To hike or not to hike (in September)

It has to be said that traders are always looking for an edge in any trade, or at least to be among the first to react.

Fed
Source: Bloomberg

This behaviour may explain the erratic movements of the market in the short term as traders’ views alter quite quickly. In the longer term, the trend is typically clearer and underpinned by fundamental factors.

While there are few people shifting their positions on whether the Fed hikes will be in September or December, it does appear there could be some shifting towards December at the margin. However, in the market’s perception, this was shattered (at least for the moment) when hawkish Fed Lockhart expressed his strong conviction the US central bank should raise rates in September. He put forth a strong argument that the macro picture is showing fairly strong momentum, and coming data would have to be very weak to rework that assessment.

The US bond market was sold across the board, with a stronger sell-off seen in the belly of the curve. Yields on the 3y to 10y rose between 7-8 basis points. The US dollar strengthened, with the dollar index touching 98.0.

Although the September or December continuum may continue to cause market gyrations in the coming one or two weeks, it is now very clear we are getting very close to Fed lift-off. The short end of the interest rate curve will therefore be extremely sensitive to upcoming employment and inflation data. The word ‘some’ in the FOMC policy statement was viewed as key to Fed action in the coming months. The ADP number tonight will add some colour to the expectations, while ISM services and trade balance data may also attract market attention.

Despite the stronger dollar, the commodity rout received a respite. Although they didn’t rebound materially, the recent slide was taking a breather. Brent even managed to regain $50.

In the Far East, IMF said China needs to work harder before being granted reserve currency status to the CNY. Nonetheless, the IMF report suggested that approval by the IMF board is within reach but China’s inclusion in the SDR will entail an element of judgment.

Meanwhile, although many analysts are concerned that the authorities’ recent intervention in the stock market may be detrimental to China’s aim to open up its capital markets and internationalise the yuan, it would at least not damage its chances with the SDR bid. IMF managing director Christine Lagarde said last week the interventions should not disrupt the SDR review.

International use of the yuan has increased significantly over the last five years, particularly in Asia and increasingly in Europe. The Wall Street Journal noted that the renminbi was the fifth most-used currency for international payments, citing comments from Swift. The USD and EUR are still the dominant currencies for international payments, accounting for over 70% as of December 2014.

Higher volume in Singapore shares

The Straits Times Index (STI) has seen a huge jump in volume recently, as yesterday’s trading volume was over 100% more than the 30-day average. However, much of this interest was concentrated in selling off STI constituents, which saw the index fall below 3200. The sharp gap-down on 31 July has widened the negative returns on the year to -5.2%, as of 4 August 2015. Short-term indicators continued to show bearish momentum. The 14-day RSI indicated oversold conditions while there is increasing divergence between negative MACD and signal lines.

Capitaland announced that Q2 net earnings rose 5.8%, and attributed most of the 18% increase in sales to development projects in China. The property developer said that Singapore’s cooling measures and concerns over rising interest rates should continue to weigh on the domestic residential market, although demand for new homes remains positive in the long term. Meanwhile, Starhub and Wilmar are scheduled to report their earnings after market close today.

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