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FINANCIAL CHRONICLE™ » DAILY CHRONICLE™ » US’ Fed move will boost Lankan Rupee, Bourse: Analysts

US’ Fed move will boost Lankan Rupee, Bourse: Analysts

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Senior Manager - Equity Analytics
Senior Manager - Equity Analytics

The US Federal Reserve’s surprise move on Wednesday to maintain its stimulus to the world’s biggest economy will help emerging markets including Sri Lanka, analysts said.
Currencies as well as stock markets of emerging economies had feared US Fed would reduce its stimulus and this saw major exodus. The Fed was to decide when and by how much it would scale back its cash injection of $ 85 billion a month.
“This is certainly good news and foreign capital will flow back to emerging markets including Sri Lanka and top blue chips with big foreign shareholding and sought after by funds will get a boost,” analysts said.
Whilst Sri Lanka has been enjoying net foreign inflow of Rs. 19 billion to the Colombo Bourse, with the US’ Fed decision days away, the Colombo Bourse saw net outflows to the tune of Rs. 740 million on Monday and Tuesday, reducing the year-to-date net inflow figure to Rs. 18.5 billion from Rs. 19.2 billion on Friday. However, there was a net inflow on Wednesday worth Rs. 361 million, which was encouraging.
The Colombo Bourse was closed yesterday on account of the Poya holiday and analysts expect investors to re-rate prospects upward when it opens today.
However, other analysts opined the US Fed move was unlikely to revive local investor sentiment. Despite continuous inflows year-to-date, the All Share Index has remained disappointing, with year-to-date gain of only 1%. It had lost much of the gains enjoyed in May of 15%.
Nevertheless, Asian shares and currencies yesterday surged across the board after the Federal Reserve stunned markets and decided not to taper its asset-buying program now, sending global bond yields and the dollar into a tailspin.
From Jakarta to Manila, Tokyo to Sydney, investors celebrated the prospect of prolonged stimulus in the world’s largest economy. MSCI’s broadest index of Asia-Pacific shares outside Japan jumped 2.2% to a four-month peak.
Lankan forex market analysts also expect the Fed’s move to help the Lankan Rupee apart from other Asian currencies.
The rupee has been falling since early July when foreign investors started pulling out of local bonds as US Treasury yields rose in expectation of a Fed pullback. The currency hit a record low of 135.20 on 28 August, but has recovered since then. It has fallen 3.6% this year.
Reuters has been quoting dealers as saying any reduction by the US Fed may prompt foreign investors to exit Sri Lankan Government securities, which could put the rupee under pressure.
However, Reuters also quoted Central Bank Governor Ajith Nivard Cabraal on Tuesday saying that Sri Lanka would not be hurt by the Fed’s tapering.
Cabraal said Sri Lanka had been “cautious in absorbing QE (quantitative easing) funds” and, because it has had a stable market environment, “we are ready to face the Fed tapering”.
“Our currency has been stable even in the light of turbulent upheavals in many other currencies in recent times,” Cabraal said.
India’s Finance Ministry’s top economic adviser Dipak Dasgupta said the country could enjoy a 0.5-percentage-point boost to its economic growth in the near term thanks to the US Fed’s surprise decision to delay winding down its monetary stimulus.
“It was a huge surprise, huge surprise,” Dasgupta told Reuters. “It has been a very positive decision.”
“I think from our growth perspective this decision by itself has the potential to add about 50 basis points to our growth in the near term,” he added.
India’s Bombay Stock Exchange’s Sensex surged over 3% on Thursday with the benchmark index marking its highest close in nearly three years, led by banks, after the U.S. Federal Reserve surprised the markets by sticking to its stimulus plan.
The Sensex surged 3.4%, or 684.48 points, to end at 20,646.64, after earlier rising as much as 3.9%, marking its highest level since November 11, 2010.
The broader Nifty rose 3.7%, or 216.10 points, to end at 6,115.55, marking its highest close since May 2013.


Senior Vice President - Equity Analytics
Senior Vice President - Equity Analytics

The Federal Reserve surprised markets Wednesday when they kept asset purchases at $85 billion a month, and that will support equities while pushing down the U.S. dollar.
The yield for the 10-year U.S. Treasury note and 30-year bond may also fall, market watchers said.
Market participants, from equity to commodity traders, braced for the Federal Open Market Committee to start reining in its massive stimulus program, with the general consensus being that the Fed would announce a “token” tapering of $5 billion to $10 billion a month.
Instead, the Fed said they would keep buying bonds, known as quantitative easing, saying that they would like to see more “evidence of growth” before it moves forward with tapering. Additionally, Chairman Ben Bernanke said it’s likely the Fed may not start to raise rates until 2015.
Stocks rallied on the news, with the e-mini Standard & Poor’s 500 stock index future pushing to 1,723.25, a record high. Prices continued their advance on Thursday. Other indexes, such as Dow Jones Industrial Index, also shot to new highs, while the Nasdaq 100 also rallied.
U.S. Treasury yields fell on the news with the 10-year yield having its biggest one-day drop in nearly two years. Before the Fed news, U.S. 10-year Treasury yields were near 3%, but as of mid-morning they are hovering around 2.738%. As yields fell, bond prices rose, which is what normally happens as yields and prices move inversely.
The U.S. dollar also broke its recent uptrend as the Fed said it would keep QE in place.
The reaction of the markets suggested that the Fed news took many by surprise, said Andrew Thrasher, chartered market technician at Financial Enhancement Group.
“A lot of institutions were positioned for a tapering and that was reflected in the type of reaction we had. Usually after a Fed meeting action is whipsaw, it will go up, then down, or vice versa. Here it just went up” in stocks, he said.
Rob Kurzatkowski, senior commodity analyst, optionsXpess, said stocks are likely to “ride the momentum” of the Fed’s announcement.
“The Dollar Tree and Microsoft stock buybacks have given investors a reason to remain in the stock market,” he said.
Thrasher said stocks are poised to rally further into the year’s end because the Fed is keeping QE, although in the near-term equities could see a pullback.
“Now that we’re at the highs, we might see some profit taking coming in. There is a bit of frothiness in the market. But now that we’ll still have QE, we’ll see further gains. Going into the fourth quarter we’ll also see hedge funds having to chase the market because they’ve underperformed…. I’m bullish into the year’s end with QE,” he said.
Looking at seasonality studies, Thrasher said equities are due for a pullback. “September gets a bad rap because it’s usually the weakest month of the year and that usually starts in the second half of the month. So that may also cause some profit taking here,” he said.
Thrasher put short-term technical chart support for S&Ps at 1,700, with secondary support at 1,625, near the August lows. “If we get to 1,625 we’ll have to revaluate, to see how small caps are doing and international stocks, before taking action,” he said.
Prior to the Fed’s announcement, stock market strategists were calling for a pullback in equities, noting signals like the nine-day Relative Strength Index had moved above 70%, which is considered “overbought” territory.
However, Kurzatkowski said given how strongly the market rallied on Wednesday, the further gains are possible. “The breakout occurred (in the e-mini S&P) with the RSI above the 70% mark, suggesting the breakout may be explosive. The market may run into a bit of resistance near 1,730, extension of the line from May and August highs, and 1,750,” he said.
The outlook for Treasury yields is lower now that the Fed is keeping QE, analysts said.
John Person, president of National, said he sees the yield on the 30-year bond falling about 50 basis points from its current level of 3.78%, which is close to where the yields were in June before the market talk about tapering really kicked in.
“The best place to be is in equities as the Fed is trying to keep bonds artificially low,” he said.
Person noted that looking at the commitment of traders report for Treasury bond future from the Commodity Futures Trading Commission, the small speculators are heavily net short. He said the last time small speculators were so heavily net short was at the end of 2008, when bond prices rallied sharply.
Barclays also lowered the outlook for 10-year notes, saying they now see 10-year Treasury yields ending this year at 2.85% because of the Fed’s dovish signals about the start and pace of policy normalization.
“While the Fed funds projections are likely simply a signaling mechanism, and the Fed may very well revise the pace if the outlook brightens, for now, we do not believe the rates market will question the path laid out by the Fed,” they said.
Taking a contrary view is Alan Bush, senior research analyst, ADM Investor Services, who said he’s not necessarily convinced that Treasury yields will stay down or that bond prices will continue to rise because of the continued QE.
“Treasurys have really underperformed the news. Despite QE, which is designed to keep rates down, the trend in rates has risen and bond prices have fallen,” Bush said.
He said he expects the yields for longer-term bonds such as the 10-year note and 30-year bond to rise and prices to fall. “I think we’ll see the price on the 30-year bond fall to 128.25,” he said. The price is currently at 131.10.
The U.S. dollar saw a sharp break on Wednesday after the Fed news and is now holding at a seven-month low.
Thrasher said the break in the U.S. dollar’s technical charts was harsh, noting that it broke an uptrend drawn from 2011 lows to the January lows and also pushed beyond the lows from May and August. Whether the dollar has changed its trend remains to be seen.
“When we have a break like that, I like to see confirmation. So we’ll see how the market trades by the end of the week and next week to see if the view changes from bullish to neutral,” he said.

Bush said the dollar rose on the idea that interest rates were going to rise further because QE was going to be reduced. “The dollar is just going to parallel Fed policy,” he said.


Senior Manager - Equity Analytics
Senior Manager - Equity Analytics

May be we may have a super September at least a partial one Wink  Now time to keep an eye on revelation and any action on our bad human rights record.


Assistant Vice President - Equity Analytics
Assistant Vice President - Equity Analytics

The extent of world market rallies is under-appreciated

Philippines, HK, Aus, NZ, Singapore and the US are all trading at the same level as ASI at 7400.


Senior Equity Analytic
Senior Equity Analytic

rainmaker wrote:The extent of world market rallies is under-appreciated

Philippines, HK, Aus, NZ, Singapore and the US are all trading at the same level as ASI at 7400.

Go CSE go.......................


Assistant Vice President - Equity Analytics
Assistant Vice President - Equity Analytics

Lot of hedge funds are on short positions....
Wouldn't blame them... prices have doubled Razz

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