ASEAN weakness continues

We are on the last trading day of August. Emerging Asian markets have gone through the wringer on concerns about the Fed removing stimulus and the unexpected escalation of tensions with Syria.

The Indian rupee remained one of the major casualties of this broad decline. Down 9% for the month, it’s the worst performer, followed by the Indonesian rupiah, down 6% for the month. The equity markets mirrored the sell-off, although the Philippines is the worst performer this month - down 11.6% - followed by the Jakarta composite, which is down 11%.

Central bankers in the ASEAN region have battled hard – and successfully, so far – to keep their currencies from a continued free fall. ASEAN economies have come a long way since 1997, and history would suggest recovery might not be too far away, with QE removal priced in.

That said, we feel that unless government and central bankers continue to handle this with strong policies, and address weaker fiscal and debt fundamentals to assuage global market participants, it is difficult to see a reversal from the strong selling momentum.

Indonesia

Bank Indonesia surprised with an increase in its benchmark reference rate from 6.5% to 7%, and also raised the deposit facility rate by 0.25% to 5.25%. This comes after Indonesia raised its key rate in June and July by a total of 75 basis points, and kept rates unchanged in August.

The record high current account deficit of US$9 billion accelerated the sell-off. The Indonesian Finance Minister Basri said they remain ‘flexible’ and have responded to investors’ concern by allowing mineral exports this year and increasing luxury goods tax to narrow the deficit.

The country is fighting high inflation after CPI rose 8.61% in July and the President Susilo Bambang Yudhoyono cut fuel subsidies. The inflation rate is expected to raise between 9 to 9.8% this year, according to the central bank. The latest move has stemmed the rupiah decline, advancing for the first time this week to 10,935.

India

The Reserve Bank of India announced yesterday that it will supply US dollars to oil buyers, causing the rupee to jump 4%. RBI intervention was what investors were looking for after watching the rupee slide the entire month. India releases GDP later today. Economic expansion is expected to have slowed in the last quarter, ending in June. GDP rose 4.6% (survey) vs. 4.8% in Q1.

Singapore

Singapore’s STI did not escape the broad sell-off. The index lost 6.4% this month and lost 12% from the high on 21 May when it touched an all-time high of 3464. The worst performing sector in the past three months is industrials, down 17%, followed by consumer services – down 14% – and consumer goods, which fell by 10%.

The STI appears bearish with the index currently touching a support level of 3000 with a possible bounce off this support, with price action moving towards resistance levels around 3065. A failure to close meaningfully above that level will see the index trend lower.

US

US GDP did not disappoint. GDP was revised up to 2.5% from the estimate of 1.7%. The revision came from better exports, lower imports and a reduction in spending. The US economy is gaining momentum and in a better shape than most expected. The jobless claims in the week ended 24 August was slightly lower, with 331k filing for unemployment compared to 336k in the previous week.

The four-week moving average shows jobless claims have been on a decline since July, and August had the steepest decline. Consumer spending remained at 1.8%, Americans continued to purchase big ticket items such as automobiles and appliances. However, consumer confidence dropped to its lowest level in more than four months as Americans grow wary of the economy and their finances. Overall, the economic data was upbeat enough and confirms to those looking for reasons for a September tapering that it is in fact on the cards.

The S&P 500 was little changed overnight. The index has corrected 2.8% so far this month. After our 12 August call of a “high probability of a head-and-shoulder formation if it fails to stay above 1700”, we now see a bullish formation with strong support around 1630 levels, with a trend line support from November 2012.

A possibility of the trend line holding would mean the index could trade higher.

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