Global equities rallied on Thursday, cheering the Fed’s decision to raise interest rates by 25bps as it not only provided certainty around monetary policy, but also strengthened investors’ confidence in the US economic outlook.
The US dollar, however, slumped over 1.55 over the last two days, fuelling the rally in commodity prices.
As commodity prices rebounded sharply, energy stocks were among the best performing sectors in the market yesterday. Singapore’s oil and gas stocks led the rally in the Straits Times Index as crude oil rebounded.
Yesterday, China’s central bank PBOC raised the short-term lending and borrowing facility rate by 10 bps, moving in line with the Fed in monetary tightening. The rationale behind this is that a stabilised Chinese economy and factory reflation gave it reason to shift toward a more neutral, or even tighter monetary stance.
That would help the Chinese government to defend its currency from falling too fast against USD, and ultimately curb capital outflow. USD/CNH fell sharply to the 6.87 area from 6.90 after the announcement.
Smaller economies like Hong Kong and Singapore are likely to follow the US with rising interest rates as well. In Singapore, the short-term interest rates have already gone up quite a lot over the last two years.
Monetary tightening is probably an inevitable trend in the US, China, Europe and even Japan. Europe and Japan have already pushed quantitative easing to the extreme and there is not much room for further easing. Last week, ECB Governor Draghi also hinted to the market that the ECB will start tapering soon, along with rate normalisation.
So in the future, money will become more and more expensive to borrow. House owners will see their mortgage rates rise but, at the same time, banks will pay more interest on their deposits.
Separately, Singapore’s non-oil domestic exports (NODX) rose 21.5% year-on-year in February, beating the estimates of 12.8%. The surge in both electronic and non-electronic exports reflects improvement in external demand. This strengthened the country’s economic outlook. NODX to all 10 major markets are on the rise, led by China (+65%), EU (+28.7%) and Taiwan (54%).