Debt downgrade concerns roil stock markets, gold and commodities
The week ended 16 December 2011 was a relatively poor one for risky assets, as credit rating downgrade concerns rattled investor nerves. Global equities declined by -2.6% over the week, led by a sharp decline in European equities (-4.6%). Asia ex-Japan equities returned -1.4%, as resilient performances by Indonesia (+0.3%, aided by positive developments on the domestic front), Malaysia (+0.2%) and China (-0.9%) helped to offset weakness in markets like South Korea (-2.6%) and India (-4.8%). Gold prices slumped by a hefty -5.8% for the week, alongside weakness in commodity prices; the DJ UBS Commodity index slumped -3.4%, led by a -5.1% in WTI Crude prices.
[All returns are in SGD terms]
Investors may refer to Market Valuations as of 9 December 2011 for more details.
Europe: Manufacturing weakness in Europe a prelude to recession?
The Eurozone composite PMI for December (advance reading) came in at 47.9, up from 47.0 in November, but still represented a contraction in production. December marks the fourth consecutive month of contraction, with both the PMI manufacturing and PMI services indices remaining below the 50 mark. Even as German and French manufacturing PMIs indicated contraction, data showed that the services expanded in both countries, offsetting some of the overall manufacturing weakness. Nevertheless, leading indicators like the PMIs and ZEW surveys remain at recessionary levels, suggesting upcoming weakness in GDP growth for the region.
Weaker than expected Retail Sales; FOMC says "no QE required, yet"
Advance retail sales rose by 0.2% month-on-month in November, below consensus expectations of a 0.6% increase. The weaker-than-expected figure was partially due to an upward-revision in the October figure (0.6% increase, up from 0.5% previously). Nevertheless, November's increase represents the sixth consecutive month-on-month increase, while retail sales excluding autos have logged 16 consecutive monthly increases, highlighting the resilience in consumer spending in the US.
In its December policy statement, the Fed continued to paint a relatively cautious picture of the US economy, highlighting some improvement in the overall labour market and strength in household spending, while "business fixed investment appears to be increasing less rapidly". The FOMC also highlighted "strains in global financial markets" which posed "significant downside risks to the economic outlook", and maintained its programme to extend the average maturity of its holdings of securities ("Operation Twist"). The FOMC's latest comments highlight the continued improvement (albeit slight in most areas) we see in the US economy (as most economic indicators continue to post improvement), with external influences not yet having a significant-enough impact on the domestic economy to warrant the Fed employing its "tools to promote a stronger economic recovery in a context of price stability".
North East Asia: Paving the way for monetary easing in China
Latest data out of China suggests that the economy is weakening, paving the way for monetary policy to turn supportive. New loans fell to 562.2 billion RMB in November, declining from the 586.8 billion RMB seen in October, while M2 money supply growth continued to moderate for the fifth consecutive month to 12.7% year-on-year, the lowest growth seen in over 10 years. Foreign direct investments (FDI) saw its first decline since 2009, dropping by -9.8% from a year earlier in November, while the HSBC flash manufacturing PMI remained below 50 in December, suggesting that manufacturing contracted for a second consecutive month.
As of 19 December 2011, IPOs in Hong Kong have raised USD23.12 billion year-to-date, a -54% year-on-year decline, and highlighting the weak appetite for equities so far this year. Poor market sentiment contributed to weak IPOs in Hong Kong last week, as Chow Tai Fook, the largest jewellerby market capitalisation, and New China Life Insurance, China’s third-largest insurer saw their stock prices slump by 8% and 9.8% over a single day (15 December 2011).
South East Asia: Indonesia’s debt upgraded, Singapore’s growth prospects downgraded
Positive news on the domestic front helped the JCI to a mild 0.3% (in SGD terms) return in an otherwise poor week for global equity markets. Indonesia’s sovereign credit rating was upgraded to BBB- (investment grade) from BB+ (non-investment grade) by Fitch Ratings, on the back of an improved economic performance, the country’s better fiscal position and stronger economic fundamentals. In addition, Indonesia’s House of Representatives has approved the long-awaited Land Acquisition Bill which empowers the government to acquire land with appropriate compensation. Infrastructure bottlenecks have been cited as a key detractor from GDP growth, and the approval of the bill is seen as an important step in spurring the country’s growth going forward.
In the December survey conducted by the MAS, private sector economists now expect the Singapore economy to post growth of 3% for 2012, down from 4.9% previously. The latest revisions come on the back of the grudging acceptance that the Eurozone is likely to fall into a mild recession in 2012, which will have a negative impact on Singapore's economy. The private sector consensus forecast is at the high end of the Ministry of Trade and Industry's (MTI) recent 2012 growth forecast of 1-3%, as the MTI cited weakening external demand as a key factor. The MTI highlighted anticipated weakness in electronics, financial services and wholesale trade, mitigated by growth in the biomedical manufacturing cluster and from tourism-related sectors, but warned that if a "full-blown financial crisis" occurs in the advanced economies, Singapore's growth is likely to come in even lower.