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Asain stocks plunge on rate hike fears Original Source Link: (May no longer be active)
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Asian stocks plunge on rate hike fears
By Shihoko Goto
UPI Senior Business Correspondent
Published 5/10/2004 11:25 AM
Share prices across Asia plunged Monday on expectations of an U.S. interest rate hike in the not-too-distant future, following the release of strong economic data last week, along with continued financial market fears of rising inflation due to high oil prices.
Higher rates in the United States would put a damper not only on the U.S. economic engine, but also on the fledgling world economic recovery. As a result, fears of monetary tightening by the Fed led markets in South Korea, Hong Kong, and Taiwan to post their lowest index levels so far this year.
On Monday in Tokyo, the benchmark Nikkei-225 average lost 4.84 percent, having fallen 554.12 points to 10,884.70, while South Korea's composite index declined by 5.73 percent to end at 790.68, its lowest level since June 2000. Meanwhile, Hong Kong's Hang Seng index dropped 3.57 percent to close at 11, 485.50, and Taiwan's top 50 index declined by 3.88 percent to 4,369.50.
In Thailand, the Thai Exchange lost 4.90 percent to 605.62 while Indonesia's composite index also fell 4.90 percent to 707.22. Even shares down under were not spared, as Australia's all ordinaries index lost 1.16 percent to end at 3,361.90.
It was the first day Asian traders were able to do business following the news Friday that the U.S. job market was recovering at a quicker pace than expected. Early Friday, following the close of Asian markets, the U.S. Department of Labor reported that the unemployment rate in April fell to 5.7 percent while employers added about 288,000 new jobs. While that may be good news for the Bush administration as the White House prepares for the presidential elections in November, it has only increased speculation that monetary policymakers will not hesitate from increasing interest rates to prevent the economy from overheating. Indeed, Federal Reserve Chairman Alan Greenspan has stated a number of times over the past several weeks in public speeches as well as before Congress that higher interest rates in the future are only to be expected. Wall Street is now only speculating on when that would be, rather than if monetary policy will be tightened, and agencies such as the International Monetary Fund have suggested that higher rates would be a matter of due course well before the end of the year.
Granted, one reason why the Fed might shy away from raising rates too soon is due to increased inflationary pressure, namely through the high price of oil in recent weeks. To be sure, crude oil prices have fallen slightly since Saudi Arabia called upon the Organization of Petroleum Exporting Countries to increase oil output earlier Monday. Still, the price of oil remains high, and concerns of higher inflation remain a threat which the Fed will be vigilant about keeping a lid on.
At the same time, European Central Bank governor Jean-Claude Trichet said Monday that higher oil prices are not a direct threat to the world economy, suggesting that the commodity's price alone would not keep central banks from raising rates if there is a need to.
The "steady growth" of the world's richest nations is not being hampered by higher oil prices, Trichet said following the latest meeting of central bankers from the Group of 10, which represents the world's wealthiest nations including the United States, Germany, France, Britain, and Japan.
But whatever the price of oil, it is certain that higher interest rates will slow down expansion, especially in the short term. Over the past two years, U.S. consumers and businesses have benefited from historically low interest rates, with the key federal funds target rate currently being at its lowest level in over four decades at 1.0 percent. Moreover, ready access to cheap money has been a boom not only to the United States, but also to the global economy, as U.S. consumption has led growth across the globe in an otherwise sluggish world investment environment.
As such, investors in Asia as well as Europe are concerned that a rate hike in the United States will directly affect their own economies adversely, especially as their own respective central banks often take the lead from the Fed in setting monetary policy. Higher rates worldwide would lead to less consumption and less investments, which would hurt global economic prospects and ultimately, weaker share prices.
At the same time, stronger U.S. economic prospects have led investors to buy up dollars once again. The greenback had been on a downward slope since the latter half of last year against major currencies, as investors sold off the U.S. currency to invest elsewhere. Expectations of further, stronger growth in the United States is making U.S. assets more attractive, and thus creating more demand for the greenback.
But similar to a strong jobs report, a strong dollar too is a double-edged sword politically. While a higher value of the national currency may benefit the Bush administration in the near-term, for export-oriented exporters, a strong dollar will make their goods more expensive and thus less competitive overseas.
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