Indonesia Stock Market & Rupiah: Stocks Rally in Post-Brexit Reality
In the post-Brexit reality, stocks have been performing well, worldwide, with the exception of the week of 4 July when markets were hit by profit-taking amid heightened concern about the world's economic fundamentals. Apart from that week (when Indonesian markets were closed for a public holiday) stocks have been rallying, fueled by optimism about monetary stimulus from key central banks. So far this week, gains in worldwide stocks reappeared, fed by a positive (but not too positive) US jobs report and the prospect of more stimulus from central banks.
Emerging market stocks climbed to a near three-month high on Tuesday (12/07), following the impressive performance of Wall Street, where the Standard & Poor's 500 index closed at a record high on Monday (11/07), while the Dow Jones industrial average is approaching its record high. US stocks performed well due to the upbeat US jobs report which showed that US employers added a seasonally adjusted 287,000 jobs in June 2016, beating forecasts. This report signals that the US economy remains healthy enough to ease concerns. However, the report was not too good and therefore did not trigger renewed expectation of another Fed Funds Rate hike.
Bets on more stimulus are also causing rallies in stocks, worldwide. After Japanese Prime Minister Shinzo Abe won a battle in the upper house a new round of monetary stimulus is expected to be conducted by the Bank of Japan (BoJ). Japan's yen has been appreciating strongly recently - a trend that hurts the nation's export performance - and therefore the central bank is expected to undertake efforts to weaken the currency. Previously Abe emphasized his commitment to combat deflation. Former Federal Reserve Chairman Ben Bernanke is currently in Japan to meet the BoJ and Abe, and to give his view on the right monetary policies. In media it has been speculated that Japan may use the "helicopter money" strategy as an alternative to quantitative easing to cause inflation and boost the economy.
Meanwhile, the Bank of England is expected to cut interest rates at its policy meeting on Thursday (14/07). One day before that meeting, Britain is expected to see the inauguration of a new prime minister - Theresa May - hence boosting certainty about Britain's leadership. Market participants also still bet on additional monetary easing in the European Union in the period ahead.
Indonesia's benchmark Jakarta Composite Index rose 0.60 percent to 5,099.53 points on Tuesday (12/07), a 13-month high, boosted by the above-mentioned positive external matters as well as on optimism about strong capital inflows due to the implementation of the tax amnesty program.
Meanwhile, Indonesia’s five-year bond yield declined to a 16-month low. Foreign investors have purchased some USD $6.5 billion worth of Indonesian debt this year, supported by Indonesia's decision to scrap tax on interest earned from bonds. Indonesia's bonds are attractive as they offer a relatively high yield, while the rupiah has been strengthening markedly so far this year. Indonesia's two-year bond yield decline 24 basis points to 6.84 percent, a 16-month low.
The Indonesian rupiah, however, depreciated 0.10 percent to IDR 13,120 per US dollar on Tuesday (12/07), tracking a weaker yen. Moreover, the central bank of Indonesia stated that it would not let the currency appreciate too much in order to maintain competitive exports. Traders claim that Indonesia's state-owned lenders were buying US dollars today on behalf of the central bank in order to curtail any further rupiah strengthening.
Bank Indonesia's benchmark rupiah rate (the Jakarta Interbank Spot Dollar Rate, abbreviated JISDOR) depreciated 0.30 percent to IDR 13,151 per US dollar on Tuesday (12/07).
Indonesian Rupiah versus US Dollar (JISDOR):| Source: Bank Indonesia