Singapore Market Focus - DBS Research 2017-09-06: Outlook ~ A Missile Over September

Singapore Market Focus - DBS Vickers 2017-09-06: A Missile Over September Singapore Market Outlook Straits Times Index Target & Support

Singapore Market Strategy - A Missile Over September

  • Eyes on central banks’ policy meetings while Merkel victory anticipated.
  • STI downside to 3210 amid an uncertain September.



Looking back at August 



September Market Outlook 


Central bankers’ policy meetings take centre stage 

  • First up is the ECB policy meeting on 7 September. The consensus view expects the ECB to make a decision on whether to extend or wind-down asset purchases in 2018. 
  • Our economist believes that there are sufficient reasons to set the ball rolling on QE tapering backed by receding deflationary risks, reduction in the bloc’s break-up fears and scarcity of assets to purchase. 
  • But the game-plan is not yet clear. This might see the ECB signalling next week that the QE pace ought to slow next year though the exact contours might be drawn up later during the Oct or Dec policy reviews.

FED to hold rates steady, may announce balance sheet unwinding 

  • The FED is expected to hold the FED funds rate currently at 1.25%, at the conclusion of the 2-day FOMC meeting on 20 September. Consensus expectations for the next rate hike have back paddled to 2Q 2018. This comes as US headline inflation remains muted with CPI retreating from a high of 2.74% y-o-y back in February to 1.73% y-o-y in July. 
  • The US labour market has shown some signs of cooling with the latest non-farm payrolls for August coming in at 156k (consensus 180k) and the unemployment rate edging higher to 4.4% from 4.3%. Furthermore, non-farm payrolls for June was revised down 21k to 210k while that for July was lowered 20k to 189k. 
  • Investor confidence over Trump’s ability to deliver his election promises on tax cuts and infrastructure spending has also taken a beating.
  • DBS Group Research chief economist thinks there’s a chance that the FED will announce the decision to unwind its balance sheet at the September FOMC meeting, followed by implementation from November or December. 
  • But while total QE injections amounted to over US$3.6bn post-GFC, our economist says the actual impact on bond yields and liquidity withdrawal from the economy is much lesser than what the figure suggests. This is because most studies have put the impact of QE on 10-yr treasury yields (currently at 2.15%) at a modest 20-40bps. Secondly, some 90% of the QE money ended up being idle at the FED’s basement in the form of excess reserves held by banks instead of being ‘injected’ into the economy.

USDSGD to stabilise soon at 1.34 to 1.38 range 

  • The outcome of these policy meetings will have an impact on currency and equity markets. The USDSGD has fallen from a high of 1.454 to 1.351 YTD. Our currency strategist believes that the USDSGD will find support soon at 1.34 and turn sideways from 1.337 to 1.382 till 2Q18. 
  • The liquidity inflow that lifted the local bourse YTD had coincided with the decline in the USDSGD. Inflows could moderate in the months ahead, corresponding with the USDSGD forecast to turn sideways in the months ahead.

Germany federal election likely non-event 

  • The risk of Angela Merkel losing the German federal election on 24 September appears low as the latest opinion polls show her Christian Democratic Union/Christian Social Union (CDU/CSU) party having an impressive 13% lead over the closest rival Martin Schulz of the Social Democratic Party (SPD).
  • Support for the populist far right AfD party has fallen to just 10%. Unlike the earlier French elections where there were concerns about populist anti-EU parties emerging victorious, a Merkel victory is well anticipated. Thus, the Germany election is likely to be a non-event for equity markets.

August choppiness to extend into September 

  • Our view for the Straits Times Index (STI) to pullback to 3255 in August proved right with the index falling to a low of 3244, which coincided with a 12-mth forward PE of 14.02x (+0.25SD).
  • The STI’s YTD rise has clearly moderated. The index was up 290pts (+10.2%) in the first four months of the year from January to April but a much tamer 105pts (+3.3%) over the next four months from May till now. 
  • We expect August choppiness to continue into the month of September for the following reasons
    1. uncertainty over central bank’s policy actions,
    2. risk of escalating geopolitical tensions in the Korean peninsula,
    3. a lacklustre 2Q results season.
  • We expect the near-term rebound to be capped around c.3320 with downside risk to c.3210 technical support. Below this, base support is 3100.







Yeo Kee Yan CMT DBS Vickers | Janice Chua DBS Vickers | http://www.dbsvickers.com/ 2017-09-06



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