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Asian stocks and emerging market currencies continue to be under pressure on Thursday morning (28/06) amid uncertainty regarding US authorities' stance on Chinese investment in US tech companies, ongoing concerns over the impact of simmering global trade woes on economic growth, and rising crude oil prices. However, as we approach the lunch break there are some signs of a rebound in Asian markets.
While Asian markets are mixed on Wednesday morning (20/06), Indonesia's benchmark Jakarta Composite Index plunged 2 percent (to a four-week low) in the first five minutes after trading resumed after the long Eid al-Fitr holiday. Indeed a lot happened on the global stage since Indonesian markets closed on Friday 8 June 2018 that has not been absorbed by Indonesian assets. Therefore, today it is catch-up day for investors.
In line with expectations the central bank of Indonesia (Bank Indonesia) raised its benchmark interest rate - the BI seven-day reverse repo rate - by 25 basis points to 4.75 percent in an unscheduled meeting on Wednesday (30/05). In combination with the scheduled monthly policy meeting on 16-17 May 2018, Bank Indonesia raised the benchmark interest rate by a total of 0.50 percent this month.
While most Asian shares are in red territory amid some risk aversion, Indonesia's benchmark Jakarta Composite Index is skyrocketing on Thursday (24/05). In the first trading session of the day the benchmark index of Indonesia soared 2.39 percent to 5,930.13 points as foreigners are back to enjoy bargain hunting (before the start of trading today, the Jakarta Composite Index had weakened nearly 9 percent since the year-start).
While most Asian stocks (as well as US and European stock futures) are in green territory on Monday (21/05) on the back of easing concerns about a potential global trade war (led by the US and China), Indonesian assets remain under pressure. Over the weekend, US Treasury Secretary Steven Mnuchin said the US-China trade war is "on hold" following both sides' agreement to suspend any tariff threats for now. This has a positive impact on global markets.
In a speech in front of the House of Representatives (DPR) Indonesian Finance Minister Sri Mulyani Indrawati said the government targets an economic growth rate in the range of 5.4 - 5.8 percent year-on-year (y/y) for 2019. She said this range is a realistic one. Moreover, growth should be inclusive and equal, meaning all people across the nation should see an increase in their welfare. The government will give special focus on the acceleration of growth in eastern Indonesia, border areas, the outermost areas and underdeveloped regions.
Despite the interest rate hike, pressures on the Indonesian assets remained high on Friday (18/05) as the US dollar and US bond yields hold firm near their recent highs. By the end of the trading day the Indonesian rupiah had depreciated 0.70 percent to IDR 14,156 per US dollar (Bloomberg Dollar Index), touching lows we have not seen since late 2015.
In line with our expectation, the central bank of Indonesia (Bank Indonesia) raised its benchmark interest rate (BI 7-Day Reverse Repo Rate) by 25 basis points (bps) to 4.50 percent at the monetary policy meeting in May 2018 that was concluded today (17/05). Agus Martowardojo, Governor of Bank Indonesia, added that the deposit facility and lending facility were raised to 3.75 percent and 5.25 percent, respectively.
Indonesian assets remain under pressure as the US 10-year treasury yield rose to 3.095 percent, touching a near seven-year peak. As a result the US dollar is at a five-month high. While the US dollar rally stalled last week after the release of weaker-than-expected US inflation (April data), the greenback's performance was lifted this week on the back of strong US consumer spending figures. It is having a big impact in Asia.
The Indonesian rupiah and benchmark Jakarta Composite Index are again under pressure on Tuesday (15/05) as the 10-year US treasury yield is again touching 3 percent, while tensions in the Middle East increase and uncertainty about US-China trade relations persist ahead of a meeting between US and Chinese officials in Washington later this week where trade talks resume. Meanwhile, crude oil prices recovered to around USD $71 per barrel, approaching a 3.5 years high, on the back of reduced supply as OPEC reported that the global oil glut has been virtually eliminated.
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The Indonesian rupiah exchange rate depreciated considerably on Wednesday (25/06) after Indonesia’s central bank (Bank Indonesia) said it would allow rupiah depreciation in an attempt to boost competitiveness of the country’s exports, while curbing imports. This strategy will have a positive impact on the country’s troubled trade balance. Based on the Bloomberg Dollar Index, the currency had weakened 0.67 percent to IDR 12,070 per US dollar by 14:30pm local Jakarta time.
The performance of Indonesia’s benchmark stock index (known as Jakarta Composite Index or IHSG) was similar to the performance at the start of last week, possibly influenced by the presidential debates that took place a day prior to the past two Mondays. These debates, between the two presidential candidates (Joko Widodo and Prabowo Subianto), are broadcast live on national television and are important to outline each candidate’s vision and mission to the people. On 9 July 2014, Indonesians will vote for a new leader.
The Indonesian rupiah exchange rate depreciated 0.62 percent to IDR 11,893 per US dollar on Tuesday (17/06), a four-month low. The main reason behind this poor performance is increased concern about the impact of violence in northern Iraq - namely higher global oil prices - on Indonesia’s trade and budget deficits as Indonesia subsidises a significant amount of domestic fuels). As oil and gas imports accounted for about 23 percent of total imports of Indonesia in April 2014.
In the past week, the global crude oil price has increased considerably due to geopolitical tensions in Iraq which can disturb oil supplies from the Middle East. Up to the end of 2014, provided that no exceptional developments occur, the oil price is expected to range between USD $105-110 per barrel. Meanwhile, the Indonesian government announced that, despite the higher oil price putting pressure on the government’s budget balance, it will not increase prices of subsidized fuels this year.
ICRA Indonesia, an independent credit rating agency and subsidiary of ICRA Ltd. (associate of Moody's Investors Service), publishes a monthly newsletter which provides an update on the financial and economic developments in Indonesia of the last month. In the May 2014 edition, a number of important topics that are monitored include Indonesia's inflation rate, the trade balance, the BI rate, the IDR rupiah exchange rate, and gross domestic product (GDP) growth. Below is an excerpt of the newsletter:
As the market already expected that Indonesia’s benchmark interest rate (BI rate) would be kept at 7.50 percent in June 2014, the Indonesian rupiah exchange rate did not undergo any significant fluctuations on Friday’s trading day. Based on the Bloomberg Dollar Index, the currency had depreciated 0.05 percent to IDR 11,796 per US dollar by 16:25pm local Jakarta time. The US dollar had to cope with some pressures due to US retail sales (rising only +0.3 percent in May 2014) and weaker US jobless claims data.
On Thursday 12 June 2014 it was decided at the central bank’s Board of Governors’ Meeting to maintain the country’s benchmark interest rate (BI rate) at 7.50 percent, with the Lending Facility rate and Deposit Facility rate held at 7.50 percent and 5.75 percent, respectively. This decision is consistent with ongoing efforts to steer inflation back towards its target corridor of 4.5±1 percent in 2014 and 4.0±1 percent in 2015, as well as to reduce Indonesia’s current account deficit to a more sustainable level.
Although at the end of Wednesday’s trading day (11/06) Indonesia’s benchmark stock index (known as the Jakarta Composite Index or IHSG) was up, the index had been moving in the red zone during most of the day. Moreover, the index did not get support from the Indonesia rupiah exchange rate nor did it get support from Asian stock indices which tended to decline after yesterday’s weakening indices on Wall Street. Fortunately, foreign investors recorded net buying, thus contributing to the 0.52 percent growth of the IHSG to 4,971.95 points.
The Indonesian rupiah exchange rate appreciated slightly on Wednesday (11/06). According to the Bloomberg Dollar Index, the currency of Southeast Asia’s largest economy appreciated 0.04 percent to IDR 11,810 per US dollar. Reuters reported that the euro zone's monetary easing in combination with the recent improvement in China's economy offset the impact of higher US yields on Asia. However, investors are still waiting for several data, including the BI interest rate, the Eurozone’s industrial production, and US retail sales.
Just as unexpected as yesterday when the benchmark stock index of Indonesia (known as Jakarta Composite Index or IHSG) fell 1.06 percent amid positive domestic and international circumstances, the IHSG made a surprise rebound on Tuesday’s trading day. Yesterday’s fall was exorbitant and unfounded and today market participants made up for that performance by accumulating stocks that had lost value. As a result the IHSG gained 1.25 percent to 4,946.09 points on Tuesday (10/06).
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