Analyst Highlight

MARKET OUTLOOK:

Sellers dominated the US trading session (as indicated by the long lower shadows and short upper shadow) amid disappointing econ data over the long weekend as well as yesterday, driving the S&P 500 and DJIA lower. On the US macro front, manufacturing activity continued to contract for the third consecutive month (owing to a decline in new orders) and construction spending fell (suggesting still sluggish housing market activity) (See Macro Data below). Chartwise, technical indicators (on various time frames) for the Dow are pointing to a correction to the downside. We caution that positive stimulus -if any- from central banks are likely to only result in tactical rallies for equities that cannot be sustained against this subdued macro backdrop as well as massive fiscal uncertainties on the G2 front.

The upcoming major risk event will be the ECB policy meeting tomorrow (i.e. Thursday). The recent intensification of Spain's banking problems is leading to an escalation of liquidity issues in the banking system, which puts pressure on ECB to act this week. While Spainish 10yr yields have retreated to around 6.5% (on the back of hopes of positive ECB intervention on Thurs), yields are still hovering precariously close to 7% (which translates to unsustainable borrowing costs). We expect consistent with hints dropped by ECB’s president Mario Draghi- that the ECB is likely to purchase short-term bonds (maturity of 2 to 3 years) to alleviate the elevated borrowing costs as well as risk premia of at-risk economies in the EZ (Spain and Italy), without contravening EU treaties. Nonetheless, we remind our readers that any form of ECB intervention will come with strings attached (i.e. conditionality) -a key ECB/German requirement. We look to the ECB’s policy meeting tomorrow for details of such a plan if it is finalised by then.

For the Fed,
we are not expecting any new policy announcements till the Sept FOMC (held on Sept 12-13). After Bernanke’s Jackson Hole speech last Friday, QE3 is very much on the cards in view of the sluggish state of the economy as well as elevated unemployment rates. Now it becomes a question of when (i.e. before or after the Nov elections)? Will QE3 be announced in the upcoming Sept FOMC meeting (Sept12-13)? We opine it is going to be a close call. Among the key macro data releases that will guide the Fed’s decision will be the jobs report this Friday, just days before the Fed meeting begins. Regular readers of our morning commentary will be well aware that our view has been that QE3 will inevitably take place by the end of this year (likely in the form of open-ended bond purchases) and “additional monetary accommodation” (alluded in the Aug FOMC minutes) might also that the form of an extension of the current late-2014 rate guidance.

The global economic trajectory is in a broad slowdown with August PMI readings portending lacklustre manufacturing performance in the months ahead. Asia's export and PMI data has been abysmal with a big disappointment from China - NE Asia economies are suffering due to China's slowdown. EZ is for all intents and purposes in recession and a program of austerity is going to hold it back this year and next. As for the US, core capex new orders are falling, below average employment and incomes and an impending fiscal cliff make us believe in a below consensus recovery. Notwithstanding some stabilisation in the housing prices, US consumers are also increasingly more pessimistic about the short-term outlook.

Our SG Sector Strategist likes defensives (SCI, Comfort, Singtel), and is sector overweight Aviation Services (SIAEC, STE, SATS), and the REITS.

Macro Data

In the US, manufactuirng activity (as indicated by the ISM manufacturing index) continued to contract for the third consecutive month (-0.2pts m-m to 49.6 in Aug) mainly due to to a decline in new orders (-0.9pts m-m to 47.1 in Aug). On the housing market front, nominal construction spending declined 0.9% in July, suggesting that housing recovery remain lackluster at best despte some signs of turning around the corner.

In Singapore, manufacturing activity contracted for the second consecutive month (-0.7pts m-m to 49.1 in Aug) owing to sluggish external demand. Surprisingly, the electronics PMI inched back to expansionary territory to register a reading of 50.7 in Aug, up from 49.2 in the preceding month. But we caution the better-than-expected performance in the electronics cluster is likely to be one-off (slight upswing in the tech cycle) and cannot be sustained without firmer global demand. Amid a global slowdown - particularly in US, EU and China, we do not rule out the possibility of a technical recession for Singapore (an externally-oriented economy) in 3Q12. Should growth come in weaker-than-expected in the months ahead, MAS might tone down its hawkish stance -reverting from a slightly steeper slope (Apr 12 MPS) to a more gradual appreciation of the S$NEER policy band or even a neutral bias at the next policy review in Oct 2012.

In Euro zone, PPI rose by 0.4% m-m in July, reversing the previous two consecutive 0.5% m-m drops in June and May. The reading increased 1.6% from a year ago. Germany’s PPI remained unchanged from June, when it declined 0.4% m-m. ECB, which has cut its benchmark rate to a record low 0.75% in July, will publish its updated inflation projections on Sep 6.

In Australia, the RBA holds the benchmark interest rate unchanged at 3.5% for another month, against a backdrop of slowing down demand from China. Australia’s growth is running close to the trend as the Governor Glenn Stevens indicated earlier, adding to the case that central bank keeps the rate unchanged. As reported earlier, inflation is resting at the lower end of the government’s target region of 2%-3%, which does grant scope for the government to restart loosening. The central bank would remain at the interest rate cut sideline and enter into action when necessary as the global outlook is still dim. We are expecting a further 50 bps cut by the end of the year. We are awaiting the nation’s 2q GDP results later today (5 Sep).