Established in 1974
185,800 clients worldwide
Over 15,000 markets

Post-NFP ‘risk-on’ lacks legs

Asian investors may be following the US outperformance last Friday, in Monday’s trade, but it does not exactly shout ‘risk-on’.

US Dollar
Source: Bloomberg

To be clear, the very soft non-farm payrolls (NFP) reading is negative for the US economy, and raised questions whether the Chinese slowdown and the moribund commodity sector have finally taken its toll on the world’s largest economy. Following this argument, risk assets such as equities should be seeing significant headwinds in the coming weeks.

There is also the fact that US equities traditionally see a lousy October, although I must warn that historical performance does not equate future profitability. If the US economy does not pull up its socks, and post better jobs data ahead of the December FOMC meeting, there is the risk of not having any rate hikes this year.

The other theory for rising equities is that not only would the disappointing jobs report possibly delay the Fed rate hike, it may even bring back the QE programme, in its fourth reincarnation. Talks of QE4 has certainly increased. While the thought of having another QE programme is making equity traders salivate, the simple fact is that the stimulus programme is a negative!

Having it once again in place means that the domestic economy is not doing well, and cannot stand on its own merits. There are also arguments that QE does not do much for the real economy, and instead divert monies into financial assets. This means that having too much stimulus for too long is a risk to financial stability. Surely, this cannot be good in the longer term.

For now, the financial markets may see renewed volatility this week as a cluster of central bank activity takes place. Starting with RBA on Tuesday, followed by BOJ on Wednesday and BOE on Thursday. The Fed and ECB will also release the minutes of their latest meetings on Thursday, while we have a couple of Fed speakers on Friday. In addition, earnings season for Q3 in US begins in earnest this week.

There may also be some interest as the IMF released its latest world economic outlook tomorrow, 6 October. Recent remarks from IMF head Christine Lagarde highlighted concerns about the global economy. She said that the IMF expects global growth to be disappointing this year, and would likely pick up modestly in 2016.

 

Singapore outperforms, as expected

The Straits Times Index (STI) put on a strong performance on Monday, rallying past 2800 right off the starting block this morning. The index gained over 1.5% by 4.20pm. However, as I mentioned earlier, the 2850 continued to restrain bulls. The upshot is that speculations over the timing of the Fed rate hike, after the NFP data, will increase uncertainty.

More uncertainty will lead to more market volatility, which means financial participants may be more comfortable sitting on the side-lines than jostling for positions. As long as STI is unable to break the 2850 level, we may see the index filling up the gap (i.e. retrace lower) in the coming sessions.

 

*For more timely quips, you may wish to follow me on twitter at https://twitter.com/BernardAw_IG

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.