While Asian markets are mixed on Wednesday morning (20/06), Indonesia's benchmark Jakarta Composite Index plunged 2 percent (to a four-week low) in the first five minutes after trading resumed after the long Eid al-Fitr holiday. Indeed a lot happened on the global stage since Indonesian markets closed on Friday 8 June 2018 that has not been absorbed by Indonesian assets. Therefore, today it is catch-up day for investors.
What are the key subjects that investors in Indonesian assets are responding to today?
- On Friday (15/06) trade tensions between the USA and China, the world's two top economies, heightened after the Trump administration announced tariffs on USD $50 billion worth of Chinese goods. China responded by threatening to impose tariffs on USD $50 billion worth of American goods such as beef, poultry, tobacco and cars. Such protectionism is expected to ripple through the global economy, impacting on international supply chains. Moreover, US President Trump stated that more tariffs are in the pipeline in US-China trade.
- At the Federal Reserve meeting on 12-13 June 2018, the US central bank decided to raise its benchmark interest rate by 25 basis points to 1.75 - 2.00 percent. It is a move that was expected by markets. In fact, Bank Indonesia had already responded to the move by raising its benchmark interest rate twice (by a total of 50 bps) in the second half of May 2018. Thus the Fed move was priced in already. However, investors in Indonesian assets will now have their chance to respond in the post-decision phase.
- On 14 June 2018, the European Central Bank (ECB) announced that it will end its bond-buying program (quantitative easing) in December 2018. Currently, the ECB is still purchasing €30 billion worth of (monthly) assets in an effort to boost the money supply in the European Union (EU). However, starting from September 2018 the figure will be reduced to €15 billion per month, and ended altogether at the end of 2018. Interest rates, however, will remain at record lows for a long time (at least through the summer of 2019).
- On 12 June 2018, the world finally witnessed the meeting between US President Donald Trump and North Korean leader Kim Jong-un in Singapore, the first summit meeting between leaders of both nations. The meeting had great symbolic meaning and managed to ease tensions in the region as North Korea seems committed to denuclearize. Critics, however, argue that the content of the agreements that have been signed by both leaders at the summit are too vague.
Trading in the Indonesian rupiah will resume on Thursday (21/06). There is concern that the currency will also commence in deep red territory after the holiday, especially considering foreign investors control nearly 40 percent of government bonds, while the country is also highly dependent on foreign inflows to finance its current account deficit.
Therefore, Bank Indonesia Governor Perry Warjiyo stated on Monday (18/06) that the Indonesian central bank is willing - if needed - to raise the benchmark interest rate again next week to respond to external pressures. Warjiyo has repeatedly stated that he wants to be ahead of the curve, taking pre-emptive actions.