Subsiding macro risks boost risk

Investors are working up an appetite for risk, as the recent combo of Greece and China continues to recede into the background.

Gold bars
Source: Bloomberg

The situation in Greece continues to improve, with the default drama coalescing into a squeak. The stabilisation in the China equity markets was also on track, vindicating the authorities’ use of brute force to beat the market participants into submission.

As these two macro headwinds fade, traders unwind hedges against downside risks, with the Fed rate increase speculation emerging into the limelight. The season of US earnings reporting also share the centre-stage with the theme of central bank divergence.

With risk sentiments gathering steam, we see investors getting back on the ‘equity’ horse. There is no surprise seeing US indices hitting into their stride. Technology stocks once again became the darlings of the market, with NASDAQ reaching another record close on Monday.

It’s not often that Google surged a massive 16% after smashing estimates. US bank earnings are also well ahead of expectations, which suggest that perhaps the estimates are a little on the low side. We have experienced this before during Q1 earnings season few months ago.

Meanwhile, expectations of an increase in the US interest rates in September are rising, after St Louis Fed President James Bullard (non-voter) said the probability of a September rate hike is above 50% because the Fed is likely to want to get ahead of the curve as inflation rise and labour market continues to improve.

Despite Mr Bullard being a non-voting member of the FOMC this year, his remarks triggered the capitulation in the front-end portion of the US treasuries. The greenback also received a boost, with the dollar index climbed above 98.00. The increase in yield premium between near-term US treasuries and other sovereign debts (bunds, JGBs, CGBs) also enhanced the attractiveness of the USD.

Commodities’ retreat accelerates

The commodity sector remained under pressure although we saw some tentative recovery in gold. The yellow metal was hit by speculative selling yesterday, with talks that five tonnes (a massive order) were dumped on the Shanghai Gold Exchange.

Gold prices slumped over 5% at one point, touching more than five-year lows, of $1072.35. Spot levels moved back above $1100 today. Crude prices on the other hand stayed soggy. WTI remained capped below $50/bbl. News that Iran is in talks with OPEC to raise oil exports, thus worsening the oversupply situation, did not help.

As a whole, the market is bearish on commodities, as the latest fall saw the retreat in the commodity sector accelerating. Based on data from the Commodity Futures Trading Commission, bullish bets on oil fell to the lowest level since March. The Wall Street Journal noted that investors pulled out $1.1 billion from commodity-related funds in Q2 2015, citing figures from EPFR global, a fund-data provider.

A rising dollar, premised on growing probabilities of a US rate hike, makes US-denominated commodities less affordable. Moreover, higher interest rates theoretically lure monies away from commodities and into yield-bearing assets. Hence, the relatively buoyant global equities and bonds are intensifying the pressure on commodities.

Falling commodity values hit related currencies hard. AUD/USD continued to weaken, sliding below $0.74 for the first time, since May 2009. Likewise, USD/CAD flirted with the $1.30, a level not seen since early 2009.

Penny stocks lead Singapore market

Improving global risk sentiments spilled over to Asia. Long in the doldrums, Singapore stocks saw a breath of life recently. The Straits Times Index (STI) broke above 3350 last Thursday, and rose to as high as 3383.56 today.

This saw the Index heading back to pre-Grexit levels at the start of June. The key level to watch will be the 3400, with the 100-day moving average at 3404.5. Market internals also showed a broad-based improvement in the STI, as the proportion of constituent members whose price is above its 20-day moving average surged above 60%, from below 20% on 9 July 2015.

The STI appeared to be running out of steam as of 3.20pm, with the number of advances and declines roughly equal. The intraday volume was also lower than the 10-day average trading volume, suggesting waning interests.

Blue chips aside, penny counters continued to attract attention, with the top 20 shares in terms of volume being small-caps as of 3.32pm. CEFC International added another 47% to the 80% surge seen on Monday, rising to as high as SGD0.265. In just two weeks, the counter rocketed tenfold from around SGD0.025 on 8 July.

Meanwhile, the Singapore’s earnings season will begin in earnest, with five companies due to announce its profits this week. The three domestic banks will announce their Q2 earnings next week, starting with DBS on 27 July, followed by OCBC and UOB on 31 July.

Singapore Airlines, Sembcorp Marine and SGX are also on the tap. Investors in the commodity and telecommunications sectors will need to be a little more patient, as Singtel, Starhub, Olam, Wilmar and Golden-Agri would only release their latest quarterly earnings in early August.

The information on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG Bank S.A. accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it and as such is considered to be a marketing communication.