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 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
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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
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