HIS review covers the last two weeks, due to the Chinese New Year holidays last Monday.
While the local stock market's benchmark index rose over the last two weeks, but it was a choppy period. Investor sentiment shifted between optimism and pessimism almost every other day. Over the two-week period, the FBM KLCI added 9.8 points or 0.8% to end at 1,257.7 points.
The long Chinese New Year holidays also saw trading volumes contract significantly, both before and after the lunar new year. Many investors took an extended holiday, or preferred to sit on the sidelines due to Wall Street's recent volatility and lingering external uncertainties.
After the holidays, the lunar new year initially got off to a good start for Asian bourses, thanks to a rally on Wall Street. Wall Street's rally earlier in the week was fuelled by hopes that the global economy recovery was on track following a number of positive economic data as well as optimism Greece's debt problems will be resolved, if not contained.
The rash of better-than-expected US data include those on the manufacturing and housing sectors. The Empire State manufacturing index for New York rose to 24.91 from 15.92 last month. US housing starts rose by a much better-than-expected 2.8% to a seasonally adjusted annual rate of 591,000 units in January, the highest level in six months. US industrial production also rose by a higher-than-expected 0.9% in January. It was the seventh consecutive monthly rise in output.
Elsewhere — and underscoring the patchiness of the recovery, UK jobless claims unexpectedly jumped in January to the highest level since 1997, with unemployment at 7.8%.
However, all this was later overshadowed by an unexpected turn of events. Sentiment for global equities took a turn for the worse at the end of the week, following an unexpected US rate hike.
Stock markets across Asia slumped last Friday, following a move by the US Federal Reserve to raise the discount rate last Thursday night, after Wall Street had closed. This raised fears that the inevitable US monetary tightening could come sooner than expected.
The Federal Reserve raised the overnight rate, the rate it charges banks for emergency loans by 25 basis points to 0.75%. This was to withdraw some of the emergency measures in place during the crisis, towards a more normalised structure with the economy on a recovery path.
Investors should note the distinction between the discount rate and the federal funds interbank lending rate. The key federal funds rate, the main monetary policy tool, remains unchanged near zero, and within the target of 0%-0.25% established since late 2008 during the crisis.
The key federal funds rate is likely to remain low for some time to sustain the still fragile US economic recovery, especially amid high unemployment.
Thus, the raising of the overnight rate itself does not necessarily mark the start of monetary tightening in the US yet, which many expect to happen in the second half of 2010 or early 2011.
Nonetheless, the sudden move, especially in between Federal Open Market Committee (FOMC) meetings, roiled global financial markets last Friday, sending stock markets and commodities lower and the US dollar higher.
Most affected were cyclical and export-oriented stocks, as well as the Hong Kong bourse, whose currency and monetary policies are closely tied to the US. The Malaysian bourse, fortunately, was more resilient as our monetary policies have been independent of US' for quite some time.
Global equity investors have been hit by several rough patches lately, with problems ranging from mixed economic data, fears of monetary tightening, China's credit-tightening measures and sovereign debt problems in Europe, among others.
The ongoing tug of war between investor optimism and pessimism will likely continue for some time, as long as US economic data remain mixed and external concerns linger. This will unfortunately cause more day-to-day gyrations, depending on developments overseas and on Wall Street.