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US Wrap:

US stocks ended mixed on Thursday as China’s surprising interest rate cut was offset by Federal Reserve’s Chairman Ben Bernanke’s testimony on Thursday which dimmed investors’ hopes for more immediate US stimulus. China’s central bank had cut its benchmark interest rate by 25 basis points which helped lifted the stocks of US companies linked to China’s commodityhungry industrial complex. Bernanke said the Fed was ready to take action but gave no hint of imminent steps hence his remarks were seen as offsetting more supportive comments from other Fed members in the last 24 hours, but still leaves the door open for more action at the Fed’s next meeting on June 19-20. While Europe still remains in the limelight, stocks showed little reaction to a downgrade by Fitch in Spain’s credit rating to “BBB” with a negative outlook, just two notches away from junk status. The Dow rose 46pts (+0.4%), the S&P500 lost 0.1pts (-0.0%) while the Nasdaq declined 14pts (-0.5%).

Scoop of the Day:

It was reported that China will cut borrowing costs for the first time since 2008 and loosen controls on banks' lending and deposit rates, in an effort to mitigate impact from a deepening slowdown due to Europe's debt crisis. Its benchmark one-year lending rate will drop to 6.31% from 6.56% effective on 8Jun12, while one-year deposit rate will fall to 3.25% from 3.5%. Banks will get extra freedom to set the amounts they pay on deposits and charge for loans. This announcement, one day before China is due to report inflation, investment and output figures, may signal that the economy is weaker than the government expected. In general, we are not surprised by the stimulative move given that quarterly results for China-based companies that are listed in Singapore had been disappointing for more than a year, including those of 1Q12. While cost pressure and strengthening RMB had been major concerns in 2011, we see demand uncertainty as a key headwind for 2012.
Among the S-Chips that we cover, six of the recent results came in below expectations compared to one that outperformed. Demand headwinds were pronounced in 1Q12 with several S-Chips seeing slower delivery of orders – HL Asia (SELL, TP S$1.43) and Midas (NEUTRAL, TP S$0.29). The sector hovers at 0.7x PBR, or -1.4SD to its 1.4x historical mean, and could remain lacklustre, pending better clarity in 2H12.

• US stocks lost much of Thursday’s gains following Bernanke’s comments that the Fed would review the economy before making a decision on further stimulus.

• The People's Bank of China on Thursday lowered benchmark interest rates on loans and deposits. The oneyear benchmark deposit rate will fall from 3.50% to 3.25% effective today.

• SGX is launching dual-currency trading for ETFs on Jun 15th, enabling investors to trade foreign-currency denominated ETFs in Singapore dollars.

• Olam International is acquiring Kayass Enterprises SA, a Nigerian maker of dairy and beverage products for US$66.5m.

• Riverstone Holdings has awarded construction contracts amounting to ~MYR13m as part of its expansion plans to meet the increasing market demand for the group’s cleanroom and healthcare gloves.

EQUITY MARKETS:
Speak of the devil: just when we said something more needs to occur to transform this technical rebound into something more, 2 positive developments: (1) China's surprise rate cut, (2) the European Redemption Pact is gaining traction.

We've been talking a lot about China doing a fiscal stimulus, but it has surprised with something just as good: a 25bp cut to loan (6.31% from 6.56%) and deposit (3.5% to 3.25%) benchmark rates. In addition, lenders can also offer loans that are up to 20% discount to the benchmark lending rate in a bid to further stimulate lending, and deposit rates up to 10% higher than the official rate. As the rate cut exposes the risk of re-fueling real estate prices, the move to improve savers returns could be a counteracting measure to curb asset price speculation as real interest rates have been negative in the past. Following Australia's cut a few days ago, we could be in the throes of a major global rate cut event, which we have pointed out before could help fuel a short-term rebound before 4q12.

Not to forget the EZ crisis, the European Redemption Pact, if adopted, looks to us like the embryonic stage to what eventually could evolve into fiscal union: the plan is a limited form of joint liability bonds - each Euro member is allowed to pool debt in excess of 60% of GDP into a common jointly guaranteed fund, on the condition that such a member would not increase his remaining unpooled debt to higher than 60% GDP, or else face sanctions/expulsion/collateral call. Access to such a fund would allow troubled countries to refinance at much lower rates. While of course the stronger countries refinance at higher rates, its surely a better alternative than disintegration. The fund would then be paid down over a 25yr period thru pledged tax revenues. If such a plan comes to pass, it would be important step toward the ultimate solution - fiscal union, as one can easily see that this could morph into fiscal union over time as countries will want oversight over each other to guarantee such repayment. The Redemption Pact goes some way to explaining why Spanish bond sales went well as rates plunged off the 6.66% peak to 6.09%.

Other short term market positives also lurk in the background: (1) risk of a Greek exit may have receded as New Democracy leads Syriza in 7 opinion polls, and (2) a slowing US economy is raising the odds for QE3/twist2, despite diminishing returns as warned by Bernanke. So there you have it, this "technical rebound" could have some fundamental legs to it, and could be the short-term rally we have guided for. Technically though, yesterdays close was not the best, as most equity markets sold into strength, the US closing lower in what looks to be a rejection candle off resistance, despite a bright start off China's surprise cut. One reason could be that Greek municipal workers are threatening a general strike that could derail upcoming elections (they do all the election operations). So expect some volatility. Adoption of the Redemption Pact, a Greek election for pro-bailout parties could stabilize markets for a short-term rebound.

(Our general guidance in our morning notes and formal reports has been, as we weren't confident that econ/earnings data could outperform to drive markets, some combination of policy safety nets needs to occur in order to reverse consolidation/correction - QE3/Twist2, ECB intervention, further loosening by central banks to err on the side of growth as inflation recedes, a major China fiscal policy announcement. Longer term, we are still giving the heads up that post 6th November 12 USA presidential elections, markets could again be challenging going into 2013 - the US and EZ are under current law obliged to undertake tremendous fiscal tightening).