The increase in uncertainty may be boiled down to two fronts.
The first alluded to Federal Reserve Vice-Chair Stanley Fischer’s comments at the Jackson Hole Symposium over the weekend, which basically still put a September rate move on the table. The market reaction was immediate, with the implied probability climbing to 42% as of yesterday.
If we recall, New York Fed President William Dudley cooled expectations of a rate hike in September last week, saying that that the argument for tightening in September seems less compelling to him compared to a few weeks ago. The main reason that influenced his assessment was the downside risks to US economic growth from international developments. Market swiftly cut their pricing to as low as 24% chance of a 25 basis point increase.
The rapid movements in the options markets hinted at heightened uncertainty relating to the timing of the Fed monetary policy. Really, what Mr Fischer is trying to do is not to commit to a date, something the Fed has been doing throughout this year by switching to a data-dependent stance and communicating carefully through speeches and FOMC meetings. I still think that December is a more likely month for rate tightening, as it will have a few more months of inflation data to provide sufficient confidence that the outlook is heading in the right direction.
The second is related to China and it comes in two parts. Firstly, ongoing concerns over China’s slowdown, and secondly, whether Beijing is no longer supporting the stock market. The National Development and Reform Commission (NDRC) sped up investment projects in several key sectors, including water conservation, power grids and healthcare.
The government had also expanded the quota for the local government bond swap programme, which lessened the debt burden on state administrations and increased their ability for fiscal spending. However, these efforts may not be reflected in the economic data, particularly the PMI readings, but we could see them filtering through in the fourth quarter.
According to Financial Times, the Chinese government has spent an estimated $200 billion over the past two months to prop up the equity markets. The scale of the intervention may have led some to question whether it is getting too costly for Beijing to maintain, going forward. I feel that the Chinese authorities may be more tactical in their intervention, choosing to enter when there is excessive volatility.
The CSRC said in mid August that the China Securities Finance Corp (CSF), the agency tasked with buying share on behalf of the government, will not exit the market for a number of years, stressing its function to stabilise the market will not change. It emphasised that when the market swings drastically and there are systemic risks, the CSF will intervene.
This week is shaping up to be a data-heavy week. China official PMI came in at 49.7 for August, in line with expectations, and the lowest in two years. Manufacturing activity eased from the previous month’s 50.0, which reinforced the weakening outlook for the manufacturing sector. RBA is meeting later in the afternoon. Also, we have a clutch of US data this week, starting with manufacturing numbers tonight.
Nomination Day in Singapore
Political elections in Singapore typically do not have an impact on the Singapore stock market. Perhaps it is because the political situation has generally saw few changes in terms of the ruling party. While this coming election is poised to become an even ‘watershed-er’ than GE2011, investors are quite sanguine about the whole affair. As such, I continue to see the Singapore markets being more affected by global developments than domestic politics.
Overnight leads do not inspire much confidence in risk taking today. Early movements in Asia showed similar signs – ASX and Nikkei were both lower. The Straits Times Index is likely to test the support at 2900, after falling 1.2% yesterday.