Asian Stocks Surge On Wall St Gains

Source : The Business Times, September 20, 2007

S'pore market scores 3.4% rise, led by banks and property stocks

(SINGAPORE) Asian stocks surged yesterday in tandem with Wall Street, following Tuesday's move by the US Federal Reserve to slash its funds rate 50 basis points from 5.25 to 4.75 per cent.

Japan's Nikkei 225 and Hong Kong's Hang Seng Index led the way, rocketing 3.7 and 4 per cent respectively to 16,381 and 25,554 points. In the United States, the Dow Jones Industrial Average gained 2.5 per cent on Tuesday.

Here, the Straits Times Index (STI) jumped 116.61 points or 3.4 per cent to 3,594.36 yesterday, led by the banks, property stocks and the Singapore Exchange. Elsewhere in the region, Australia's ASX 200 rose 2.6 per cent and Malaysia's KLCI added 1.6 per cent.

The trigger for the gains was the outcome of the most eagerly awaited Federal Open Market Committee (FOMC) meeting of the year on Tuesday, at which the US central bank had been widely expected to lower its short-term lending rate to ease mounting pressure in credit markets created by a crashing housing mortgage market.

Analysts unanimously described the Fed's rate cut as welcome. Canadian research house BCA Research called it a 'bold start to a new Fed easing cycle' and pointed out that although 39 per cent of respondents in an informal poll were against Fed action of any kind as it would constitute a bailout of speculators and hedge funds, the Fed's motive was clearly to revive flagging US economic growth.

'Although the economy has not fallen off a cliff, it seems clear that continued sub-par growth lies ahead,' BCA said. 'Against that background, 4.75 per cent is still too high.'

DBS Group Research also believes more rate cuts are justified as the US has been slowing for some time.

'(US) growth has run at a paltry 2.2 per cent for full two years,' it said. 'Fed funds should have been cut to 4.75 per cent even before the recent blowout in credit markets.'

DBS expects a further 25 basis-point reduction at the Oct 30 FOMC meeting and possibly one more in December.

Bank of America economist Peter Kretzmer, on the other hand, said the Fed's statement accompanying Tuesday's meeting said it has no plans at this time to ease further.

'We concur with the FOMC that there is more than the usual uncertainty surrounding the current economic outlook,' Mr Kretzmer said. 'Our presumption at this point is that the FOMC may well stay on hold for a time to assess the impact of its actions on the financial markets and US economy. We anticipate a year-end funds rate target of 4.5 per cent.'

Nomura Asia Pacific strategist Sean Darby said that in contrast to other big central banks, the Fed has chosen to ignore latent inflationary concerns to ease the credit crunch afflicting the interbank markets.

With central banks already running loose monetary policies, Nomura said the US move will exacerbate inflationary problems.

'While domestic credit conditions have marginally improved, sentiment remains fragile,' Mr Darby said. 'We expect other global central banks to remain much more hawkish and refrain from rate cutting.'