Weathering Market Volatility

MARKET VOLATILITY is back after a relatively subdued 2017 and emerging markets (EM) have not been spared.

- Haryanto T. Budiman

A resurgent U.S. dollar and higher borrowing costs have triggered a global sell off in EM bonds and currencies, with Indonesia caught in the cross hairs. The country’s two-year bond yield hit the highest level in 10 months in May and the rupiah breached the 14,000 mark. The Jakarta Composite Index, meanwhile, languished at lows not seen since August last year.

The headwinds are clear. The tightening monetary policy in the United States—as the Federal Reserve continues to normalize its balance sheet—is attracting inflows back into the U.S. With three more rate hikes by the Fed expected this year, the market declines could continue especially for countries like Indonesia where foreign investors own a large chunk of its financial assets.