FOMC is coming

The quote ‘You know nothing, Jon Snow’ from the wildly popular Games of Thrones television series may be an apt description for the odd moves in global markets ahead of the all-important FOMC meeting.

Federal Reserve building in Washington
Source: Bloomberg

In the run up to market-moving events, global markets often position themselves in counter-intuitive ways, which usually ends up badly for most of them.

Perhaps they are taking a bet with no accurate information. Or maybe they do know something.

To be sure, when the rate lift-off comes, and it will, the USD is expected to strengthen and US equities may take a hit due to a stronger dollar and higher interest rates.

But we should remember that the Federal Reserve (Fed) have been taking great pains to explain that any rate normalisation will be gradual, until they reach their target of 3.75%.

Therefore, the so-called ‘dot plot’ chart, which shows the projections of the Fed funds rate by FOMC participants, will show further insights. I feel the Fed will take the June FOMC meeting as an opportunity to prepare the ground for a late Q3 to Q4 rate hike. This should support the consensus’ case for a September move.

The currency markets appeared to be more cognizant of the event risks, which could explain their rather steady movements this week. Some uncertainty surrounding the FOMC meeting as well as negative headlines out of Greece imposed a sense of caution.

I expect the next big move in FX to be right off the bat after the Fed press conference. There is also the potential for the FOMC to convey an optimistic economic outlook and lower its dot-plot rate firming path at the same time, which will introduce countervailing forces in the markets. As such, risk of a more dovish Fed would see some near-term greenback weakness.

In China, the IPO funds to be locked up for subscription of the 25 listings will start today. Recently, Chinese IPOs have been oversubscribed by 200 to 300 times, which brings estimate of the locked-up amount for the latest batch to a record USD 1.1 trillion.

It’s not just concerns about shrinking liquidity putting pressure on the Chinese equity markets, but intensifying China Securities Regulatory Commission (CSRC) action also weighed on sentiments. Since their respective peaks on Monday 8 June, China A50 is down 9% and CSI 300 corrected 5%. I feel that market consolidation may continue in the near term, mainly as a product of fragile investor sentiment.

The underlying reasons of elevated valuations, higher trading velocity and lofty margin debt may cause the Chinese investors to be a tad more cautious, going forward. More regulatory tightening could also temper the bull market. Having said that, it is worth mentioning that Beijing is looking for a stable and healthy bull market, suggesting that any policy adjustments will gear towards tempering excessive speculations, not curbing the bullishness.

Short selling in Singapore stocks jump

With recent weakness in the Singapore stock market, it is not unexpected that the average short-sell interest has jumped up. According to Markit, the heavy exposure to China and the energy sector has seen the average short interest for the Singapore Stock Exchange to rise 26% year-to-date. Counters related to energy and commodity are among the most short sold.

What’s more, the Straits Times Index, which comprises larger blue-chip companies, have witnessed comparatively more shorting activity than the whole market. Markit further reported that ‘the largest movement in the shorting activity in the STI has been in Noble Corp’.

It is estimated over 7% of the firm’s free float is now out on loan, with short interest having surged ten-fold year-to-date. The STI closed below 3300 again for the second time this month, dropping 0.75% yesterday. This brings 2015 lows of 3267.89 into focus.

IGA, may distribute information/research produced by its respective foreign marketing partners within the IG Group of companies pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the research is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, IGA accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact IGA at 6390 5118 for matters arising from, or in connection with the information distributed.

This information/research prepared by IGA or IGA Group is intended for general circulation. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. You should take into account your specific investment objectives, financial situation or particular needs before making a commitment to trade, including seeking advice from an independent financial adviser regarding the suitability of the investment, under a separate engagement, as you deem fit. 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. In addition to the disclaimer above, the information does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. Any views and opinions expressed may be changed without an update.

See important Research Disclaimer.