+  MARKET OUTLOOK  

June 19 , 2013:

Reports:

Country Strategy: S’pore, 18 Jun / Thai, 8 May /China & HK, 24 Apr /

Global Macro, Asset Strategy: ASEAN, 8 May / 12Apr,Update / US, 20 Mar / 4 Mar,Update

 +   MORNING NOTE  

Daily market commentary

June 19, 2013:

- STI: +1.45% to 3229.6
- JCI: +1.38% to 4840.5
- HSCEI: -0.11% to 9733.5
- Nikkei 225: -0.20% to 13007.3
- India NIFTY: -0.62% to 5813.6
- SET: -2.97% to 1427.4
- KLCI: +0.11% to 1774.1
- Hang Seng: -0.00% to 21225.9
- ASX200: +0.67% to 3367.1
- S&P500: +0.78% to 1651.8

Market Outlook :

Markets are waiting for the cue from Bernanke and notably US markets overnight have seemingly jumped ahead of the gun in anticipation of positive news, especially when a benign core inflation reading for May allow scope of continued monetary easing if need.

For the STI, it paused just a tad below the 3230 resistance level on Tues after bouncing up for the third consecutive day. Today, the STI might see an anticipatory –but limited- bounce up, with near-term resistance ahead at 3235. Near term support pegged at 3200 (resistance turned support level) and 3100.

In recent months, markets have been dancing to the Fed's tune (rather than economic fundamentals). We know the Fed can’t expand balance sheets indefinitely. When will the music end?

The major key risk event ahead will be the conclusion of FOMC meeting on 20th June (2 am SGP time) especially Bernanke’s press conference which follows afterwards.

Now note if the Fed reduce its emphasis on tapering in the next few months, do expect some sharp gyrations with covering of shorts on risk assets such as equities, especially since markets seem to have aggressively priced in expectations of sooner-than-expected reduction in QE.

What should investors watch out for: Fed’s updated assessment on the (i) economic outlook, (ii) inflation expectations (any deviation from its previous assessment on it being well anchored), (iii) commitment to hold down short-term rates even after tapering begins.

Our base case is for Fed to start tapering by end Dec 2013 and we are likely to see the first rate hike by end 2014.

The 2nd event worth close monitoring will be the release of flash June manufacturing PMI readings for US, EZ and China on Thursday as it will give us a sense of the state of global demand.

In Asia, the Indonesian government announced the approval of fuel hikes, with an assistance package for the poor families (we reckon that this move is to make the hike in fuel prices more politically palatable). We reiterate that we expect headline inflation to rise around 8% y-y in 2H13. However, we take comfort from Bank Indonesia’s pro-active management thus far, especially in its recent bid to anchor inflation expectations before the fuel price hike.  Recall the central bank Bank Indonesia hiked its key rate by 25bps to 6% after raising the FASBI deposit rate (off-cycle) by 25bps to 4.25%. As we have guided previously, a hike in overnight deposit facility rate (FASBI)-  is long overdue in view of an impending spike in domestic inflationary pressures as fuel subsidies –which has been a fiscal strain but politically sensitive- would eventually need to be scaled back. We do not rule out the possibility of another 50bps of FASBI rate hike to 4.75% by year end.

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MACRO DATA:

In US, core inflation -which exclude food and energy- inched up 0.17% m-m sa in May, following a mere 0.05% gain in the preceding month. This should ease deflationary concerns, though inflation is expected to remain benign on account of sluggish commodity prices.

In China, home price eased for the second consecutive month on a m-m basis in May, registering 0.9% m-m gain, compared to 1.0% increase in preceding month. But y-y basis, home prices rose 6% -the fastest pace ytd. This illustrates the kind of policy dilemma faced by the Chinese government which we wrote about in our morning commentary yesterday.