Indonesia Stock Exchange Falls Amid Domestic and International Concerns
On Thursday (13/06), Indonesia's main stock index (IHSG) could not continue the recovery it had shown on the previous day. The index fell 1.92% to 4,607.66 points amid international and domestic concerns. Investors are worried about central banks' policies and the World Bank's downgrade of global economic growth in 2013. On the domestic side, negative sentiments were brought on by the fuel subsidy issue (and its inflationary impact), the weakening rupiah, the BI rate hike, falling foreign exchange reserves, and the trade deficit.
This week, Indonesia's central bank (Bank Indonesia) raised both the deposit facility rate (known as the Fasbi) and the benchmark interest rate (BI rate) by 25 bps to 4.25 percent and 6.0 percent respectively in order to support the weakening IDR rupiah, which has been one of the worst performing Asian currencies against the US dollar in 2013.
Bank Indonesia also foresees a significant increase in inflation as the government intends to raise the price of subsidized fuel this June in order to relieve the government's budget deficit. Bank Indonesia's governor Agus Martowardojo said that inflation can go up to eight percent if the central bank fails to mitigate the effects of the price hike. Initially, the bank had set an inflation target of 4.9 percent this year.
The Dow Jones Index climbed 1.21 percent on Thursday (13/06) after various economic data of the USA were well-received by investors, as well as speculation that the Federal Reserve will maintain a low interest rate. Positive data included a rise in US retail sales by 0.6 percent compared to April, and US initial jobless claims that fell to 334,000 (a decline of 12,000) this week. Moreover, a number of take-overs supported the upward movement. Gannet, publisher of the newspaper USA Today, gained 33 percent after accepting a take-over bid of Belo Corp (worth USD $1.5 billion), and Safeway, one of the largest supermarket chains in the USA, rose eight percent after announcing the sales of its Canadian retail shops.
Most Asian stock indices weakened on Thursday (13/06), particularly the Nikkei. Japan's main index fell more than six percent as investors were concerned about ongoing uncertainty regarding the continuation of the Federal Reserve's quantitative easing program, as well as a lack of extra stimulus from the Bank of Japan. In combination with a strengthening Yen, it resulted in a sell-off of Japanese stocks. Moreover, the World Bank has revised down its forecast for global economic growth in 2013 to 2.2 percent from 2.4 percent in its January forecast due to the slowing down of economic growth in emerging economies such as China and Brazil, while cutbacks in the Eurozone will haunt the economies of Europe and result in the Eurozone's recession of 0.6 percent in 2013 (significantly lower than the World Bank's previous forecast of -0.1 percent).
On 21 May 2013, Ben Bernanke said that the Federal Reserve's stimulus program can be scaled back when the American labor market shows a marked improvement. Bernanke mentioned a maximum unemployment rate of 6.5 percent and inflation below 2.5 percent as the suitable context to start retracting the Fed's stimulus program. Currently, US unemployment stands at 7.6 percent and the latest annual inflation rate at 1.1 percent (April 2013). The World Bank revised up its forecast for economic growth in the USA this year to 2.0 percent from a previous forecast of 1.9 percent.
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