Since April 2004, international financial markets have been dominated
by uncertainty about the sustainability of U.S. economic growth amidst
mixed economic news, profit warnings, higher oil prices and tightening
monetary policy. Tighter monetary policy in the U.S. beginning in
mid 2004 moved interest rates from historically low levels.
Foreign capital flows into Asia and the belief that Fed tightening
will continue to be measured supported Asian stock markets
Despite impressive corporate profits, global stock markets have traded
sideways since the beginning of 2005 as investors mulled the impact
of higher oil prices and interest rates on economic growth and corporate
earnings. There were also concerns that the global technology cycle
had peaked, with technology-heavy indices underperforming the broader
markets (See Chart 14).
Government bond yields in developed markets rose from their year-lows
in March 2004 following initial signs that Fed will start to raise
interest rates although expectations of a measured pace of tightening
amid benign inflationary pressures have since led to lower yields.
Nevertheless, yields have backed up since early February this year
amidst signs of stronger than expected growth and renewed concerns
over inflation (See Chart 15).
After a brief correction during April to May 2004, Asian bonds continued
to rally, reflecting efforts by investors to sustain returns in a
low interest rate environment. However, bond prices began to correct
in February 2005 on the back of concerns over the possibility of more
aggressive Fed tightening to curb a rise in inflationary pressures
(See Chart 16).
In the foreign exchange market, the USD weakened significantly in
late 2004 driven by concerns about the growing U.S. current account
deficit. Excessive focus on exchange rates as corrective mechanisms
for global imbalances also invited speculative capital flows into
Asia that strengthened regional currencies (See Chart 17).