The Rising Threat of A Second Wave
Yopie Hidayat (Contributor)
THE truth is nothing has changed with the Federal Reserve’s policy. The United States (US) central bank will still pamper markets with plenty of cheap liquidity injections. But on Wednesday, June 10, the Fed Chairman Jay Powell shook financial markets by sharing a bleak prediction for the US economy. Following his words, global market has teetered with uncertainty.
The Federal Open Market Committee (FOMC), a group of the Fed leaders that decide on monetary policy, has estimated that the US economic recovery will not be proceeding as fast as the market had believed. May employment data, which showed an addition of 2.5 million new jobs, made markets believe that the US economy will recover quickly. But the FOMC’s predictions are not making markets cheerful. The US economy will contract by up to 6.5 percent this year. The Fed has also sent signals that Covid-19 pandemic will keep inflicting serious damage to the US economy for a long time.
These predictions immediately shook markets. The S&P 500 fell by 5.9 percent in just one day on the following Thursday. This is the biggest one-day drop since March, when Corona virus started taking off around the world. Fortunately, the panic was short-lived. On the next day the market returned to a positive trend.
But that short commotion expanded and reached Jakarta. The trend of stock prices rising that started on May 18 immediately stopped. On Thursday, June 11, the Jakarta Composite Index (JKSE) lost 1.34 percent in one day. On Friday, the JKSE bounced back, but the trend of foreign fund outflow quickened. As a result, in just one week up to Friday, June 12, the flow of foreign funds in the exchange was minus Rp1.74 trillion.
In the bond market, the same trend is going on. Since May 18, foreign funds that entered and bought Indonesian government bonds have been increasing slowly but surely. This long rally instantly stopped on Thursday, June 11, and foreign ownership dropped from Rp942 trillion to Rp939 trillion.
This foreign funds outflow has weakened rupiah value against the US dollar, once again depreciating it to above Rp14,200 on Friday, June 12. When the week had started, the rupiah had been on an appreciating trend at around Rp13,800 per US dollar.
The foreign currency market in Indonesia is very thin. Therefore the rupiah exchange rate tends to overshoot following foreign fund movements into or out of the country, even though their volume is not significant. If there are foreign fund inflows, rupiah will appreciate very quickly. Contrariwise, when there are signs of foreign funds exiting, the price of the dollar rises sharply.
The uncertainty afflicting global markets will certainly make the rupiah exchange rate as well as stock prices more volatile for the next few months. And the Fed’s prediction is not the only factor that can quickly reverse the situation. Currently, many countries are struggling with the risk of reopening the economy even though the pandemic is not over yet. This is understandable, as they do not have a choice: if business activity does not recover soon, the economic damage can worsen to the point that a recovering will be extremely difficult.
On the other hand, reopening the economy when the pandemic is not yet completely over raises the threat of a second wave of Covid-19. The early warnings for such a wave has in fact appeared in the data for new Covid-19 cases in several US states such as California, Texas, Arizona and Florida. The jump in new cases has raised the total number of Covid-19 positive individuals in the US to over two million.
It is this risk that makes markets around the world rise and fall in tremors. The Fed has reaffirmed that there will still be liquidity injections of at least US$80 billion per month to keep the market going until the economy heals. And just like that, there is no limit. Also, the Fed rate will not rise until at least 2022. In other words, the abundance of dollar liquidity will stay cheap.
Despite such strong guarantees, the market still wavers. The fate of the global economy after Covid-19 is still clouded in uncertainty.