Market Update: The Fed, ECB, Jong Un to Sways the Market Tune This Week

G20 Finance Ministers, CB Governors, and leaders of International Organizations - Photo by G20

JAKARTA(TheInsiderStories)–Investors around the world awaits U.S’s Federal Reserves (The Fed), European Central Bank (ECB), an escalation in trade tension between major countries and North Korean drama. In this week the central banks prepared to hold crucial meetings while U.S’s President Donald Trump and North Korean leader Kim Jong Un will meet in Singapore tomorrow.

On the meeting of Trump and Jong Un on Tuesday (12/06), investors will aware of the talks on North Korea’s nuclear program, meaning the meeting will be closely watched. It is very hard to know what will happen, but it could have profound global implications.

The meeting in Singapore, is intended to detract the Pyongyang‘s nuclear threat. The decision is taken after North Korea detonated explosives to destroy tunnels and buildings at the nuclear site in the country’s remote mountains on May 24, to ensure the transparency discontinuance of nuclear test.

Trump cancelled the summit via a letter released by the White House. The decision came after North Korea violated a series of promises and cut off direct communication with the U.S.

The cancellation coupled with the threat of imposition of a tariff on vehicle imports drove the Wall Street down on May 24. In addition, the cancellation also brings effect to the European capital market with London and Frankfurt exchange dropped by almost 1 per cent.

Trump expect the upcoming meeting in Singapore represents the beginning of a bright new future for North Korea new future for the world and the denuclearization of the Korean Peninsula would usher in a new era of prosperity, security, and peace for all Koreans.

On the monetary side, on May 2, the Federal Open Market Committee (FOMC) hold the rate steady and stayed on track for June increases amid the concerned on inflation. The Governor Jerome Powell has said, the committee will carefully monitor actual and expected inflation developments and expects that economic conditions will evolve in a manner that will warrant further gradual increases in the Fed funds rate.

While, the ECB left its key interest rate unchanged in the last governors meeting. The interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.00 percent, 0.25 percent and -0.40 percent respectively.

ECB’s President Mario Draghi expects the ECB key interest rates to remain at their present levels for an extended period of time, and well past the horizon of the net asset purchases. Furthermore, he said, the Governing Council will continue to monitor developments in the exchange rate and other financial conditions with regard to their possible implications for the inflation outlook.

Commenting on the U.S economy, Draghi saw the yield increase was to be expected for two reasons, the different position in the business cycle of U.S economy and recent measures concerning fiscal expansion.

The Fed are seen to raise the Fed funds rate 25 basis points, marking the second hike of 2018 when they conclude their two-day meeting June 13. In the next day (14/06), the ECB is expected to end their quantitative easing (QE) program, meaning that its 2.55 trillion euro bond purchase scheme will end this year.

With this recent development, the investors will pay attention to the reaction in the bond market. The rise in the 10-year Treasury yield toward 3.25 percent could eventually be in store if the Fed continues to tighten the monetary policy.

Otherwise, if the central bank rising the rates will not present too much of a headwind for the market as long as economic growth is also seen picking up and policy makers continue to signal a steady approach.

ECB itself indicated that policy makers are prepared to begin setting the stage for the wind-down of its bond-buying program despite recent political turmoil in Italy. If the ECB holds off on laying out a timetable for QE exit, it could be taken as a sign of concern by policy makers about the economic outlook, which could be something of a negative for markets.

The world’s top two central banks will hope to signal confidence in global economic growth, despite risks of a trade war, currency swings and political turbulence. Though largely a coincidence, their twin steps suggest the era of cheap central bank cash will soon be over.

Indonesian Market

Hows about Indonesian market? International rating agency Standard & Poor’s Global Ratings (S&P) stated that Indonesia’s sovereign outlook remains positive despite the negative trend of global volatility market.

Kim Eng Tan, S&P’s senior director for sovereign ratings said the reason is because the rating agency saw a lot of improvement in investment, which gives investors a lot of confident for Indonesian market.

S&P’s finally upgraded Indonesia to investment grade in May last year, sending the rupiah and the stock market soaring, while Fitch raised its ratings for Indonesia a notch above its lowest investment grade in December.

Furthermore, S&P said it does not expect a strong reform drive ahead of 2019 elections, otherwise, the agency expects the ease of monetary policy from Central Bank, which will help rejuvenate private sector’s expansion.

However, S&P warns The Fed’s decision and U.S-China’s trade war are likely to make the global financial market to remain volatile, which may result in suppressing the Asian regional currencies in risk.

Risk on SOE’s Finance Portfolio 

S&P also warns the tension on the balance sheets of the Indonesian state-owned enterprises (SOEs), involving in the government-led infrastructure projects. Their balance sheets seem to be more exposed to the next earnings downcycle than in the previous downturn

If companies continue to raise investments at the current pace, they could be forced to stop all investment in five years to control their finances, renegotiate their debt or ask for recapitalization from the government, Jean added.

The debt that these companies take would also affect ratings of Indonesia’s sovereign debt and the banking system from which they borrow, although at this point it would not negatively affect the government finance.