Early October Rally out of steam

The early October rally seems to have come to an end as we head into the middle of the month. Today Asia was bathed in red, reversing some of the gains from the first week of October.

Hong Kong Business District
Source: Bloomberg

It was interesting to note how prospects of further easing in China did not carry the domestic equities through the session. China CPI undershot the average estimate, slowing to 1.6% y/y in September from 2.0% previously. The markets were looking for a +1.8% reading. This heightened fears of weak domestic demand, and highlighted there is room for authorities to ease policies.

Producer prices remained in deflationary territory, where the PPI contracted -5.9% y/y. The persistent fall in producer prices continued to underscore the overcapacity issue, weak global commodity prices, and soft demand.

Although the CSI 300 and the Hang Seng Index initially rode higher on the wave of more easing, the momentum ran out of steam in the afternoon, which saw the indices reverse direction. CSI 300 and HSI fell -1.1% and -0.7% respectively. Market participants might have second thoughts on how much the PBOC can ease policy, as the government is keen to keep the yuan stable.

More rate cuts will likely lead to further yuan weaknesses, perhaps beyond the 6.40 level in the USD/CNY. We have noted that the USD/CNY has strengthened recently to around 6.35, on the back of dollar retreat.

Meanwhile, monetary conditions in China are becoming more accommodative according to Bloomberg’s China Monetary Conditions Index, which continued to head north in Q3. Nonetheless, it looks like there is room for more accommodation, as the eight-year average at 91.4 is still over 30% higher than the current reading of 68.6 in August 2015.


The Singapore dollar continued to see favour in MAS’ less-than-aggressive policy action. USD/SGD tumbled over 1%, trading below good support at 1.3900 to two-month lows of 1.3855. The pair may be set for the steepest one-day drop since June 2012. The strong downward momentum now threatens the 100-day moving average at 1.3820. The USD/SGD remains vulnerable to more downside as financial participants look to unwind long positions, owing to increasingly likelihood of the delay in the Fed rate hike.

In addition, while the MAS reduced the pace of appreciation in the SGD ‘slightly’, it maintained its modest and gradual appreciation of the S$NEER policy band. ANZ called today’s move a ‘token easing’. The fact that MAS decided to reduce the slope instead of lowering the midpoint of the policy band, where many analysts predicted, suggested that the Singaporean central bank may be comfortable enough to look beyond near-term growth weakness. While the MAS sees dimmer outlook for Asia ex Japan, it also expects some pick-up in core inflation over the course of 2016. This is why they may not see a need for an aggressive easing move this at this point.

The slight adjustment also underscored the Bank’s cautious approach to monetary policy. That said, I do not rule out the possibility of more easing measures in the next meeting in April 2016, if the inflation outlook underwhelms their forecast. In that case, the next step is likely another reduction of the S$NEER slope to neutral, which would pave the way for a re-centring move (lower).

Meanwhile, the STI remained somewhat choppy, failing to hold on to the 3000 handle, and falling in tandem with regional performance. The index slipped moderately to as low as 2960, led by sales in consumer discretionary and staples sectors. Some bids are likely hovering at 2950. Modest gains in the industrials and telecom sectors helped to offset some of the overall losses.


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