The Fed will be at a standstill

Asian markets will be largely mixed after the FOMC statements reinforced the majority view that the Fed will be at a standstill.

The statements drove US equities and gold down. The dollar moved higher and the 10-year government note ticked up three basis points to 2.54%. Anaemic US economic data is expected, and Asian traders will look to domestic activity such as China’s HSBC flash manufacturing PMI and South Korea’s exports tomorrow for indication of trade in the region.

The FOMC statement may have some arguing about the tone and degree of dovishness. The outcome comes as no surprise, supporting the market’s belief that stimulus is here to stay.

As we head into all-time high territory for the US equity markets, the word “bubble” is being widely used. Elements of risk, such as high use of leverage and perception of stability, are apparent with a widening disconnect between higher asset prices and slowing economic growth. The problem with bubbles is that they can go on for a long time with nobody knowing when they will pop.

US jobs

The private sector payrolls that came through with 130,000 in October were the weakest in the past six months. Although this figure would be discounted with the spill-over effect of the shutdown in October, it showed that companies held back hiring. This set the stage for the October payrolls report, which would include the government workers in furlough. While companies such as Amazon and Macy’s have announced hiring for the holiday season, the majority of the jobs are for part-timers.

Asian index valuation

There are those who would argue that the valuation for the S&P 500 is still fair at 16 times earnings, given it is still below the valuation of 16.8 to 17.5 times earnings at its peak in October 2007. It is by no means cheap. Using this argument, it would appear the Philippines is the only emerging Asian market where valuations are stretched at 19 times, above its 2007 ratio of 16 times.

The attraction of the Kospi index shows in the earnings ratio of 10.5, slightly below its five-year average of 11 times. The rest of the emerging Asian countries had the August correction which capped the high valuation; however, they are mostly above their five-year averages.

The concern for investors would come when it becomes difficult to get a return on yield from other asset classes, such as bonds and currencies, and when inflows favour a specific asset class for an extended period of time, inflating it further.

There are two clear schools of thought on the Fed’s tapering decision. Firstly, some expect tapering sometime next year. Others expect the Fed to continue with this policy for many years, until such time as the Fed takes action reining in liquidity. These discussions are healthy and to be expected if the market is looking to normalise itself by keeping reality in check.

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