Singapore - Market Commentary

Commentary for week of 6 - 13 November 2009

ASIA: China data points to strong recovery
• The MSCI AC Asia Pacific ex-Japan Index rose 3.1% in USD and 2.3% in local currency terms, boosted by calls from regional finance ministers for a continuation of stimulus measures to boost economic growth.
• Hong Kong’s Hang Seng performed particularly strongly, up 3.3%, as Moody’s raised its credit outlook for both Hong Kong and China.
• Strong results from HSBC, a boost to oil producers from a rise in Chinese fuel prices and speculation that Malaysian-based Guoco Group may make an approach for Bank of East Asia also contributed to the market’s rise. 
• Shanghai SE A-share Index and the MSCI China rose 0.7% and 3.1%, respectively. China's industrial production growth accelerated to 16.1% yoy in October, which is consistent with GDP growth in the fourth quarter of around 10%.  Retail sales also beat expectations, rising 16.2% yoy. 
• The strong data raised questions over the potential for policy tightening and currency appreciation in China.  Notably, the People’s Bank of China, China’s central bank, dropped a phrase promising to keep the renminbi stable from its monetary policy report, replacing it with a commitment to manage the currency in a “productive, controlled and gradual manner.”
• Taiwan’s TWSI climbed 2.7% as the island’s exports declined in October at their slowest pace for ten months. The Taiwanese government also scrapped plans to create a state-run memory chip maker to help revive the industry following the recent rebound in chip prices. 
• Korea’s KOSPI was unchanged despite a fall in unemployment.  Hyosung, a chemicals group, withdrew its bid for Hynix Semiconductor, leaving creditors looking for another buyer for the struggling chip maker.
• Australia’s All Ordinaries was up 2.6% as higher commodity prices supported by the strong Chinese economic data and takeover news boosted sentiment. French insurance group Axa and Australian wealth manager AMP made a USD 10 billion bid for Australian insurance provider Axa Asia Pacific in the biggest regional takeover bid so far this year. 
• India’s BSE National rose 4.0% despite further signs that inflation is beginning to quicken. The wholesale price index climbed 1.34% from a year earlier in October, contributing to concerns the Indian central bank may soon raise borrowing costs after it began withdrawing stimulus measures last month by ordering banks to increase government bond holdings.

JAPAN: Plenty of corporate equity financing in the pipeline
• The TOPIX fell 0.8% on the week. Economic data was broadly positive, with machine orders rising more than expected in October and the current account surplus widening as exports recovered. However, Japanese exports remain well below their peak, raising doubts over the sustainability of the recovery once global stimulus measures begin to be withdrawn.
• Concerns were raised over the health of the Japanese financial sector as Aiful, a consumer credit company that is trying to restructure its debts, announced a record USD 3.2 billion first half loss. 
• Expectations of more upcoming equity financing from the Japanese banks and companies also weighed on the stock market sentiment.  For example, Nippon Yusen, Japan's biggest shipping company by revenue, will raise up to JPY 142.5 billion (USD 1.6 billion) through its first equity financing in four decades, making it the latest Japanese company to tap the stock market to realise its growth strategy and achieve a sound balance sheet.
• Solid demand at an auction of 5-year Japanese government bonds sparked across-the-board buying and pushed the benchmark 10-year yield down below 1.4% for the first time in a week. Despite growing concerns about extra supply, Japan sold JPY 2.2 trillion (USD 24 billion) of the 5-year paper. The bid-to-cover ratio, a measure of demand, was 3.7, much higher than 2.2 at the last tender in October.

US: Stimulus reassurance boosts equities
• Wall Street stocks hit new highs for the year as comments from the G20 reassured investors that stimulus measures would remain in place until the recovery is on firmer ground. The Dow Jones returned 2.5%, while the broader S&P 500 rose 2.3% and the tech-biased NASDAQ rose 2.6%.
• At a meeting in Scotland at the beginning of the week, G20 leaders agreed to maintain economic stimulus efforts, saying the recovery is ‘uneven and remains dependent on policy support’. Federal Reserve officials also provided assurances that interest rates are set to remain low for ‘an extended period’, with Janet Yellen, president of the San Francisco Fed, saying rates must remain accommodative to boost employment.
• The week also brought further evidence of a recovery in merger and acquisition activity, as Kraft launched a formal hostile takeover bid for Cadbury, the UK chocolate market, and Hewlett-Packard announced that it would buy 3Com for USD 2.7 billion.
• Meanwhile, defence contractor Northrop Grumman agreed to sell its TASC unit to private equity groups KKR & Co and General Atlantic LLC, in the latest sign of a revival in leveraged buyouts. 
• Upbeat third-quarter earnings announcements also continued to provide support. Walt Disney reported an 18% jump in fiscal fourth-quarter profit and said it was seeing ‘encouraging’ signs of an improvement in ad sales, while online travel agency Priceline.com said it had gained market share as consumers booked discounted trips to save money.
• Of the S&P 500 companies to have reported so far, 80% have beaten analysts’ estimates. Aggressive cost-cutting helped Wal-Mart to raise its full-year profit forecast; however, the retailer said confidence among its customers remained low and gave a more cautious outlook for holiday season sales than the market had expected.
• The latest Reuters/University of Michigan index of consumer sentiment added to concern over the consumer, falling to a three-month low of 66 in November from 70.6 in October as high unemployment continued to weigh on confidence. 
• However, initial jobless claims data gave rise to hopes that the pace of job losses may be easing. The number of Americans claiming unemployment benefits for the first time fell by 12,000 to 502,000 in the week to 7 November – the lowest level since January. 
     
EUROPE: Eurozone economy returns to growth
• The MSCI Europe Index rose 2.5% as economic reports suggested the regional recovery was gathering pace.
• Among the major markets, the German DAX led the way with a 3.6% gain, followed by a 3.3% rise for Italy’s S&P/MIB, a 3.0% increase for the UK’s FTSE 100 and a 2.7% jump for the French CAC 40. Spain’s IBEX was up 2.5%, while the Swiss SPI lagged with a more modest 1.1% gain.
• Corporate news was supportive, with several companies reporting strong quarterly profits. Financial stocks did well as HSBC, Credit Agricole and ING all beat expectations, although Barclays suffered a 54% drop in its third-quarter earnings on rising bad loan charges.
• Elsewhere, insurance group Allianz and cement maker Holcim both reported earnings ahead of forecasts, while energy company E.on raised its full year profit forecasts on lower debt costs.
• The week also saw further merger and acquisition announcements, with British Airways and Iberia agreeing to a USD 7 billion tie-up that will create Europe’s third largest airline.  Meanwhile, Cadbury rejected a formal GBP 9.8 billion takeover approach from US-based Kraft Foods.
• In economic news, sentiment was lifted by further evidence of a revival in regional economic activity as German industrial output rose more than forecast in September thanks to a strong recovery in exports, which rose 3.8% month on month.
• GDP data also showed the Eurozone had returned to growth in third quarter, although the 0.4% quarter on quarter increase was lower than expected and driven by exports, with household spending across the region still disappointingly low.
• In the UK, meanwhile, the Bank of England lifted its economic assessment in its latest Quarterly Inflation Report, expecting the UK economy to recover strongly in 2010 and peak at 4% growth in 2011 thanks to the boost from global demand and UK stimulus measures. 

EMERGING MARKETS:  Russia posts 13.9% qoq 3Q GDP growth
• Emerging markets stocks moderately outperformed their developed market peers last week as G20 leaders agreed to keep stimulus measures in place and positive data from China boosted global sentiment. The MSCI Emerging Markets Index rose 2.3% versus a 2.0% increase for the MSCI World.
• In Latin America, Mexico’s BOLSA returned 3.8%, helped by better-than-expected industrial production data and hopes that government spending cuts will help the country to avoid a debt rating downgrade.
• Brazil’s BOVESPA had a more mixed week, closing 1.3% higher. A jump in retail sales provided support, but concern mounted that the government may take further action to rein in the appreciation of the real, in addition to the tax on foreign purchases of equities and bonds announced last month, after  Finance Minister Guido Mantega said the currency’s valuation was being ‘exaggerated’ by the foreign exchange markets.
• Stronger commodity prices helped Russia’s RTS to a 6.1% gain. The Russian economic decline began to ease in the third quarter, with GDP shrinking 8.9% yoy after a 10.9% contraction in the prior quarter.  On a quarter-on-quarter basis, 3Q GDP grew by 13.9% without adjustment for seasonal effects. Elsewhere in emerging Europe, Hungary’s BUX returned 5.2% and the Polish WGI rose 3.3%.

BONDS & CURRENCY: Higher long-term bond yields in the near future?
• In the face of an economic recovery, ballooning issuance and a 15%-plus rally in global equities so far in 2H’09, US 10-year Treasury yields have actually fallen, while rates in Europe and the UK have also been subdued. In other words the so-called ‘bond vigilantes’, who many had thought would push yields higher as the economy began to recover, have thus far been missing in action.
• Risk-averse banks may be curtailing loans to households and firms, but their purchases of government debt have exploded: outstanding commercial bank loans and leases have shrunk by 2.3% over the past three months, but over the same period banks’ Treasury purchases have jumped by over 5%.
• Weak private sector borrowing, slow economic recovery and rising global savings have helped to keep bond yields low.  Add to that the return of rising reserve balances in Emerging Asia, much of which is being invested in US government securities, investors could be facing another bond ‘conundrum’ wherein yields fail to rise against all expectations.
• It may be worth acknowledging the risk scenario that could occur when conditions in the economy do improve, businesses do begin to speed up investment, the banking sector does begin to take on more risk and the government comes under increased competition for funds from the private sector.
• At that stage, rising bond yields could well pose a larger threat to the economic outlook. Even if the household savings rate continues to rise, the relatively small proportion of household assets for which Treasury securities account suggests that this source of funding will barely make a dent in the roughly USD 1.5 trillion deficit expected next year, or for that matter the roughly USD 800 billion budget shortfall expected on average over the next ten year.
• Perhaps in anticipation of this risk and given today’s abnormally low real yields, the Treasury may be starting to lengthen the maturities of its bond issues from what are currently well below average levels; indeed just over half of last week’s USD 81 billion auction was in 10-year and 30-year bonds.
• But while understandable from the government’s point of view, this strategy may be risky as far as the economy is concerned. Even in the absence of a meaningful decline in bank buying, such an increase in supply may help push longer-term private rates higher, especially given the approaching conclusion of the Fed’s agency mortgage purchase program.
• Furthermore, China, the largest foreign holder of Treasury debt, has already begun to concentrate its buying at the shorter end of the yield curve, shifting some demand away from longer-dated bonds. A continuation of this trend may add to the upward pressure on long rates.  
• Moderately higher long-term rates could be taken by investors as confirmation that the recovery is proceeding, but a sharp rise would cast doubt over its sustainability.