Indonesia's Equity Market: Focus on US-China Turmoil & Fed Meeting

To start with the latter, there is concern about a further escalating trade war between the United States and China. On Monday (24/09) USD $200 billion worth of Chinese products will become subject to higher import tariffs. This comes on top of the USD $50 billion in goods that were already slapped with additional imports tariffs earlier this year and, together, now constitutes almost half the value of imports from China (into the USA). The latest round of US trade tariffs is the biggest and will affect handbags, rice and textiles. On Monday (24/09) an additional 10 percent levy will need to be paid for the products, while per 1 January 2019 the tax will rise to 25 percent (unless both countries manage to agree on a trade deal).

Meanwhile, China announced to retaliate on Monday (24/09) by putting import tariffs on USD $60 billion worth of US goods, or about 70 percent of the value of goods China purchased from the USA in 2017. China will put an additional 5 percent tariff on US products, including smaller aircraft, computers and textiles, as well as an extra 10 percent on US goods such as chemicals, meat, wheat and wine.

But to make matters worse, US President Donald Trump had earlier already vowed to impose more import tariffs on Chinese goods (which would then cover basically all Chinese imports into the USA) if China would retaliate to the USD $200 billion tariff package. Therefore, matters may escalate further in the foreseeable future. Markets will now be eagerly awaiting for Trump's reaction.

Although Asian equity markets had been recovering over the past two weeks on optimism that economies can weather the hit from USA-China trade restrictions, the latest tariffs cause renewed concern that the USA-China trade conflict undermines global economic expansion and disturbs the supply chains of many multinational companies. For example, global credit ratings agency Fitch Ratings cut its growth estimates for China and the global economy in 2019 due to protectionist US trade policies.

By 12:00 noon local Jakarta time (24/09) Indonesia's benchmark Jakarta Composite Index had fallen 1.08 percent to 5,893.60 points. Meanwhile, the Indonesian rupiah had weakened 0.39 percent to IDR 14,874 per US dollar (Bloomberg Dollar Index) by the same time. Markets in Japan, South Korea and China are closed for public holidays.

Another indication of growing trouble between the world's two biggest economies is that China - over the weekend - called off planned trade talks with US officials, postponed joint military talks, and summoned the US ambassador in Beijing in protest against a US decision (made last week) to sanction a Chinese military agency (China's Equipment Development Department) and its director for buying Russian fighter jets and a surface-to-air missile system from Rosoboronexport, Russia's main arms exporter. China's authorities responded by saying that the US sanctions are a blatant violation of the basic norms of international relations and that China's decision to purchase Russian fighter jets and missile systems should be considered a normal act of cooperation between sovereign countries, and therefore the USA has no right to interfere.

Secondly, market participants need to focus on the next Federal Reserve meeting (scheduled for 25-26 September 2018). It is expected that the Fed will opt for another interest rate hike (to a range of 2.0 - 2.25 percent) due to the strengthening US economy. However, considering most market participants expect to see a US rate hike this week, it should be priced in. A fourth US rate hike is expected to be implemented in December 2018 and therefore monetary tightening in the world's top economy will still encourage capital outflows from emerging markets, including Indonesia.

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