WHAT WILL HAPPEN WHEN FED'S CUT STIMULUS

Tapering of QE                                                                HAFIZ RUSLI

Referring to, increase in interest rates; reduce liquidity in stock market and volatility in world currency. The fact is that, U.S will stop the quantitative easing when their economy improving. Therefore, good news will adversely influence the world market. Based on the inter market relationship, US dollar and interest negatively related to equity, commodity and bond price. When U.S begin the tapering program, US dollar and interest rate will rise thus it will create setback in equity, commodity and bond price. Market will be less liquid due to high borrowing cost.

South East Asia

Our market highly correlated with U.S Treasury because we received huge amount of foreign investment. ASEAN market consider as
the best place to do investment because we are developing nations that offer 5% to 7% growth in GDP. There a lot of opportunity to grab compared to European market that already old and sluggish. Malaysia and Thailand hold huge of amount of foreign funds. For instance, foreigner hold 28% of Malaysia government bond and according to BNP Paribas, Malaysia recorded $1.1 billion of inflow for the first 9 months, so we definitely should feel the heat when Fed’s begin the tapering program. Same goes to other countries that enjoy the influx of funds since 2008 such as Thailand and Indonesia. 

Technical view

Based on the weekly chart below, long term uptrend still intact as all the indexes managed to stay above uptrend line since 2008. As we can see, the bullish trend starts to build up in 2008 and continue to climb upward until then. The green arrows above show the start of quantitative easing program by the Fed’s. Since 2008, JCI recorded more than 350% of growth, followed by KLCI and Dow jones both recorded more than 100% of growth. It clearly shows that our market positively related to U.S market.

Tapering program widely expected not to be in December and likely to be called in late 1Q14. It may result in early selling pressure which we expect to spark in January if not earlier. According to January Barometer, bullish in January would likely lead to a bullish year. The Barometer has been seen to produce better than 50% accuracy rates during 20 years period. The chart below will help you to spot the sign of weakness and avoid huge losses. 

Dow jones industrial weekly chart for 10 years

Source: Bloomberg,

Based on the weekly chart, the bull is in control as the price hovering above uptrend line. However, volume divergence can be noticed on the chart. It indicates that people are skeptical on the bullishness and due to that reason correction is imminent. Failure to stay above 15,600 levels specifies the uptrend is losing momentum and will test the next support level at 14,690. Violation of vital support at 14,000 will lead to further correction. If Dow jones failed to stay above 14,000 levels, it indicates that U.S economy would not sustain without quantitative easing. 

KLCI index weekly chart for 10 year

Source: Bloomberg,

On the weekly chart above, firm uptrend can be noticed since 2008 as the index handsomely traveled above 45 degree uptrend line. For the past few days KLCI struggle to close above 1800 level due to profit taking activity and rumors on the tapering program. Failure to stay above 1700 level will sent a strong warning of counter trend. Violation of 1600 level confirm the counter trend and for those who already in long it is advisable to liquidate position. 

Jakarta composite index weekly chart for 10 years

Source: Bloomberg,

Violation of uptrend line in September 2013 provides an early signal to Indonesia that correction is imminent. Return move can be noticed after the violation of uptrend line. Indonesia was hit by destructive news of Fed’s tapering program in September 2013. It is because investors were worried over the wobbly economy condition in the country. Unstable commodity price is one of the factor that amplified Indonesia’s current account deficit in that period of time. 4000 level will act as immediate support level. Failure to stay above 3000 level will likely drag Indonesia into further downtrend.

USD/MYR weekly chart for 10 years

Source: Bloomberg,

Based on the chart, US Dollar begin to fall critically in 2009. This is due to quantitative easing program by the Fed’s to overcome subprime crisis in 2008. As a result, the supplies of US Dollar overwhelm the demand. Therefore ASEAN received huge influx of foreign investment, push borrowing cost lower and accelerate growth in equity market. However, in September US Dollar tested 50% level of Fibonacci retracement due to the rumors that Fed’s start tapering. As a conclusion, I believe that major correction is about to happen when Fed’s begin the tapering because the bullishness on our regional markets were fueled by low borrowing cost rather than the strength of economy.