Asian shares in holding pattern ahead of Fed; Japan closed for holiday UPDATE

Asian shares in holding pattern ahead of Fed; Japan closed for holiday UPDATE

	Published : Mon, 17 Sep 2007 11:02 By : Agencies Print this Story

SINGAPORE (Thomson Financial) - (Updates with closing figures throughout)

Stock markets across Asia were stuck in a holding pattern on Monday with Japan closed for a public holiday and other markets treading water ahead of a much-anticipated US Federal Reserve decision on interest rates.

The Fed is expected to cut its fed funds rate at its meeting Tuesday but economists and traders are divided on whether it will cut by a quarter or a half point as it weighs rising inflationary pressure against the problems in credit markets and the degree to which they may act to brake economic growth.

'We view the choice between 25 bps and 50 bps as close, but we forecast 25 bps (to 5.0 pct), coupled with another 50 bps on the discount rate and a statement signalling a bias to ease further in coming months,' said Maury Harris, senior economist at UBS AG.

UBS is optimistic that a rate cut will help the US avoid a full recession, countering the more pessimistic view among some economists that the crisis that began in the housing sector still has a long way to run.

Still, Harris concedes that the tight conditions in the credit markets since the summer will inevitably weigh on the economy right into 2008. UBS is cutting its real GDP growth forecast for 2008 by 0.3 percentage point to 2.3 pct. The bank is now expecting the Fed to cut the fed funds rate from a current 5.25 pct to 4.25 pct by yearend, down from an earlier 4.5 pct forecast.

Morgan Stanley said the Asian markets should continue to gain in the medium-term although they will be buffeted by developments overseas.

'We foresee a tug-of-war between the positives of Fed rate cuts, buoyant Asian liquidity conditions, economic momentum and funds flow, and deteriorating G7 economic indicators and earnings forecasts on the other,' said analyst Malcolm Wood in a note. 'Eventually the bulls should prevail.'

A robust outlook

Backing that outlook, the Asian Development Bank on Monday revised its 2007 growth projections for Asia's developing economies to 8.3 pct from 7.6 pct earlier. The Manila-based multilateral financial institution said solid growth in China and India is supporting the whole region.

So far, the storm in global credit markets has created only a slight turbulence in developing Asia, with equity markets falling by an average of 6 pct in August, said the bank.

'Strong growth in China (now put at 11.2 pct from 10 pct) and India (8.5 pct from 8.0 pct) will spearhead expansion, but there is more of a general pattern of high, and in, some countries, accelerating growth,' the ADB said in its updated 2007 Asian Development Outlook.

ADB said the outlook for 2008 also remains favourable although growth will slow to 8.2 pct, with the odds still against a recession in the US.

'Developing Asia's defences against external shocks are solid and it can weather a slowdown in the US. The region's growth prospects will continue to depend on how well the countries address their internal challenges,' said Ifzal Ali, chief economist of ADB.

ADB said despite the rapid expansion in developing Asian economies and more closely integrated internal markets, 'it does not automatically follow that they have become impervious to the fortunes of the world's largest economy.'

There are other risks too, including avian flu, which 'is still a significant source of uncertainty with potentially devastating consequences.'

There are also symptoms of overheating in China and India, said the bank.

Sydney dips, Manila up

In Sydney, the S&P/ASX 200 ended down 0.6 pct at 6,271.4, and the All Ordinaries index dropped 0.5 pct to 6,283.7.

CommSec equities analyst Savanth Sebastion said investors were on the sidelines ahead of the Fed, while weaker commodity prices were pressuring the resources sector.

Sebastion said stock-specific news means there are some highlights, including a solid performance by Newcrest Mining Ltd, Australia's leading independent gold miner, after it raised 1.586 bln aud in capital to allow it to close its gold hedge book and gain full exposure to a currently strong price for the precious metal. Newcrest was up 10 pct to 25.15 aud.

Oil Search was sharply higher after Hong Kong's South China Morning Post reported that China National Petroleum Corp and subsidiary PetroChina Co are considering a bid worth about 5 bln usd for the company, Sebastion said. Oil Search rose 11.7 pct to 4.30 aud. The company would not comment on the report.

BHP Billiton Ltd was down 1.5 pct at 38.82 aud, while Rio Tinto Ltd lost 1.3 pct to 98.15 aud.

In Seoul, the Kospi closed up 0.1 pct at 1,871.68 as hopes that the benchmark index will finally be included in the FTSE developed world indices later this week and the the Asian Development Bank's upgraded growth forecast for South Korea boosted sentiment.

In China, the benchmark Shanghai Composite Index ended up 2.1 pct at a record 5,421.39, with investors shrugging off China's latest interest rate hike.

'This (rate hike) is consistent with our expectation, as the August CPI inflation figure obviously posed additional pressure for the central bank to act,' said Jun Ma, chief economist at Deutsche Bank.

The central bank announced after market close on Friday that it is raising benchmark lending and deposit rates by 27 basis points, in the fifth rate hike this year. The rate hike followed last week's news that the consumer price index (CPI) rose 6.5 pct year-on-year in August, the highest single-month level since December 1996.

After the latest move by the central bank, the benchmark one-year bank lending rate increases to 7.29 pct while the one-year deposit rate moves to 3.87 pct.

China Construction Bank kicked off its 9 bln A-share subscription to retail investors for its initial public offering in Shanghai, and the market expects it to attract more than 2 trln yuan, surpassing Bank of Beijing's record of 1.9 trln yuan last week. The bank is planning to write off more non-performing loans in the second half, CCB officials told investors in China, without giving details. In the first half of this year, the bank wrote off 3.3 bln yuan in soured loans.

The subscription was expected to avert funds from the secondary market, but it appeared to be having little impact on the market.

The Shanghai A-share Index rose 2.1 pct to 5,690.23 and the Shenzhen A-share Index was up 2 pct at 1,587.63.

The Shanghai B-share Index rose 2.1 pct to 358.90 and the Shenzhen B-share Index was up 2.2 pct at 785.37.

In Hong Kong the Hang Seng Index closed down 1.2 pct at 24,599.34, after closing at record levels for three straight days last week.

Elsewhere in the region, the Singapore Straits Times Index closed down 1.7 pct at 3,476.31, Malaysia's Kuala Lumpur Composite fell 0.9 pct to 1,278.34, Indonesia's Jakarta Composite lost 0.1 pct at 2,223.22, while Taiwan's weighted index fell 1.5 pct to 8,899.91. In Manila, the Philippines Composite rose 0.4 pct to 3,307.43.

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