Fed meeting, N. Korea to test markets

Several events are likely to test the stock market this week, but none quite as significantly as the US central bank's policy meeting and persisting geopolitical fears fuelled by North Korea's latest provocation.

Wall Street's bull market appears to be raging on, with the S&P 500 index surging past the 2,500 mark for the first time with a 0.2 per cent gain last Friday, alongside 0.3 per cent gains in the Dow Jones (record highs) and Nasdaq Composite indices.

US equities appeared unmoved by North Korea's decision to fire a missile over Japan and had also shrugged off the unexpected drop in US retail sales last month and the first drop in industrial output since January, which were partly a result of the hurricanes.

"It would be wrong to say that markets are not taking any notice (of North Korea's action), but the relatively muted responses of Japanese yen, Korean won and risk assets globally suggest that a sense of fatigue on this belligerence is creeping in," said Mr Rob Carnell, ING Asia Pacific's research head for Asia in a recent note.

"Was this latest show of force for public consumption in North Korea ahead of a more diplomatic path being taken? It is impossible to say. We hope so."

The Federal Open Market Committee (FOMC) meeting late on Thursday will be keenly watched. While the likelihood of an interest rate change in this meeting is "next to none", the markets will be watching for possible moves by the Fed to normalise its balance sheet.

"The 'relatively soon' pre-empt for the commencement of balance sheet tapering in July's FOMC minutes long had the markets anticipating a September announcement.

"Fed members had prepared the market for months to avoid surprising it," said IG Markets strategist Jingyi Pan.

'UNWINDING'

"While it may be a historical moment for the Fed to start unwinding the massive US$4.5 trillion (S$6.05 trillion) balance sheet, the impact upon markets is expected to be muted and the process, a gradual and predictable one."

She added that the timing of the next rate hike is uncertain with a broad view that rate changes may be withheld until next year.

Maybank FX Research said it sees the risk of one more rate hike in the December meeting, anchored by US growth that is still intact, upticks in inflation gaining momentum and progress on US tax and healthcare reforms.

The economic calendar for Asia is relatively light. No one is quite expecting additional easing measures by the Bank of Japan, which meets on Thursday, with Moody's Analytics expecting a "relatively neutral monetary policy statement".

Central banks in Taiwan, Indonesia and Philippines will also hold meetings with no changes in interest rates expected. Inflation figures out of Malaysia will be due, while Japan and Thailand will provide trade updates.

Singapore will see the release of last month's non-oil domestic exports (NODX) data today.

"The realisation of an upturn in NODX would be positive for the industrial sector and a welcome relief for the Straits Times Index (STI), which had recently touched a two-month low," said Ms Pan.

Last week, the local market's key barometer lost 19 points or 0.6 per cent, finishing on Friday at 3,209.56. This takes the STI's year-to-date performance to 11.4 per cent.

Yet, things may look up. Macquarie Research recently raised its target for STI by 5 per cent from 3,235 to 3,400 on the back of improvements in overall economic backdrop and better price target upgrades for component stocks.

This article appears in The Business Times today. For full listings of SGX prices, go to http://btd.sg/BTmkts