By 14:30 pm local Jakarta time on Wednesday Indonesia's benchmark Jakarta Composite Index (IHSG) had fallen 1.25 percent to 5,402.81 points, while the Indonesian rupiah had depreciated 0.33 percent to IDR 13,021 per US dollar (Bloomberg Dollar Index). What explains this poor performance today?

Citing unnamed officials at central banks within the European Union (EU), news agency Bloomberg reported that the ECB is likely to wind down its 80 billion euro (approx. USD $90 billion) monthly bond purchases, gradually. However, ECB media officer Michael Steen later informed that the ECB has not discussed this option yet.

Meanwhile, several Federal Reserve officials released "hawkish" statements. Richmond Fed President Jeffrey Lacker stated on Tuesday that borrowing costs may need to rise sharply to keep US inflation under control, while Chicago Fed President Charles Evans stated one day later that he would support higher US interest rates if economic data would allow such a move. Earlier, Cleveland Federal Reserve President Loretta Mester said the US economy is ripe for an interest rate hike.

A US interest rate hike will most likely cause large capital outflows from Indonesia. However, this should be a temporary phenomenon only, and Indonesian markets are expected to recover rather rapidly from these outflows given the country's stronger macroeconomic fundamentals (compared to the situation in mid-2013 when the country had to cope with a severely widening current account deficit and surging inflation due to energy subsidy reforms).

Washington-based IMF cut its outlook for US economic growth from 2.2 percent to 1.6 percent in 2016. This less rosy outlook is caused by cutbacks in the energy industry, a strong US dollar that is undermining exports, and political uncertainties surrounding the November presidential election. However, the IMF left its forecast for overall global economic growth in 2016 unchanged at 3.1 percent (y/y) as higher-than-earlier-expected growth in Japan and the Euro zone should manage to offset the negative impact of easing US economic growth.

Indonesia is leading declines in Asian markets today and this shows again that the country remains one of the most volatile and vulnerable markets in times of global shocks. This (modest) sell-off is also fed by profit-taking as Indonesian assets had strengthened markedly recently (primarily on the government's successful tax amnesty program and earlier expectation of a delay in US monetary tightening).

However, Indonesia is one of the most attractive and lucrative markets. In rupiah terms, the Jakarta composite index recorded a 26.7 percent (y/y) increase as of 30 September. However, given the stronger rupiah, in US dollar terms growth reached 48.2 percent (y/y), implying that foreign investors got double gains due to rising Indonesian shares and the stronger rupiah rate (versus the US dollar).

Today, Japan's Nikkei bucked the trend in Asia by climbing 0.5 percent. This was the result of a weakening Japanese yen (versus the US dollar), hence making export-oriented stocks more attractive. Meanwhile, China remained closed for a national holiday.

Stocks on Wall Street fell overnight (04/10) led by sharp drops in utilities and phone companies. As such, more downward pressures on Asian assets were felt on Wednesday. US government bond prices fell accordingly overnight, while gold had its worse day in nearly three years. The Dow Jones industrial average was down 0.5 percent, the S&P 500 fell 0.5 percent, while the Nasdaq composite declined 0.2 percent on Tuesday.

Bahas