Investment Insights US Back in Front, Leading the Risk Taking Charge
Transcription
Investment Insights US Back in Front, Leading the Risk Taking Charge
Investment Insights Tuesday, 11 November 2014 US Back in Front, Leading the Risk Taking Charge SUMMARY US equities rally again with corporate earnings growth and a “market friendly” outcome at the mid-term elections Europe and Japan stocks pause after large gains; Emerging markets fall back US dollar index rallied in tandem with stocks DXY now approaching 2010 high – a pullback likely before yet higher prices Gold – an unsustainable technical rebound? Dovish tilt in ECB statement – Governing Council prepared to do more to achieve policy objectives PBOC confirms use of new monetary easing tool The Week Ahead: Obama in Asia, US retail sales, Euro GDP Fig 1: Rising S&P 500 2200 2000 S&P 500 1800 1600 1400 1200 The global market was flat last week. Yes. But US stocks continue higher, diverging with the other developed markets as corporate earnings roll in, strength building on strength. US equities were also boosted by the Republican victory at last week’s midterm elections, where the party gained majorities in both the House and Senate. This election was seen as a pro-business outcome. Meanwhile, strong US equities continued to be accompanied by a stronger US dollar index, the DXY. This is a correlation has been observable since the start of 4Q-14. In contrast, Japan and Europe stocks paused after the rally of the past two weeks. This, despite the European Central Bank (ECB) President Mario Draghi’s dovish (but coy) statement after his team met: he suggested they are prepared to do more if current policy tools prove insufficient. Back to the US Dollar: it is now approaching technical resistance at its 2010 high, where we are likely to see selling pressure and a downside correction. But we should see the Dollar eventually higher on continued divergence between US economic growth and weakness in other developed economies US equities continue to stand out for their resilience. The S&P 500 pushed higher, gaining 0.7% to hit 2,031.9 (Figure 1). The rebound in US equities continued despite non-farm payrolls missing estimates in October – though there were strong gains in October’s ISM manufacturing reading. The key driver of the US equities rally last week appeared to have been the ongoing earnings reporting season, where the percentage of positive earnings surprises continues to trend well at around 80%. Because of buoyant corporate earnings, growth exceeding other Developed Markets and monetary accommodation globally, we have revised our three-month outlook for US Equities to Overweight from Neutral. Sentiment in other developed markets was mixed. Japan’s Nikkei-225 gained 2.8% last week, but started lower as we enter the new week. European equities traded lower even though the ECB gave a more ‘dovish’ announcement after wrapping up monetary policy discussions. The central bank said it would use “additional unconventional instruments” to achieve its policy targets should the prevailing ones prove insufficient. In other words, the ECB would at some point consider outright purchases of government bonds should the current combination of Targeted Long-Term Refinancing Operations and Asset-Backed Securities /covered bond purchases fail to deliver the desired outcome of lifting inflation towards the targeted level. 1000 Oct-09 Oct-10 Oct-11 Oct-12 Oct-13 Oct-14 Fig 2: US Dollar Index Trading Higher 95 US Dollar Index (DXY) 90 85 80 75 70 Oct-04 Oct-06 Oct-08 Oct-10 Oct-12 Oct-14 Fig 3: Better-than-Expected US ISM Manufacturing PMI 65 ISM Manufacturing PMI 60 55 50 45 40 35 30 Nov-99 Nov-01 Nov-03 Nov-05 Nov-07 Nov-09 Nov-11 Nov-13 Source: Bloomberg, DBS CIO Office as of 7 November 2014. 1 Equities gain amid firm 10-year US Treasury yield. While equities were higher last week, the US Treasury (UST) 10-year yield held firm. It ended the week 4 basis points lower. This suggests the market expects interest rates to stay lower for longer. That said, the US Dollar Index (DXY) managed to gain another 0.8% in response to recent Bank of Japan and ECB statements. (Figure 2) Dollar faces resistance ahead, gold surges in anticipation of DXY correction. Spot gold staged a sharp rebound last Friday. One media outlet stated the obvious, that gold rebounded because there was “robust” buying support: Not very insightful. A hopefully more useful take is this: Gold was technically oversold, with stochastics and MACD indicators suggesting a near-term rebound was likely. On fundamentals, the rebound coincided with the US dollar index (DXY) approaching a cyclical high – the 2010 year high. Traders may be anticipating a likely pullback in the US dollar at technical resistance, resulting in a trading bounce for gold. Yes, we expect a correction in gold as it approaches the cyclical high. But we also expect the Dollar to eventually break higher, taking gold even lower. Our 3M outlook for gold has been revised down to Underweight from the previous Neutral view. US data: Strong ISM Manufacturing rebound while nonfarm payrolls slightly under. Last week, US ISM Manufacturing rebounded to 59 in October from 56.6 a month earlier, buoyed by gains in production and new orders. (Figure 3) There were also two releases on employment. The first – the private ADP survey – showed 230,000 new jobs were created in October, driven by robust growth in the trade/transportation/utilities and construction sectors. Non-farm payrolls meanwhile, didn’t match expectations after it came at 214,000. Forecasts were for 235,000, but still, the number means there have been nine straight months of growth above 200,000 – making it the longest stretch since 1994. Separately, the US unemployment rate dipped to 5.8% - backing the US Federal Reserve’s view that the economy is growing. There were other figures to consider too. The trade deficit widened by a larger-than-expected USD43 billion, but that was also partly because China exports to America grew to a monthly record. With 3Q earnings season winding down, there was joy on Wall Street. Close to 90% of the companies on S&P 500 have announced their quarterly numbers and the proportion of companies reporting positive earnings surprises stood at 80%, led by cyclical sectors like industrials and technology. Meanwhile, 73% of companies saw top-line revenue growth, and momentum is particularly strong in the healthcare sector. US midterm elections: Sweeping victory for the Republicans. The Republicans gained control of Congress after it gained control of the Senate and wrested the House of Representatives from the Democrats. They pinned it as a referendum of President Barack Obama’s policies, and both sides of the divide have pledged to work together. The Republicans have pledged no government shutdown, unlike 2013, when they were largely blamed for a shutdown that embarrassed Washington and cost the government millions. Now with Republican congressional majority in both House and Senate, industries subject to regulatory issues could benefit as new pro-business agendas are put forward. The energy sector, for instance, could benefit from laws pertaining to crude oil exports and natural gas. The financial sector is also looking for some leeway over the FrankDodd Act – which sets stringent capital adequacy tiers and calls for stricter compliance to protect the American consumer. ECB set to do more. The ECB, in a highly expected move, did nothing. Except that it came across as a dove after its latest policy meeting last week. ECB President Mario Draghi said he received unanimous support from the Governing Council to expand its balance sheet by EUR1 trillion. The ECB said that while the current set of measures is sufficient at present, the Governing Council is “unanimous in its commitment to using additional unconventional instruments within its mandate.” The ECB is also preparing early so that everyone who needs to be ready is ready when called upon. The willingness of Mr. Draghi and the Governing Council to add on additional steps suggests that the ECB may implement further monetary easing measures in addition to the Targeted Long-Term Refinancing Operations, asset-backed securities and covered bond buying already announced. The latest ECB stance highlights rising concerns that the region may eventually spiral into a “Japan-style” deflation should no additional steps be taken to address the concerns on growth and inflation. PBOC confirms use of new monetary easing tool. The People’s Bank of China (PBOC) has in its 3Q monetary policy report confirmed that it has deployed a newly created facility called the Medium-term Lending Facility (MLF) to inject large-scale liquidity into the system. The PBOC has pumped CNY769.5 billion to Chinese commercial banks in September and October. This facility has a three-month tenor with an interest rate of 3.5% and its main purpose is to guide interest rate expectations. The suggests the PBOC will continue to use unconventional liquidity tools to ease monetary conditions in China and this is part of the central bank’s wider policy of implementing ‘targeted’ easing to support growth in China. DBS Group Research is advocating a long-term view on China – beyond the up-and-down data noise from week to week. We believe that structural reform is the best measure for China’s tick box on how it will perform going forward. The Week Ahead: Obama in Asia, US retail sales. US President Barack Obama begins his Asian tour with a visit to China and is expected to hold talks with President Xi Jinping on the sidelines of the Asia-Pacific Economic Cooperation summit. The 21 APEC nations account for over half of global commerce. APEC members including China, the US and Japan, have been hemming and hawing over the creation of more robust pacts, especially since APEC has been slow to act on some agenda items and the WTO Doha round seemingly dead over agriculture, customs and other contentious issues. Mr. Obama also travels to Australia for the G-20 meetings, and Myanmar for the Association of Southeast Asian Nation meetings. Back in the US, there are retail sales figures to watch out. Consumer spending accounts for around 70% of the US economy, and it is expected to rise in October after September’s fall. Among the releases in Europe: 3Q GDP and October consumer inflation. Both are likely to underwhelm. China meanwhile, will release money supply, inflation, fixed asset investment, retail sales and industrial production numbers for October. 2 Economic & Market Data Monitor US Treasury Yields (%) Leading Global Returns US (S&P 500) 4.50 0.65 0.7% 0.60 Europe -0.5% 4.00 0.55 Japan 0.50 2.8% 3.50 0.45 Asia ex-Japan -1.9% 3.00 0.40 0.35 Emerging Markets-2.8% 2.50 0.30 Oil -2.3% 2Yr UST (LHS) 10Yr UST (RHS) Oct-14 Sep-14 Aug-14 Jul-14 Jul-14 Jun-14 May-14 Feb-14 Mar-14 Apr-14 2.00 Jan-14 0.25 -0.2% Dec-13 Gold -0.7% Nov-13 Global Bonds 30Yr UST (RHS) Key Benchmark Rates (%) Asia Country Returns US Fed Rate RBA Rate India Repo Rate Malaysia O/N Rate -0.1% China 9 Hong Kong ECB Refinance Rate China Lending Rate Indonesia Reference Rate -1.9% 8 Korea -1.3% Taiwan 7 6 -0.7% 5 Indonesia -2.0% Malaysia 4 -1.7% 3 Thailand 2 -0.4% 1 25 20 15 Oct-14 Sep-14 Aug-14 Jul-14 Jun-14 May-14 10 Apr-14 14.3 12.6 16.2 12.6 11.5 n.a. 10.8 11.7 10.4 15.1 15.1 15.7 13.1 14.4 Mar-14 16.9 15.2 18.6 12.6 11.9 n.a. 9.9 11.1 n.a. 14.3 16.3 16.8 16.4 14.4 Feb-14 9.9% 2.1% 3.6% 2.4% -1.5% 1.7% 14.3% 1.0% -3.6% 3.5% 16.7% -2.3% 21.5% 3.8% 30 Jan-14 5-Year Average Dec-13 12-month Fwd P/E Nov-13 YTD* Returns Earnings Growth 2014** 6.3% 33.3% 9.2% -6.2% 1.9% n.a. 17.2% -6.5% 3.1% 7.9% 17.9% -3.5% 14.0% -6.6% India (Sensex) 31.6% 17.6 15.9 9.8% * YTD refers to Year-to-date; Returns in local currency. ** Earnings growth based on local benchmark index, except for South Korea (MSCI Korea). Source: Bloomberg, IBES, DBS. Data as of 7 November 2014. 3 Aug-14 May-14 Feb-14 Nov-13 Aug-13 Feb-13 May-13 Nov-12 Aug-12 May-12 Feb-12 Nov-11 Aug-11 Feb-11 May-11 Nov-10 Volatility (VIX Index) Key Forward PE & Earnings Growth US (S&P 500) Europe (DJ Stoxx 600) Japan (Nikkei-225) Asia ex-Japan (MSCI) Emerging Mkt (MSCI) Global Bonds China (SHCOMP) Hong Kong (HSI) Korea (Kospi) Taiwan (TWSE) Indonesia (JCI) Malaysia (KLCI) Thailand (SET) Singapore (STI) Aug-10 0.0% Feb-10 India 0 Nov-09 0.4% May-10 Singapore In The Coming Week 10 Nov 2014 Event Period Survey Prior CH CPI (YoY) Oct 1.60% 1.60% CH PPI (YoY) Oct -2.00% -1.80% CH Money Supply M2 (YoY) Oct 12.90% 12.90% IN Exports (YoY) Oct -- 2.70% 11 Nov 2014 Event Period Survey Prior JN Trade Balance (JPY billion) Sep -782.5 -831.8 PH Exports (YoY) Sep 11.70% 10.50% MA Industrial Production (YoY) Sep 5.50% 6.50% 12 Nov 2014 Event Period Survey Prior SK Unemployment Rate (sa) Oct 3.60% 3.50% EZ Industrial Production (MoM,sa) Sep 0.50% -1.80% IN Industrial Production (YoY) Sep -- 0.40% IN CPI (YoY) Oct -- 6.46% US Wholesale Inventories (MoM) Sep 0.20% 0.70% 13 Nov 2014 Event Period Survey Prior JN Machine Orders (MoM) Sep -1.30% 4.70% JN Industrial Production (MoM) Sep F -- 2.70% SK Bank of Korea 7-Day Repo Rate 13 Nov 2.00% 2.00% CH Retail Sales (YoY) Oct 11.60% 11.60% CH Fixed Asset Investment (YTD) Oct 16.00% 16.10% CH Industrial Production (YoY) Oct 8.00% 8.00% US Initial Jobless Claims 8 Nov 280K 278K ID Bank Indonesia Reference Rate 13 Nov 7.50% 7.50% 14 Nov 2014 Event Period Survey Prior MA GDP (YoY) 3Q-14 5.70% 6.40% SI Retail Sales (YoY) Sep 3.90% 5.40% IN Wholesale Prices (YoY) Oct -- 2.38% HK GDP (YoY) 3Q-14 2.00% 1.80% EZ CPI (YoY) Oct F 0.40% 0.30% EZ GDP (YoY,sa) 3Q-14 A 0.60% 0.70% US Retail Sales Advance (MoM) Oct 0.20% -0.30% US University of Michigan Confidence Nov P 87.5 86.9 US Monthly Budget Statement (USD billion) Oct -111.7 -- CH Foreign Direct Investment (YoY) Oct 1.10% 1.90% IN THE COMING WEEK US President Barack Obama begins a visit to Asia, where he is expected to meet China leader Xi Jinping on the sidelines of the APEC summit. China has one of its most important data weeks of the month, and releases retail sales, fixed asset investment, and industrial production. Singapore retail sales, a measure of the citystate’s economic and consumer confidence, is unveiled. It is expected to fall on-month. Source: DBS Group Research, Bloomberg as of 7 November 2014. 4 In Review Inflation in Indonesia accelerated to 4.83% on-year in October as retailers increased durable goods costs in anticipation of the fuel price hike. Meanwhile, exports expanded 3.9% on-year in September while imports rose only 0.2%, dragged by sluggish capital goods imports. The trade deficit widened to USD270 million. The economy grew 5% on-year in 3Q-14, down from the previous quarter’s 5.1%. DBS Group Research cut its GDP forecasts to 5% this year and 5.5% in 2015 from 5.4% and 5.9% respectively. The final HSBC / Markit China PMI rose to 50.2 in October, despite falls in new orders, output and employment growth. Earlier, the government said its official manufacturing PMI fell to 50.8, the lowest in five months, on weaker orders and higher borrowing costs. Official services PMI dipped to 53.8 in October, a nine-month low, as domestic demand was hit by the cooling property market. HSBC / Markit services PMI also fell to a three-month low of 52.9 last month. Exports grew 11.6% on-year in October, lifted by stronger shipments to the US and Europe, which account for about a third of China’s total exports. Imports gained 4.6% on-year, slightly below forecasts for 5%, signalling weaker domestic demand in the world’s largest economy. The resulting trade surplus was at USD45.4 billion, staying near its record high. Source: Bloomberg News, Dow Jones Newswires, Thomson Reuters. Data as of 8 November 2014. Prepared by the CIO Office Chief Investment Officer Lim Say Boon Investment Strategy Manish Jaradi Benjamin Wong Dylan Cheang Jason Low Investment Communications En-Lai Yeoh Michele Lee Zita Setiawan 5 Disclaimers and Important Notice The information herein is published by DBS Bank Ltd. (“DBS Bank”) and is for information only. This publication is intended for DBS Bank and its clients or prospective clients to whom it has been delivered and may not be reproduced, transmitted or communicated to any other person without the prior written permission of DBS Bank. This publication is not and does not constitute or form part of any offer, recommendation, invitation or solicitation to subscribe to or to enter into any transaction; nor is it calculated to invite, nor does it permit the making of offers to the public to subscribe to or enter into, for cash or other consideration, any transaction, and should not be viewed as such. 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