Attack on Risk Appetite

The event-packed week started quite cagey for Asia. It did not help that China is beginning its golden week holiday later this Thursday, 1 Oct, which will go on until next Wednesday, 7 Oct.

Hong Kong CBD
Source: Bloomberg

The deluge of event and data risks may have convinced market participants that squaring positions or lightening up trades are advisable. Trade volumes were horrible. The Shanghai Composite Index saw over 50% less volume today compared to the 30-day average. Hang Seng, Nikkei, ASX, and STI similarly experienced lower volume of between 20-35% lesser than their respective 30-day averages.

This week will see another talk-fest featuring the heavy hitters of the Federal Reserve. Chairperson Yellen, New York Fed President Dudley, Governor Brainard and Vice-Chair Fischer are all slated to speak during the week. In addition, markets will have a plethora of top-tier data to assess. The market movers however will be the core PCE (Fed’s preferred inflation gauge), pending home sales, ISM manufacturing, and nonfarm payrolls.

To top it off, there is also the risk of government shutdown as we transit to October on Thursday. This means that US data out on Thursday and Friday, including the important payrolls numbers, may be delayed. The last time a shutdown took place was in 2013, where government offices closed for 16 days from 1 October to 16 October.

The nonfarm payroll data was delayed to 22 October. Given the possibility of such a scenario, the private ADP reading may take on more prominence.

Inflation data in Europe will also be on the docket. One should be mindful that we probably need greater downside risks to inflation to material alter the ECB inflation outlook in the medium term. ECB President Draghi has already said he anticipates a zero rate of headline inflation in the very near term, and expects consumer prices to pick up towards the end of the year.

This suggests that October is unlikely to be the month for ECB to add to its stimulus programme, despite recent expectations. The ECB is more likely to hold fire until the December meeting, at which more data would be on hand to make an informed decision.

Thus it appears that October may not be the month for central bank action, although speculative bets on the policymaker rhetoric and macro data may still heighten market volatility.

On the same topic of stepping up monetary policy, the Bank of Japan (BOJ) will consider the batch of Japanese macro data due this week. If Governor Kuroda reiterates that he is looking at a timeline of about a year to assess the risk of reaching the 2% CPI target, then expectations for additional QQE by year end may be too aggressive.

Moreover, there are concerns of how exactly is the BOJ going to step up its asset purchase programme, when they already cornered around 90% of the government bond issued each month.

The currency markets are relatively muted today, the dollar was little changed against a basket of major currencies. Nonetheless, the dollar theme remains intact, and USD is expected to strengthen further, especially against the commodity currencies.

The euro, however, is quite hard to fathom. On one hand, you have sustained signs of improvement in the EU economy, and unwinding of the carry trade using euro as a funding currency have provided support to the single currency. On the other hand, the ongoing QE programme, and the lack of acceleration in inflationary pressure because of weak energy prices have continue to weigh on EUR.

In China, industrial profits fell by the biggest since 2011, shrinking 8.8% y/y, stoking concerns about the Chinese economy. The weak earnings reading also validated the soft manufacturing data we have been seeing. Official NBS manufacturing PMI is out on Thursday, and should continue to point towards a sluggish manufacturing sector, in line with the private-sector Caixin PMI readings.


Singapore: Dousing the risky flames

The Straits Times Index (STI) started the new week on a strong selling tone, piercing through the 25 August lows of 2808.31, which had held off several attempts this month. The break also flushed out bull stops, which pushed the Index further south below the key 2800 level, touching over three-year lows at 2780.74. Market positioning is likely the main culprit behind the selloff from the get-go. The soft leads from Wall Street on Friday, and the short-trading week in China ahead of the week-long holiday, may have prompted investors to reduce their positions.

Moreover, the fact of the matter is that the index has long been in a downtrend. The price level is below the moving averages of multiple timeframes (20, 50, 100, and 200), suggesting bears are already in the driving seat over the short and medium term period.

In terms of macro outlook, Singapore’s growth prospects are not looking overly optimistic due primarily to China’s weakening growth. Recent economic data bear this out, with the August industrial production tumbling 7% y/y. Retail sales and exports were also weak. Lower commodity prices also affected the STI outlook, particularly on shares of commodity suppliers, such as Noble and Golden Agri.

All of this will play into the MAS’ assessment of Singapore’s GDP outlook and monetary policy next month. Growth concerns will likely take the front and centre for the MAS. Downside risks for economic activity are seen from a China slowdown due to structural reforms, weakness in global trade and Singapore’s tighter immigration policies.


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