Indonesian stocks declined more than expected during the first trading session on Tuesday (09/06). The benchmark Jakarta Composite Index plunged 3.12 percent to 4,858.31 points amid heightened expectation of a US interest rate hike as well as worries about the Greek debt situation in the Eurozone. The performance of other Asian stock indices was mixed on Tuesday morning with Shanghai, Singapore and South Korea showing modest gains, while New Zealand, Hong Kong, Malaysia and Taiwan were down marginally.
Negative market sentiments were also caused by falling indices on Wall Street on Monday (08/06), extending losses to a third straight day, after last week's positive US jobs report (informing that 280,000 jobs had been added in the USA in May) raised speculation that the Federal Reserve will soon raise interest rates. Higher borrowing costs in the USA leads to a stronger US dollar and will most likely reduce demand for riskier assets such as Indonesian stocks.
Next week the Federal Reserve will hold another policy meeting (16-17 June) and perhaps we will see an indication of a (slight) rate hike (perhaps as early as September 2015). Several countries that are particularly vulnerable to such a rate hike are Indonesia, Brazil, India, South Africa and Turkey as these countries rely on attracting global capital flows for financing.
Worries about a Greek exit ("Grexit") from the Eurozone are another main problem for investors. A Grexit could jeopardize the whole Eurozone's financial system and makes investors hungry for safe haven assets. Last week, the government of Greece delayed its 300 million euro debt repayment to the International Monetary Fund (IMF) until the end of June.
Moreover, there are no domestic factors that can support Indonesian stocks. In fact, the presence of negative domestic factors has exacerbated the situation. These factors are:
• Slowing economic growth; Indonesia’s GDP slowed to 4.71 percent (y/y) in Q1-2015
• Generally lower-than-expected Q1-2015 corporate earnings reports of companies listed at the Indonesia Stock Exchange
• The rupiah has been the worst performing emerging Asian currency so far this year
• Indonesian inflation accelerated to 7.15 percent (y/y) in May 2015
• Indonesia’s current account balance may remain around 3 percent of GDP in 2015
• Indonesia’s May forex reserves declined to USD $110.77 billion as Bank Indonesia sold US dollars to combat high volatility
The Jakarta Composite Index is now at its weakest position since late June 2014.