Indonesia's benchmark Jakarta Composite Index experienced another tough day on Monday (14/11). After Indonesian stocks plunged 4.01 percent on Friday, stocks fell another 2.2 percent today. Not only Indonesia, but most Asian markets are hit by the selloff, particularly the emerging markets of Southeast Asia. Investors are re-evaluating their emerging market assets now Donald Trump has been elected the next US president (and who can rely on a Republican-controlled US Congress). To make matters worse, current uncertainty is expected to persist in the next couple of months.
Trump's election caused a lot of uncertainty about the future economic and political policies of the USA. Considering Trump wants to boost US economic growth (partly by rising government spending), inflation may rise quickly and therefore the US Federal Reserve may need to raise its Fed Funds Rate soon (and more frequently than in the years before). Meanwhile, expectation of wider budget deficits of the USA contributes to higher Treasury yields. Surging US bond yields take the shine off the relative yield of emerging market assets.
Money is now flowing from emerging markets to the USA. The US dollar is strengthening against almost all currencies worldwide (Japan's yen being a notable exception), while US stocks are touching record highs. This trend may continue as we could be at the start of a long period of uncertainty. Only some time after Trump is inaugurated as the 45th president of the USA (the inauguration is scheduled for Friday 20 January 2017) we can see what direction the USA is heading: will it isolate itself through protectionism, exiting free trade deals and building walls to block immigration, or will policies implemented by president Trump differ from his campaign pledges as presidential candidate?
To know the answer to the above question we will simply have to wait and see until after Trump has been inaugurated and his policies start to crystallize. Until then, markets could be plagued by a high degree of uncertainty as investors and analysts carefully monitor Trump's interviews and speeches ahead of his inauguration.
Meanwhile, the Indonesian rupiah actually appreciated 0.06 percent to IDR 13,375 per US dollar on Monday (14/11) according to the Bloomberg Dollar Index, bucking the trend that we saw in other Asian emerging market currencies. It is assumed that Indonesia's central bank (Bank Indonesia) continued to intervene in markets to stabilize the rupiah rate. On Friday (11/11) Bank Indonesia intervened heavily after the rupiah weakened more than 5.50 percent against the US dollar. Nanang Hendarsah, Head of Financial Market Deepening at Bank Indonesia, confirmed the central bank's moves. Hendarsah said the rupiah depreciated sharply after several short-term investors "rushed to the non-deliverable forwards market to hedge, causing the contracts to drop significantly".
What are the changes that markets expect with Trump in office and a Republican-controlled Congress:
- Quicker and more frequent rate hikes by the US Federal Reserve
- Rising US government spending and inflation
- Tax cuts and the implementation of pro-growth policies
- Trump's protectionist approach will protect the US economy, especially the old economy