Asian stocks rebounded sharply for the first time in seven days early on Wednesday, following gains on Wall Street and in Europe over Tuesday night.
This rally was in reaction to an announcement by the US central bank to maintain interest rates near zero until mid-2013, helping to prevent one of the biggest sell-offs in recent years. The Federal Open Market Committee has also discussed reviving economic growth through the use of a range of unspecified policy tools which they will employ “as appropriate”.
On Tuesday, Wall Street stocks posted their biggest gains in more than two years, with the S&P 500 index leaping 4.7 percent and the Dow Jones Industrial Average rising 4 percent.
In Asia, Japan’s Nikkei 225 index advanced by 1.7 percent within the first 20 minutes of trading. MSCI’s index of Asia Pacific shares outside of Japan jumped 3.2 percent. South Korea’s Kospi index also rose, opening 4 percent higher.
Report: Asian stocks stage strong early rally [AFP, Aug 10 2011]
Report and Analysis: Asian stocks bounce after Fed move stems rout [Reuters, Aug 10 2011]
Despite the positive gains in Asian markets, Toshiyuki Kanayama, market analyst at Monex, warns that "market sentiment hasn't stabilised yet, so while we'll likely see a relief rally today, it'll be a rocky path to recovery.”
Analysts expect markets will remain choppy due to long term global growth concerns and the lack of any announcement from the Federal Reserve about further quantitative easing or an economic stimulus package.
“A lot of traders will be disappointed that the Fed did not go any further,” said Robin Bew of the Economist Intelligence Group. “The immediate nervousness triggered by the downgrade...that is dissipating...but long-term worry, that the US and Europe have some serious issues and really don't seem to have a policy answer to them, still remains," he added.
Investor confidence has been shaken not only due to the European debt crisis and US’s struggling economy but also by data that suggests even China, the second largest economy is also stalling.
"It's possible the bottom has been met but it is too early to say so," said Albert Hung, chief investment officer at Sydney-based Alleron Investment Management.
Report and Analysis: Asian stocks rebound after US Fed puts rates on hold [BBC, Aug 10 2011]
Meanwhile, the Ministry of Trade and Industry (MTI) of Singapore has cut its 2011 economic growth and trade forecasts to 5-6 percent, down from a previous forecast of 7 percent.
Asia, especially export-reliant Singapore, faces the threat of weakening demand and appreciating currencies due to a struggling U.S. economy and Europe’s debt crisis spreading in Italy and Spain.
“Singapore is historically more sensitive to a U.S. and global downturn,”stated Chua Hak Bin, an economist at Bank of America Merrill Lynch.
MTI announced Wednesday that Singapore grew by 0.9 percent on a year-on-year basis. However, on a quarter-on-quarter basis, the economy contracted by 6.5 percent, in contrast to a 27.2 percent growth in the first quarter.
Analysis: Singapore cuts export growth forecast as global risks rise [Bloomberg, Aug. 10 2011]
The global debt crisis is also expected to affect ASEAN either directly, through foreign direct investment, or indirectly through third party trade. The European Union accounts for the majority of investments in the region, making up approximately 22 percent of total foreign direct investments into ASEAN, and providing a critical source for growth.
Analysis: Global debt crisis will affect ASEAN ‘sooner or later’ [Jakarta Post, Aug. 10 2011]