Despite the suicide bombs attack in Jakarta on Wednesday evening (24/05) that killed 3 police officers (and the two militants) at a Jakarta bus station, the Jakarta Composite Index rose after opening on Friday (26/05), while the rupiah only weakened slightly against the US dollar (Thursday was a public holiday). It is yet another example of the fact that markets around the globe have become used to the existence of militant attacks. Particularly a relatively small attack will not lead to any negative sentiments.
This is reassuring because Indonesia had just become in a fortunate position. Not only has it obtained investment grade status from all three key credit rating agencies after Standard & Poor's (S&P) finally decided to upgrade its rating for Indonesia last week, but also Moody's Investors Service's decision to downgrade China's credit rating from Aa3 to A1 (and changing its outlook to stable from negative) is expected to boost capital inflows into Indonesia.
However, to tap this potential Indonesia needs to make sure its domestic situation (both the economy and politics) is stable. The main threats (for Indonesian markets) are not terror attacks because Indonesia's counter-terrorism squad Densus 88 has had a lot of success detecting, arresting and killing militants over the past decade or so and - considering global developments over the past couple of years - Indonesia may even be labelled a safer place compared to the big cities in Europe (in terms of militant Islam).
Read more: Analysis of Radical Islam in Indonesia
What is more concerning is the influence of hardline Muslim organizations (backed by specific political forces) on justice and politics as we saw in the 2017 Jakarta gubernatorial election and the blasphemy trial of former Jakarta governor Ahok. The main political forces that use these hardliners for political gain are actually not hardliners themselves (more likely they are "Islam KTP" - "ID card Muslims" - meaning they do not really practice Islam). But the concern is that these forces are gaining popularity in Indonesia and thus jeopardize Indonesian President Joko Widodo's chances in the 2019 presidential election (assuming Widodo decides to run in this election). If these forces become in charge of the nation it will surely be a setback for the much-needed reform agenda, including tackling the difficulty of doing business in Indonesia (to attract direct investment it is vital that authorities continue to improve bureaucracy or red tape).
For portfolio investments, however, the 2019 election is still very far away and these investors are far more interested in US monetary policy. On Wednesday (24/05) the latest Federal Reserve minutes (May 2017) were released. The content shows policymakers are sticking to their plans to gradually remove the stimulus that has helped prop up stock markets for years. This gives rise to some risk-on sentiment on Friday (26/05).
Meanwhile, crude oil prices fell on Friday after the market is a bit disappointed because the OPEC only decided to extend supply cuts of 1.8 million barrels per day until the end of the first quarter in 2018. Many hoped for larger cuts.