Following a unanimous decision by US FOMC members to slash the federal funds target rate by 50bp to 1%, and a 27bp reduction in rates by the PeoplesÆ Bank of China late on Wednesday, the MSCI Asia-Pacific ex-Japan stocks index rose 10% - its third consecutive day of gains. Markets in Japan, Hong Kong, Singapore and Korea climbed as much as 12%, and commodity prices surged.
Taiwan cut rates by a further 25bp to 3% yesterday, after reductions of 37.5bp in the past five weeks, while on Monday the Bank of Korea surprised the markets by cutting its key rate by 75bp. Hong Kong authorities also lowered interest rates.
ôOngoing policy initiatives from global central bankers and policymakers are finally gaining some traction,ö says Patrick Bennett, Asia FX and rates strategist at Societe Generale. ôA relative sense of calm has returned to markets during the last sessions with the extreme levels of risk aversion, attendant routs in asset markers and deleveraging flows slowing, and in most cases reversing some of the recent volatile and outsize moves,ö he wrote in a note.
The markets were further boosted by the Wednesday announcement from the US Federal Reserve that it will provide $30 billion each to the central banks of South Korea, Singapore, Brazil and Mexico. The currency-swap arrangements, which will be effective until April 30 aim "to mitigate the spread of difficulties in obtaining US dollar funding" and hence increase bank liquidity, the Fed said in a statement, and pointed out that the counterparties were "four large systemically important economies".
Earlier in the week, the Fed also agreed to a $15 billion swap line with the New Zealand central bank and removed limits this month on four existing swap lines, including one with the European Central Bank.
The Korean won, which earlier in the week fell to a decade low, leaped 14% yesterday as finance minister Kang Man-soo said the government was also trying to expand currency swap deals with Japan and China. Korea already has swap lines of $4 billion with China and $13 billion with Japan. The won was further supported by data which showed that the countryÆs current account deficit had narrowed in September.
The swap line with the Fed ôwill expand our foreign-exchange reserves and help stabilise the currency market,ö Bank of Korea Governor Lee Seong-tae said at a press conference in Seoul on Thursday. "We'll also try to cooperate with other central banks to stabilise global and local financial markets."
During the past two weeks, Korea has announced several measures that include guaranteeing up to $100 billion of local banksÆ new foreign debt that is taken up until June 30 next year, injecting $30 billion into the interbank market, the direct purchase of domestic bank bonds and the 75bp rate cut announced on Monday. Default protection on Korean government debt yesterday fell by the most in more than four years, dropping 130bp to 435bp.
ôSouth Korean initiatives to address risks arising from banks exposure to offshore borrowing plus the measures aimed more directly at the domestic economy û would in circumstances other than that which have dominated global markets recently û probably have been better-received,ö says SocGenÆs Bennett.
The Nikkei rose 10% yesterday, recovering from a 26-year low hit on Tuesday, led by exporters whose profit outlooks were encouraged by a weaker yen. Toyota Motor and Mazda Motor gained more than 11%. On Thursday, Japan's prime minister Taro Aso pledged to inject Ñ5 trillion ($51 billion) into the economy to help households and small businesses, which is equivalent to about 1.2% of the countryÆs annual gross domestic product. It is also Japan's second stimulus package since August.
Ñ2 trillion in financial assistance will be provided for families and Ñ1 trillion for local authorities. The government will also help ensure small businesses can access loans and offer tax relief on mortgages, Aso said. In addition, the government will reduce highway tolls in order to help cut freight costs.
Hong Kong's Hang Seng Index rose more than 10% after the PeoplesÆ Bank of China reduced its one-year lending rate to 6.66%, from 6.93%. Shares sensitive to fluctuations in commodity prices, such as CNOOC, the top Chinese offshore oil company, were among the biggest gainers. SingaporeÆs Straits Times Index rose nearly 10%.
In a separate move, the International Monetary Fund (IMF) set up a short-term fund for countries with good track records for economic policy. The IMF will almost double borrowing limits for emerging market countries, yet wonÆt insist on them implementing austerity measures.
Last month, the Credit Suisse/Tremont emerging markets hedge fund index showed a loss of 8.9%, the biggest in a decade, exceeding the 6.5% decline in the benchmark hedge fund index, according to Reuters. Despite the recovery this week the MSCI Asia-Pacific ex-Japan index is still down more than 50% this year.
But the yield premium on emerging market dollar bonds over US Treasuries narrowed on Wednesday by more than 60bp, according to JPMorgan Chase & Co's EMBI+ index. The spread has leaped 572bp from a record low of 149bp in June 2007. And the cost of protecting Asia-Pacific bonds in general also fell. The Markit iTraxx Asia credit-default swap index of 50 borrowers dropped the most since it was devised in September 2007.
However, SocGenÆs Bennett warns that ôdespite the welcome responses to policy actions, risk from slower global growth has not been extinguished and still points to potential underperformance for much of Asiaö.
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