle out, leading to disappointment in growth and corporate earnings numbers, should his administration fail to deliver its promises,’’ said Lee. Columnist Yap Leng Kuen notes investors’ confusion in a yoyo market.