European Woes Drag Markets Down

Equity markets were down across the board for a second consecutive weak over the week ended 18 May 2012, as global equities lost -3.57% for the week as European worries continued to plague the markets. Political turmoil in the world's largest economy saw investors fret over the future of the Euro and the impending battles on the continent. Europe and Japan posted losses of -5.00% and -1.00% respectively. Mixed economic data in the US saw US equities end the week -2.51% lower.

Emerging Markets bore the brunt of the equity retreat, losing -4.89%, with the BRIC markets amongst the biggest losers. Brazil's Bovespa Index lost -10.36%, Russia gave up -10.31% and China posted losses of -3.28%. In Emerging Markets news, Russian 1Q 2012 GDP grew 4.9% year-on-year, compared to 4.8% in 4Q 2011, beating consensus estimates. However, continued weakness in commodity prices on the back of risk aversion has continued to impact the Brazilian and Russian markets negatively, with both indices now in the red for 2012 (-13.4% and -8.3% respectively), surrending a large chunk of the gains they had posted since 4Q 2011.

Asia ex Japan was also hit badly over the week, dropping -3.80% as weakness was pervasive across the market. The Southeast Asia region were amongst the week's biggest losers, as Malaysia and Singapore declined -3.54% amd -3.62%, while Korea fell a whopping -7.14% and Hong Kong lost -3.31%

The SGD ended the week lower against move of the major currencies, losing -2.6%, -1.6% and -1.7% against the JPY, RMB, and USD respectively.

[All returns in SGD terms]

Investors may refer to Market Valuations as of 18 May 2012 for more details.

US: Mixed Economic Data & Signals

US economic data releases were mixed this week. Industrial production in April rose 1.1% on a month-on-month basis following a -0.6% decline in March, beating consensus estimates of a 0.6% growth rate as gains in materials, business equipment and consumer goods contributing significantly to the rise. Housing starts came in significantly better than expected in April, with a seasonally adjusted annual rate of 717,000 units as compared to a 685,000 estimate, with building permits coming in at 715,000, down from 769,000 and missing estimates of 730,000, providing signs that the recovery in the US housing market is continuing its sluggish recovery.

Initial jobless claims were unchanged from the prior upward revised reading at 370,000 and roughly in line with the 365,000 expected claims, as the warmer weather over Winter had an effect on the latest numbers. The Philly-Fed Manufacturing index fell unexpectedly to -5.8 in May, its lowest reading since September 2011. A drop in employment (-1.3) and new orders (-1.2), led to the index missing estimates of a rise to 10.0 from 8.5 in April. In contrast, the New York Fed Manufacturing index (Empire index) displayed improvement, indicating an uneven recovery in the manufacturing sector in the states.

In the release of the FOMC's April 24-25 meeting minutes, the Fed has kept the option of more monetary easing on the table, with "several" members supporting more easing if the economy slows or if "downside risks to the forecast became great enough".

Europe: GDP Stalls Despite German Strength, Greeks Go Back To The Polls

Despite Eurozone Advanced GDP growth figures beating estimates of a -0.2% contraction with a 0% rate of growth on a quarter-on-quarter basis, the contrast in economic strength across Europe continues to pose concerns. In Germany, GDP surprised heavily on the upside, beating estimates of a 0.1% quarter-on-quarter growth rate by posting a 0.5% rate after contracting -0.2% in 4Q 2011. In France, GDP stagnated in 1Q 2012, after posting a downward revised growth of 0.1% in 4Q 2011. The worrisome periphery continue to display contractions, with Italy contracting by -0.8% in 1Q 2012 on the back of a -0.7% contraction while Spanish GDP fell -0.3%, matching estimates of a -0.3% contraction following a -0.3% contraction in 4Q 2011.

With no political solution found in Greece, the country that brought democracy to the world is now going back to the voting booths for the 2nd time this year with June 17 being the official date for the election to be held. With the far left leader Alexis Tsipras gaining popularity for his anti-austerity rhetoric, and, with the Greeks continuing to be pro-Euro and anti-austerity, the outcome of the elections will be tight and significant.

We maintain our call for a recession in Europe in 2012 and will continue to monitor the situation in Greece, Italy and Spain with keen interest.

Greater China: China's RRR Cut

In China, The People’s Bank of China (PBoC) announced that it would lower its RRR effective 18th May. The cut was widely anticipated by markets as it had been almost three months since the central bank last cut the ratio. In addition, the policy move came right after a series of disappointing data which indicated weakness in the Chinese economy. Industrial production growth was weak in April, growing just 9.3% year-on-year, missing estimates of a 12.2% growth rate and was also the weakest growth figure in three years. In addition, New Yuan loans came in at RMB 681.8 billion in April, which was not only significantly below the RMB 1.01 trillion seen in March, but also below the RMB 780 billion estimate. In particular, medium to long term loans to businesses dropped 46% year-on-year, indicating weak investment sentiment and demand for loans. Market participants now worry whether RRR cuts will be able to boost loan growth and support the economy as they worry that the issue rests on loan demand rather than its supply.

South East Asia: Singapore Maintains Forecast

In Singapore, the final estimate for Q1 GDP was unchanged, showing the economy expanded 1.6% year-on-year in 1Q 2012, slowing 3.6% in the preceding quarter. On a quarter-on-quarter SAAR basis, the Singapore economy expanded by 10% in 1Q 2012, reversing the -2.5% contraction seen in 4Q 2012. The Ministry of Trade and Industry maintained its economic growth forecast of 1%–3% for 2012, citing continued sluggish global growth and renewed stress in Europe as headwinds for the city state.

In Indonesia, consumer spending on automobiles slowed in the month of April as motorcycle and car sales dropped to 617,508 and 87,080 units from 619,678 and 87,761 units in March respectively, translating to a -1% and -0.4% decline on month-on-month basis. The fall is attributed to the stricter down payments requirements which are due to take effect in June to curb asset bubble formation. The new ruling from Bank Indonesia will require consumers to pay at least 25% on vehicles purchased as compared to the current 5%. Given uncertainty over the subsidized fuel price hike and higher loan-to-value requirement, the demand on vehicles is weakening and has negatively impacted automobile related stocks. The miscellaneous sub-index (90% of which are automobile-related stocks) shed -5.2%, as compared to the Jakarta Composite Index's 4.1% year-to-date positive return as of 18 May 2012.