This time it was the Dow surpassing its previous record high, on October 29, by over 128 points and the S&P 500 being two points shy of its all-time high. However, Asian markets have lagged behind versus the US markets. The two reasons are, flow back into US assets have continued after the debt ceiling debate where investors are buying on dips, but not selling the rallies and Asian equities indices that outperformed during the political wrangling are now lacking in conviction. Local investors have also been selective, given the volatility they experienced in May and the fear generated during that episode, creating a lack of confidence.
The US equity markets have barely seen a correction, the worst pullback was a 7.5% decline during May through to June, while the Asian markets such as the Jakarta composite had a 27% decline, Philippines lost 23% and Singapore declined by 12%. While foreign flows into Asian markets continue on a moderate level, it has ebbed in Indonesia -$69m, the Philippines -$27.6m, Thailand-$147m and South Korea -$305m for the week ending 6 November.
New York Fed paper
The New York Fed paper presented overnight, not to be confused with the FOMC, has been the focal point for debate amongst market participants. It stipulated “by specifying economic conditions rather than a calendar date, the central bank allows the market to determine the expected duration of the zero-bound policy based on its evolving view about the economic recovery”.
This raised a question whether the Fed would lower the unemployment rate to 6%, as one of the target indicators. The paper also argued that “lowering unemployment to 5.5% improves measured economic performance”, and “lowering to 5% reduces welfare”.
Given that the monetary policy has not significantly affected unemployment rate in the past five-years, standing above 7%, it is easy to translate their argument as low interest rates are here to stay. (Full document can be found here.)
Twitter to buoy sentiment
The paper has added to the flux in the equity markets are in where earnings and economic data have not matched the rallies. US GDP is expected to be around 2% for Q3 and initial jobless claims will be softer at 335k for November, from 340k in October. US economic data will take a backseat to Twitter’s debut. The social media company will be the catalyst that maintains momentum in the US equities tonight, given its timely IPO. This year’s strong performance of the tech sector and equity markets in general, means investors want to the stock fly as it begins trading.
Cracks appearing in emerging Asian markets
Meanwhile, a sense of déjà vu has taken place in emerging Asian markets. The structural problems that appeared during the middle of the year, which have been masked by the Fed’s decision to not start tapering in September, has become more apparent. Indonesia started the month of suffering a sell-off, when trade data showed a slump and CAD is likely to remain for a period of time.
Malaysia‘s current account surplus is fast narrowing, leaving the country’s currency vulnerable to any changes in the Fed policy. Moving towards the end of the year, investor’s bias towards US assets will likely continue and the divergence between emerging Asian markets and developed markets may widen, unless leaders start implementing longer-term policies that address growth on a multi-facet level.