Recent Global Narrative

The Fed normalization policy is challenged by US economy recovery prospect as Q4’15 GDP number was disappointing. Global picture is not favorable also with China continuing the slowdown and several countries PMI is slowing. The US recession probability talk turned market to be more risk averse and thus explaining the horde into US treasury (pushed yield to 1.8). The oil price drop to some extent amplifying this fear. Not only lower oil price will push O&G companies to reduce investment or even running out of business thus creating unemployment, but the spiral effect on commodity price will negatively affect emerging market-commodity related economies (and make global growth recovery become more shallow). On the positive side, lower oil price is good for consumer and make less pressure on inflation. But for developed market, lower oil price may become a concern in giving threat of deflation risk.

In addition, January stock market under-performance in developed market such as US, EU, JP and also CH deterred market in risky asset class. Nonetheless the stock market has still got support from central banks with ECB stated will be more accommodate and the last effort from BOJ that pushed interest rate to below lower bound (negative rate). Will central banks keep on supporting the market is remain the question, but in the short term market perceived the central banks will try anything to support the economy even diving below the lower bound. Market is now also unsure if The Fed will aggressively hike its interest rate this year.

The S&P500 correlation with oil price is increasing since late Sep’15. Back then, the increase in oil price is a positive sign of pick up in economic growth (under assumption that demand > supply). But the current issue is the otherwise: supply > demand, in which a hike in price will be associated with supply (production volume) compromising among oil producer countries. IN the short term, the oil price will be driven factor for S&P500.

Correlation between S&P500 and oil price (source: bloomberg)

The same pattern also applied for S&P500 correlation with USD Index. Strengthening USD is associated with better US economy prospect. But now people are worried that stronger USD could hurt the economy considering other countries are tend to have a depreciating currencies thus reducing US export competitiveness.

Correlation between S&P500 and USD Index (source: bloomberg)

For Indonesia case, in early 2016, the JCI movement correlation with global market (S&P500) starting to weaken. This suggest the local market has more confident on domestic economy and explaining the market resiliency. A more clear evident is from JCI correlation with EIDO (JCI-Futures) that started to weakening since last Dec’15.

Correlation between JCI and S&P500 (source: bloomberg)

Correlation between JCI and JCI-Futures (source: bloomberg)

The only factor that support local market confidence is currency stability. The negative JCI correlation with IDR is increasing (which means IDR/USD down/appreciation = stock market up).

Correlation between JCI and forward IDR (source: bloomberg)

Conclusion:

Global market will watch for oil price movement and the confidence came from expectation on continuing accommodate central banks policy.
Domestic market in short term is sheltered from global negative sentiment as long as IDR is stabilized. Although what makes IDR strong is subject for more analysis.

— -end of post #31