Pressure mounts on Asian trading

The broad sell-off in exchange-traded funds overnight will continue to put pressure on Asian trading today.

The market rout in Indonesia has prompted President Susilo Bambang Yudhoyono to announce measures on Friday to combat the falling rupiah and weak exports. Government intervention is nothing new, what investors want to see is longer-term reforms that address fundamental issues instead of quick fixes such as rate hikes.

The Malaysian government cut its growth forecast for the year to between 4.5% and 5%, after GDP missed forecast and the current account surplus narrowed. This prompted minister Abdul Wahid Omar to reassure investors that they will undertake measures to keep it in the surplus position.

Philippines stock market to reopen

The Philippines stock market reopens today after closing for the past three days due to flooding, and investors are expecting a choppy session. Fundamentals in the Philippines economy are in a better state compared to those of Malaysia and Indonesia. The country had a healthy current account surplus of $1.2 billion in March 2013 and Q1 GDP expanded 7.8% year on year.

This beat market expectations and marked the fastest rate of growth since Q2 of 2010. Construction’s 34% rise, government spending’s increase of 13% and consumption rising 5% were the main drivers of growth. Consumer confidence reached its highest level on record in Q2 2013 on low inflation of 2.5%, better job opportunities and higher salaries, although the unemployment rate increased 0.4% to 7.5% in Q1.

The weakness in the peso boosted exports and increased household spending power from remittances. June exports figure recovered to an expansion of 4% year on year, down 0.8% from the previous month. The peso has fallen close to 7% this year and the stock market dropped 11% since 22 May, holding onto double-digit returns of 12% for the year.

Looking ahead

Looking ahead, the drop in rupiah and rupee put India and Indonesia most at risk given their large current account deficits. Global growth in demand for goods needs to recover in bigger economies such as China, Europe and the US before we could see the effect of increased exports on weak Asian currencies.

We have seen a rise in PMI in the US, Germany and Japan, which will be positive for exports. Asian economies have been running on credit growth since 2009. The lack of spending in infrastructure and the weakness in the currencies may not be enough to shift growth towards domestic demand.

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