Indonesian Stocks Down on Profit Taking; Rupiah Up on Court Decision

With few domestic matters expected to influence investors’ sentiments next week, the market will be focused on consumer confidence data from Europe and the USA as well as results of central bank meetings. Pressure on the IHSG at the start of next week will also originate from declining US and European shares on Friday (22/08), paring weekly gains, on spiking geopolitical tensions between Russia and Ukraine as well as comments from central bank leaders resulting in a stronger US dollar.

Emerging market stocks performed well last week despite data signalling an improving US economy. Positive data include US housing and US manufacturing. Meanwhile, Federal Reserve Chairwoman Janet Yellen stated at a symposium in Jackson Hole (Wyoming) that the US economy made “considerable progress in recovering”. Although solid US economic improvement may imply sooner-than-expected higher US interest rates (resulting in capital outflows from emerging economies including Indonesia), it also boosts US demand for exports from developing countries.

Investors in Indonesia are now expected to wait for news about the line-up of the new Joko Widodo (Jokowi) cabinet. After the Constitutional Court rejected defeated presidential candidate Prabowo Subianto’s claims that massive fraud occurred during the voting and counting of the July presidential election, there seem to be no more obstacles for Jokowi to become the seventh president of Southeast Asia’s largest economy. His government is expected to be inaugurated in October 2014. After the Constitutional Court verdict, Jokowi immediately announced to start working on the new cabinet. If minister candidates are considered market friendly, then the IHSG is expected to advance further in the weeks ahead.

On Friday, Indonesian consumer stocks were particularly affected by profit taking. Unilever Indonesia, one of the consumer goods giants in Indonesia, fell 0.9 percent. Indofood Sukses Makmur, the world’s largest instant noodle manufacturer, declined 1.5 percent.

The Indonesian rupiah exchange rate appreciated 0.16 percent to 11,673 per US dollar according to the Bloomberg Dollar Index on Friday (22/08). Indonesia’s currency appreciated on the news that the country’s Constitutional Court upheld the KPU’s election result. Bank Indonesia's benchmark rupiah rate (Jakarta Interbank Spot Dollar Rate, abbreviated JISDOR) appreciated 0.53 percent to IDR 11,654 per US dollar.

| Source: Bank Indonesia

Next week the rupiah may come under pressure as positive market sentiment brought on by the court decision will fade and market starts focusing again on the economic reality (specifically Indonesia's ongoing current account deficit and slowing economic growth) and news about Jokowi's cabinet choices. Also problematic is that Jokowi lacks a parliamentary majority. The political party coalition that supports Jokowi only controls 39.97 percent of seats in parliament. Therefore it is of strategic importance to seek a larger coalition to govern affectively starting from October 2014.

The yield on the government’s 10-year notes fell to 8.3487 percent from 8.3671 percent on the previous day according to the Indonesia Bond Pricing Agency.

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