Turning points dictate market mood

Business | Ivan Tong 13 Dec 2019

The latest rate-setting meeting of The Federal Reserve of the United States has concluded without any surprises, since leaving the interest rate unchanged definitely conforms to current economic fundamentals.

However, what took the market by surprise was that the "dot plot" of individual members' future projections indicated no hike in 2020 and just one increase in 2021.

Chairman Jerome Powell's dovish intent was on full display after the rate-setting meeting.

It was about a year ago that the Fed suddenly turned from a hawk into a dove - a U turn - over interest rate policies. At first the market took the news with a pinch of salt, but Powell kept being bombarded by President Trump several times to reduce rates further.

Now, it appears that Trump has got what he wants and restrained his criticism, as the Fed's monetary policy has synchronized with the strategic direction of Trump's presidential re-election campaign.

Paul Volcker, the former head of the US central bank who died a few days ago, was known for an aggressive series of interest rate hikes in an effort to rid the United States of the ravages of inflation and to manifest the independent status of the Fed.

He was, of course, extremely dissatisfied with Trump's attempt to maneuver the Fed, but as the former chairman lacked power and influence, his criticism proved futile. I believe he would be most displeased to see the Fed being used as a political tool, if his spirit in heaven is able to see what's happening right now.

However, while Volcker has carried his regrets to the grave, Hong Kong's stock market was quite glad to hear the Fed's message of holding interest rates steady this time and performed well yesterday.

The benchmark Hang Seng Index once surged nearly 400 points and closed 348.71 points or 1.31 percent higher at 26,994, with the growth rate surpassed only by the 1.5 percent rise of the South Korean stock market.

Apart from benefiting from the US interest rate policy, the South Korean stock market is also pinning its hopes on a phase one Sino-US trade deal.

At least for a period of time, at the beginning of next year, South Korean stocks, which have a cheaper valuation among the Asian stock markets, can also be stimulated.

Global stock markets are being driven by three events this week - the FOMC meeting, the general elections in the United Kingdom and whether China and the United States can reach a phase one trade deal before Sunday, when fresh tariffs kick in on US$160 billion worth of Chinese imports.

The first event has made a safe landing, with stock markets in Hong Kong and South Korea delivering positive reactions to the Fed meeting.

It seems that the US stock market is still focused on the results of the trade negotiations, and it is looking less likely that both countries will strike an agreement on or before the Sunday deadline.

However, the United States will not adopt a hard line in imposing additional tariffs, and most possibly will extend negotiations for fear of spoiling the carnival at the US stock market.

Hence, it will be a bonus if a trade deal is reached, but a nightmare if there is a tariff increase without a deal. The market believes while there will be no deal, there will be no tariffs either.

Hong Kong stocks have now risen for two consecutive days by nearly 550 points with a slightly increased turnover but as businesses pull down their shutters over Christmas and the New Year, the upward movement over the past two days is most likely because of a short squeeze and window dressing of funds.

Unless there is extremely good stimulus before the weekend, Hong Kong's stock market will have to wait patiently for the outcome of the trade negotiations.

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