International Financial
Markets: Broad Recovery Amid Uncertainty
Global stock markets saw a lacklustre
start to 2003 as economic uncertainty continued to weigh on
market sentiment. Following the successful containment of SARS
and the conclusion of the Iraq war, global equities recovered
in the second half of the year, buoyed by a turnaround in the
world economic environment. However, markets saw a sharp correction
in March 2004 following the Madrid bombings and a rise in Middle
East tensions. More recently, Asian stock markets have been
unsettled by uncertainty over the timing and magnitude of a
possible tightening in US interest rates and the risk of a hard
landing in China (See Chart 20). Rising security concerns and
political uncertainty also dampened South-east Asian stock markets.
Following the global stock market
recovery, global bond yield backed up sharply in the third quarter
of 2003, but thereafter returned to more moderate levels for
the remainder of the year as concerns over a possible tightening
of US interest rates diminished. Global bond yields have however
started to rise again in recent weeks following market expectations
that the Fed will begin to tighten interest rates over the next
six months (See Chart 21).
While Asian bonds have continued
to perform well, bond prices have also begun to correct in March
2004 as concerns over the possibility of a US interest rate
hike weighed adversely on prices (See Chart 22).
In the currency market, following
a brief rally in the US Dollar with the successful conclusion
of the Iraq war, concerns over the US current account deficit
and US involvement in Iraq have continued to weaken the greenback
from July 2003. In addition, the increasing perception that
Asian currencies were undervalued against the US Dollar has
also contributed to further weakness in the greenback. Nascent
signs of a Japanese economic recovery at the beginning of 2004
also strengthened the Yen and lifted the other East Asian currencies
in tandem. The broad strengthening in East Asian currencies
was also underpinned by the region’s synchronised growth
upswing. More recently, renewed concerns of a possible rise
in US interest rates and a China economic slowdown have weakened
Asian currencies somewhat (See Chart 23).
Enhancing Risk-focused Supervisory Approach
Box 1 – Fostering a Sound and Progressive
Financial Services Sector
