US rate hike roils Asian markets

Stock markets across Asia slumped today, following an unexpected move by the US Federal Reserve to raise the discount rate yesterday night, after Wall Street had closed. This raised fears that the inevitable US monetary tightening could come sooner than expected.

The Federal Reserve raised the overnight rate, the rate it charges banks for emergency loans by 25 basis points to 0.75%. This was to withdraw some of the emergency measures put in place to counter the economic crisis, towards a more normalised structure with the economy on a recovery path.

Investors should note the distinction between the discount rate and the federal funds interbank lending rate. The key federal funds rate, the main monetary policy tool, remains unchanged near zero, and within the target of 0% to 0.25% established since late 2008 during the crisis.

The key federal funds rate is likely to remain low for some time to sustain the still fragile US economic recovery, especially with high unemployment. Thus, the raising of the overnight rate itself does not necessarily mark the start of tightening monetary policy in the US yet, which many expect to happen in the second half of 2010 or early next year.

Nonetheless, the sudden move, especially in between Federal Open Market Committe meetings, roiled global financial markets today, sending stock markets and commodities lower and the US dollar higher. Most affected were cyclical and export-oriented stocks, as well as the Hong Kong bourse, whose currency and monetary policies are closely tied to the US.

The local stock market was comparatively more resilient. The FBM KLCI traded within a narrow four-point range for much of today, and ended down just 1.3 points to 1,257.7.

Market breadth was negative with declining stocks beating advancing ones by a three-to-one margin. Trading remained thin with 623 million shares changing hands.

Actively traded stocks include newly-listed Homeritz, Genting, KNM, Maybank, CIMB and Axiata. Major gainers include DiGi and Dutch Lady. Losers include Tanjong plc, BAT and Genting.

Global equity investors have been hit by several rough patches lately, with problems ranging from mixed economic data, fears of monetary tightening, China’s credit tightening measures and sovereign debt problems in Europe, among others.

This ongoing tug of war between investor optimism and pessimism will likely continue for some time as long as economic data remains mixed and external problems linger.