Asian Stocks Mixed On Fed’s Cautious Approach To Rate Hike As US Stocks Open Lower

Asian stocks showcased mixed reactions on Thursday after the US Federal Reserve failed to increase interest rates as widely speculated. The Fed remained cautious on another increase in interest rates, despite current economic drivers pointing to a strong growth, bar the low inflation numbers.

Among the most impressive figures following Fed’s comment were the nonfarm payrolls, which rose from 11,000 in June to 287,000 in July.  "Job gains were strong in June following weak growth in May," the FOMC said in its post-meeting statement, adding that "On balance, payrolls and other labor market indicators point to some increase in labor utilization in recent months."

However, as pointed out in the previous statements, inflation is expected to remain low in the near term. The Federal Reserve is counting on the rebound in energy prices and the continuous improvement in the labor market to boost inflation in the near future.

The news resulted in mixed reactions in the stock markets around the world with Asian stocks rallying to record highs while the US stocks opened lower.

Shanghai composite index rallied 0.1 percent higher after reversing an early loss of 0.8 percent while counterpart Hang Seng slipped 0.2 percent. On the other hand, India’s BSE Index rallied to a new 12 month high after adding 0.3 percent. This rally was mirrored by New Zealand and Australian stocks as share prices increased to push the NZX 0.1 percent higher while the ASX200 was up 0.3 percent to close highest since August 2015.

Nonetheless, Japanese stocks still remain highly speculative with the market now waiting on the Bank of Japan (BOJ) to issue its comment on the economy on Friday.

This has created a situation, which Mitsushige Akino, a Tokyo-based executive officer at Ichiyoshi Asset Management Co referred to as a “tug of war between selling on expectations the BoJ will disappoint, and short-covering for individual shares that will push the market up,” adding that the Fed’s decision to remain clam on tightening the monetary policy would have been expected.

Reflecting Fed’s decision not to raise interest rates, the Japanese Yen rallied against the USD leading to massive declines in share prices in Tokyo Stock Exchange. Illustratively, Japan’s Topix index dropped significantly as the JPY gained ground by 0.8 percent to 104.59 against the dollar while South Korea’s Kospi index plunged 0.2 percent. Singapore’s Straits Times Index was also amongst the losers, dropping 0.9 percent.

In the US, stocks opened lower on Thursday with NASDAQ 100 down 0.04 percent in the morning hours while the S&P 500 was losing 0.18 percent. The Dow Jones Industrial index was the biggest loser early in the morning dropping by nearly 0.4 percent.

The US stocks had started recovering towards midday but still remained in the negative territory as investors continued to exercise caution towards Fed’s latest comment.

Conclusion

In summary, the market was anticipating another US interest rate hike this July, especially following positive comments in the last few months. However, given the manner in which things went down last year, it was not a huge surprise that the Federal Reserve once again took the safer option.

Now, there are reports that the rate hike could actually come in September especially following another solid month from the labor market. Should investors brace themselves for it, or should they maintain caution?

At the moment, Gold prices appear to be rising, which means that some investors are exercising caution by covering their risk-geared investments with some stakes in Gold. Therefore, it would not be a huge surprise if September comes and goes without another US interest rate hike.

After all, inflation, which still remains very low, is very crucial in any decision that the Federal Reserve makes with regard to increasing the base interest rate and this means that December could be the ideal target again.