Equity markets ended the week higher, courtesy of a late week rally as 6 major central banks moved to ease liquidity pressures in Europe by cutting USD swap arrangement costs by 50 basis points. Over in China, the decision by the PBoC to cut the reserve requirement ratio (RRR) by 50 basis points also helped to boost market sentiment and prompt hopes of further implementation of accommodative monetary policy measures. European equities rallied 7.5% over the week, while US equities jumped 5.0% as marked by the S&P 500. Emerging market equities rebounded sharply with a rise of 7.1%, aided by strong returns in Brazil (8.5%), India (7.3%), Russia (6.9%) and Korea (8.6%). [All returns are in SGD terms]

Investors may refer to Market Valuations as of 2 December 2011 for more details.

Europe: The Real McCoy might be around the corner

While we do not believe the move by the central banks was a watershed moment, the action should at the very least ease the current liquidity problems and help to ensure European banks have access to USD funding sources. The coming week sees a slew of important events beginning with the ECB convening in Frankfurt for a rate decision where expectations are for Mario Draghi to cut rates further. Eurozone finance ministers have a meeting prior to a summit by Eurozone leaders at the end of the week where the agenda should be focused on further integration of European nations.

Economic data releases for the week saw confidence levels for consumer, economic, industrial, and services continue to deteriorate as Europe’s debt crisis continues to sap sentiment.

US: “Super committee” failure suggests increased risk of further credit downgrades

Consumer confidence for November 2011 rebounded sharply from October's upward-revised 40.9 reading to 56.0 (est: 45.0, Oct revised up from 39.8), on the back of improving employment conditions and income expectations. The mismatch in consumer sentiment and spending data has been stark in 2011, with resilient retail sales figures in marked contrast to consumer confidence indices which are consistent with recessionary conditions. Strong "Black Friday" sales are a further testament to the revival of US consumption, which may help propel the US economy even in the face of external uncertainties.

ISM Manufacturing PMI stronger than expected at 52.7(est: 51.5) for November, rising from 50.8 in October on stronger export orders and production. The ISM Manufacturing PMI is often viewed as a key leading indicator for the US economy, and the latest reading should help to quell concerns that the economy is headed for a slump. According to ShopperTrak, Black Friday sales in the US amounted to USD 11.4 billion, up 6.6% year-on-year, the largest annual increase since 2006-2007, which saw an 8.3% gain. IBM's data unit Coremetrics showed online sales expanded by a hefty 24.3% year-on-year over this period, highlighting the increasing importance of web-based retail activity.

Following a re-examination of our earnings forecasts for US companies, we are reverting to the consensus estimate of 2011 EPS (which we still consider a fairly conservative estimate), while maintaining our own forecasts for 2012 and 2013 earnings (which are more conservative compared to the consensus).

northeast Asia: Initiation of Accommodative Monetary Policy, Industrial production falling

As anticipated by markets, the People’s Bank of China (PBoC) lowered reserve ratio requirements (RRR) this week on Wednesday evening, the first decrease since the monetary tightening cycle started at the end of 2010, signaling a shift towards accommodative monetary policy. The policy move came right before the announcement of November’s manufacturing Purchasing Manager’s Index (PMI) which declined to 49, from its previous 50.4, indicating a contraction in the sector. This is the first time the manufacturing sector saw a contraction since February 2009.

In Korea, Industrial production expanded 6.2% year-on-year in October, representing the 28th consecutive y-o-y growth since July 2009. Still, on a monthly basis, the figure dropped 0.7%, the third drop in the past four months. The weak number as compared to the month earlier was mainly attributed to the slump in vehicle production and video and audio equipment. Korea’s export driven economy is poised for a challenge in the face of a tough global environment.

Japanese industrial production rebounded 2.4% month-on-month in October after declining 3.3% in previous month. Despite beating consensus estimates of a 1% rate, a survey of the firms’ forecast in the near-term is not encouraging. Producers expect overall production to drop 0.1% month-on-month in November, a sharp downgrade from their earlier forecast of a 1.8% gain. As an export-oriented economy, Japan’s industrial production is volatile and easily affected by the changes in the external economic environment. Exports dropped 3.7% year-on-year in October, the first decline in three months. Based on the latest figures and the outlook, the Ministry of Economic, Trade and Industry retained its overall assessment of “industrial production appears to be flat”.

South East Asia: Monetary Policy Easing underway

Bank of Thailand (BoT) cuts its benchmark interest rate by 25 basis points to 3.25% in order to provide an accommodative monetary policy to support the economic restoration. As the flooding and the weaker exports have severely impacted economic growth, BoT expects the economic growth for 2011 to be 1.8%, lowered from the previously forecasted 2.6%. On the other hand, as inflationary pressure is expected to remain controllable, BoT is likely to further ease its monetary policy if the economic growth continues to slowdown.

In Indonesia, Consumer Price Index (CPI) for November further eased to 14-month low at 4.15% after peaking at 7.02% in January 2011. The moderated CPI has provided more flexibility for Bank Indonesia to adopt a looser monetary policy in order to boost economic growth. After it slashed the reference rate by 75 basis points to 6.0% recently, Bank Indonesia is likely to pause its monetary easing.

oceania: credit rating upgrade

Fitch Ratings became the last of the three credit rating agencies to upgrade Australia’s sovereign rating to its highest rating of “AAA”. The rating agency said the upgrade reflects the country’s fundamental strength including “its high value-added economy, strong political, civil and social institutions and its flexibility policy framework”. Australian debt-to-GDP ratio in 2010/11 is 26.3%, much lower than the average of 55.7% in the AAA rating group. The agency also said the Australian government is committed to get the budget back to surplus by 2012/13.