SET, baht advance on 'pull-out'

Thailand’s stock market and currency rose along with regional reactions to economist Lawrence Summers’ withdrawal as a candidate to head the US Federal Reserve, convincing many investors that the US central bank’s monetary stimulus will be prolonged and lead to a fall in the US dollar.

The US Federal Open Market Committee’s two-day meeting, starting today, is highlighted as the key factor influencing global stock markets. Investors are fretting that the Fed may scale back or stop the monthly bond-purchase programme worth US$85 billion (Bt2.7 trillion), which would reduce capital flows to emerging markets.

The SET Index jumped 44.03 points or 3.14 per cent to 1,445 on turnover of Bt55.2 billion. Confirming foreign investors’ conviction that the US stimulus would not be stopped soon, foreign investors this month were net-buyers in the Stock Exchange of Thailand. They added Bt1 billion net on Friday and ramped up net purchases to Bt3 billion yesterday. Their net-buys this month have reached Bt14 billion, against the net-sells of Bt39.99 billion in August. 

The baht also rose on the back of renewed foreign share purchases, gaining 0.60 per cent from last week to 31.62 per US dollar. It reached 31.58 on Friday, the strongest level since August. Heavy outflows since May had pushed the currency to 32.33 on September 5 – the weakest level since August 4, 2010. This was after it peaked at 28 per dollar in April.

However, Supavudh Saichuea, Phatra Securities’ managing director of research, said the baht would be on a downtrend due to the tapering of the Fed’s quantitative easing and poor exports, which are hurting the current account.

Kozo Hasegawa, a Bangkok-based foreign-exchange trader at Sumitomo Mitsui Banking Corp, said news of Summers, who was believed to be more aggressive in the reduction of easing, is leading to a sell-off in the dollar across the board. “Fund inflows are also supporting the baht.”

As volatility will continue until the Fed is clear on tapering, Thai Finance Minister Kittiratt Na-Ranong sees a long-term benefit, saying this will reinstall the equilibrium in Asian economies in the long term. The foreign money leaving Thailand should not have entered the country in the first place. As long as the outlook is unclear, this would enhance short-term speculation in the stock market.

 

Return of equilibrium

“The tapering, in a long-term view, is a good thing as the economic equilibrium returns,” he said. “The tapering will happen when the US and Western economies show improvement.”

It is unclear whether the US will scale back QE this month. 

According to HSBC Global Asset Management, the US economy is on a gradually improving trend, albeit at a relatively slow pace and with some risks. In particular, the labour and housing markets are gradually healing, though a substantial fiscal drag of about 1.5 per cent of gross domestic product – due to government spending cuts and higher taxes – has weighed on overall growth this year. Next year, this fiscal drag should be around 1 per cent of GDP or lower and household income growth is expected gradually to pick up as wages rise and unemployment falls, supporting stronger consumer spending growth.

In this scenario, Summers was perceived as unenthusiastic about the Fed’s aggressive bond-buying programme. His withdrawal means Fed vice chairwoman Janet Yellen, a supporter of QE, “is firmly in pole position for running toward the top job”, said Stan Shamu, market analyst at IG in Melbourne, Australia. “That’s really what lit up the board this morning.” 

Summers’ withdrawal followed a growing chorus of criticism about his suitability for the Fed job, including from some members of the US Senate committee that would need to back his nomination.