Impact of Federal Reserve's Quantitative Easing on Indonesia's IHSG
On Wednesday (19/06), Indonesia's main stock index (IHSG) posted a 0.70 percent fall to the level of 4,806.66 points as foreign investors continued to sell more Indonesian stocks than they bought. Moreover, the IHSG did not receive any support from the Asian region, where most stock indices weakened. Similar to Europe and the United States, Asian markets were eagerly waiting for results of the meeting of the Federal Reserve on Wednesday evening and thus mostly refrained from trading during the day.
The meeting of the Federal Reserve on Wednesday evening was an important one as market players have been speculating about what direction the Fed will take with its quantitative easing program. Limited recovery, as seen in various economic indicators of the United States, made many investors think that there might be a possibility that the bond-buying program will be scaled back soon. And the message conveyed in chairman Ben Bernanke's speech after the meeting of the Fed surely pointed in that direction. "The Fed may 'moderate' its pace of bond purchases later this year and may end them around mid-2014", Bernanke said last night.
However, the central bank of the USA stressed that reducing or increasing the quantitative easing program depends on the outlook for the US job market and inflation. An unemployment rate of about 6.5 percent and inflation below 2 percent will provide a conducive context to reduce or stop the program. US inflation has been held below the 2 percent threshold but US unemployment still stood at 7.6 percent in May 2013. It is expected to reach 6.5 percent at the end of 2014.
As such, Bernanke's speech did not contain a good message for the investor community. Moreover, it remains more or less unknown when and how exactly the bond buying program will be reduced. For stock markets, the Fed's quantitative easing program has been a blessing as it brought various stock indices to new record high levels. Moreover, stock indices in emerging economies (such as Indonesia) have benefited tremendously from its spillover effects. Reduction, or a stop altogether, of the Fed's bond buying program is therefore assumed to have a negative effect on stock indices in Indonesia. Bernanke's message last evening - in combination with the 1.35 percent fall of the Dow Jones Index on Wednesday - is expected to have a large negative impact on the IHSG today (20/06).
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