Most Markets Rebound From Heavy Selling

Most markets rebounded over the course of the week, as European debt concerns were countered by remarks from Fed Chief Ben Bernanke and his European counterpart Mario Draghi who remain ready to act if necessary whilst exhorting politicians to do their part. MSCI AC World gained 2.2% over the course of the week, helped by gains in the major developed countries; US and Europe rose 3.0% and 3.1% respectively while Japan fell -1.9%. Emerging Markets and Asia ex Japan rose and fell 0.6% and -0.7% respectively, despite the majority of markets rising, China dragged down the indices thanks to its -2.0% return for the HSML 100 index and the -4.6% fall in the Shanghai composite.

The week's biggest gainers were India, Russia and Australia, rising 4.0%, 3.8%, and 3.4% respectively.

[All returns in SGD terms]

Investors may refer to Market Valuations as of 8 June 2012 for more details.

Europe: Spain's Banking Sector Bailed Out, ECB Holds Rates

In Europe, Spain saw its credit rating downgraded 3 notches by Fitch Ratings to BBB from A with a negative outlook on Friday. The rating agency also estimated the cost of recapitalising the Spanish banking sector between EUR 60 billion and EUR 100 billion, a figure which was spot on at the top of its estimates. On Saturday, Spanish finance minister Luis de Guindos announced that Spain would seek Eurozone financial assistance to bail out its troubled banking sector, with the amount to be set upon the completion of two independent assessments on the health of the banking sector. Eurozone finance ministers were quickto agree to the request on Saturday, issuing a statement stating "The loan amount must cover estimated capital requirements with an additional safety margin, estimated as summing up to 100 billion euros in total."

In other European news, the European Central Bank held its benchmark rates constant at 1.0%, putting pressure on European leaders to come up with a solution as indicated by his press conference remarks of "Some of the problems in the Euro area have nothing to do with monetary policy. It's not appropriate for ECB policy to take the place of other players' lack of actions". Meanwhile, German Services Purchasing Managers’ Index fell in May 2012. The index slipped to a reading of 51.8, down from a flash reading of 52.2 earlier, and from April’s reading of 52.2. A reading above 50 indicates expansion, while a reading below 50 indicates contraction. The reading of 51.8 indicates that the resilient German service industry expanded at a slower pace as compared to its previous reading of 52.2, possibly hinting at a German economy that is starting to feel the effects of a recession in the European periphery.

North Asia: China Cuts Rate, Taiwan’s Exports fall

The People’s Bank of China (PBoC) announced a cut in its benchmark interest rate by 25 bps, effective on 8 June 2012. This is the first rate cut since September 2008 and the first price-oriented monetary policy since July 2011. The cut brings the official 1-year lending rate to 6.31% and the 1-year deposit rate to 3.25%. It was widely agreed upon that an interest rate cut was necessary given the range of disappointing economic data that had been published for April. The rate cut also comes at an interesting time, just before the release of other important economic data such as industrial production, trade figures and new loans, which suggests that these figures may also point towards a deteriorating economic situation for China. The rate cut will definitely provide support for the economy as it will help spur demand for credit, unlike previous Reserve Requirement Ratio (RRR) cuts. However, a one-time rate cut itself is unlikely to ease all economic stress, hence we expect further monetary policy easing to come.

One notable feature of the policy move this time was that the interest rate cut was asymmetrical. PBoC also liberalised banks’ ability to set lending and deposit rates, allowing banks to set lending rates as low as 20% below the benchmark rate (increased from 10% previously) and deposit rates as high as 10% above the benchmark rate. The liberalisation marks a step towards reforming the nation’s financial system.

In Taiwan, exports continued to remain weak as it contracted -6.3% year-on-year in May, which was only marginally better than the -6.4% year-on-year contraction seen in April, but missed estimates of a -5.3% contraction. The marginal improvement hardly provides signs of a rebound; instead, the economic outlook remains grim in the near term as external demand remains weak. Imports weakened even more severely, contracting -10.5% year-on-year last month, missing estimates of a -4.7% contraction significantly.

On the other hand, the consumer price index (CPI) rose 1.74% year-on-year in May, which was higher than the market’s expectations of a 1.4% increase. The figure has also accelerated for three consecutive months. Last month, inflation was primarily boosted by rising costs in food, which increased 3.75% year-on-year. Although the Taiwanese economy remains weak, given that inflationary pressures remain to be an evident threat to the nation, the central bank will have limited room to loosen monetary policy in the near term.

South East Asia: Singapore's PMI Rises, Indonesia's Rupiah's Troubles

Singapore's Purchasing Managers Index recorded a reading of 50.4 in May, suggesting that manufacturing expanded for the month, following April's 49.7 reading which indicated that the segment contracted. The PMI for the electronics sector fell marginally to 50.8 from 51.5, but remained in expansionary territory for the fifth consecutive month, highlighting the sectors recovery following the supply chain disruptions of 2011. Both new orders and export orders continued to post expansion, a healthy sign of external demand despite the uncertain macro-environment. However, the employment component of the survey posted an 11th consecutive month of contraction, an indication of some weakness in the domestic labour market, and hints at a slight upward tick in the unemployment rate going forward.

In Indonesia, Bank Indonesia has implemented several measures in order to reduce the Indonesian Rupiah volatility, the worst decliner among Asian currencies after India on year-to-date basis; the Rupiah fell to its weakest position against the USD since 2010. Bank Indonesia has offered short term dollar-denominated deposits to provide more dollar liquidity in the system, whilst aiming to bring back the overseas dollar earnings of corporates currently parked outside Indonesia, mainly in Singapore and Hong Kong banks, by requiring them to reduce their overseas earnings held abroad to 50% from the current unrestricted level.

Oceania: Australia's Rate Cut

The Reserve Bank of Australia (RBA) lowered its benchmark interest rate by 25 basis points to 3.5%, the lowest level since 2009. This is the second rate cut in two months following the RBA's unexpected interest rate cut of 50 basis points last month. Market estimates that more rate cut action will come next month. Cutting its benchmark interest rate in two successive months reflects the Australian government's concerns about the growth of Australia’s economy very much because of the weakening European debt crisis and slowdown in China economic growth. RBA expects the inflation to be in range of 2% to 3% for the coming one to two years. In the short term, inflation is likely to be in the lower part of the range, providing room for the Australian government to further lower the interest rate and launch monetary easing policies in order to boost economic growth.