Quiet end to the week likely

Amid the hoo-ha from central bank policy announcements, equity markets seemed set to end the month on a quieter note

Stocks Databoard
Source: Bloomberg

However, this is unlikely to diminish the fact that October was a strong month for risk assets, notwithstanding the minefield of important events and economic data.

In US, even though the world’s largest economy posted a slightly softer Q3 GDP figure at 1.5% q/q, annualised, compared to estimate of 1.6%, it did not raise concerns about the expectation of the Fed rate increase. This is because the details showed a better picture than the headline number suggested.

Firstly, the weak inventory investment hide the performance of the US economy. Slower growth in inventories shaved 1.4 percentage point off the headline GDP reading, the most since 2012, according to the Commerce Department. This drag is perceived to be a correction that should wane in the coming quarters.

Secondly, we are still seeing resilient domestic demand. Consumer spending rose 3.6%, supported by stable employment and lower gasoline prices.

How would this affect the FOMC view on policy tightening? It won’t!

The US GDP growth averaged about 2% q/q annualized for the Q1-Q3 period, which aligned with the Fed’s forecast of growth in the range of 2.0-2.3%. Furthermore, the FOMC has unequivocally said that they will consider an increase to the interest rate at their next meeting in December. They noted that the economy continues to expand at a moderate pace, which suggests they are comfortable with the current growth tempo, in spite of slower recent gains in jobs.

I sense that the FOMC is aware of the Q3 GDP data, and is still keen to prepare the markets for a 2015 rate hike. Therefore, the Q3 GDP is unlikely to be an excuse for the Fed to hold off a rate hike. It is clear from that meeting that the default plan is to raise rates by end of the year.

As long as the jobs data resumes a strong upward trajectory, shrugging off the soft patch in August and September, alongside improvement in the inflation numbers, the case for a December lift-off remains alive.

 

Equities subdued

European and US equities ended Thursday lower, which set the stage for further weakness in the Asian markets. Already, the Australian shares are slipping. After a strong rebound for most of October, Asian indices look likely to end the month on a softer note.

The Chinese markets are consolidating at the moment, with prices still supported by government measures. However there is no catalyst to push higher, especially when the Shanghai Composite is approaching a critical resistance level at 3500.

 

Singapore

UOB posted Q3 net earnings of S$858m, which was down -0.9% y/y but up 12.6% from Q2. It also beat market expectations of $812m. Earnings in the third quarter was largely supported by improved loan yields, higher fee and commission income, as well as investment income. Although the increase in the three-month SIBOR over 1% in Q3 make mortgage borrowers feel more pain, it certainly helped support interest margins of the local lenders.

But it is clear that non-interest income continued to cushion top-line growth. UOB shares were the worst performing among the three local banks, slumping 18% so far this year, compared to an 11% slide in the STI. UOB may remain under pressure, despite an above-consensus earnings report.

The STI already tested below the psychological level of 3000 yesterday, before closing above the 3000 mark. But it’s still a 1.3% drop from Wednesday. Given the weak performance in the European and US markets in the overnight session, the index may close below 3000 today.

 

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