MARKETS INSIGHT

Fed and BOJ hold market in their thrall

The Bank of Japan (right) and the US Federal Open Market Committee will be releasing their latest monetary policy decisions on Thursday. The market is expecting additional stimulus from the BOJ later this month.
The Bank of Japan (above) and the US Federal Open Market Committee will be releasing their latest monetary policy decisions on Thursday. The market is expecting additional stimulus from the BOJ later this month. PHOTO: REUTERS

Investors await their next policy moves, as well as local economic data for March

A lively week lies ahead as the Singapore corporate earnings season continues in full swing and as investors keenly await the United States Federal Open Market Committee (FOMC) and Bank of Japan monetary policy decisions on Thursday.

They will also monitor closely the release of local economic data, starting with March's consumer price index (CPI) due today. March's industrial production figures are due tomorrow while the first-quarter unemployment rate will be out on Thursday.

Investors will also be eyeing the first-quarter earnings of United Overseas Bank and OCBC Bank before the market opens on Thursday and Friday, respectively. Of interest is the non-performing loan portfolio of both banks, traders say.

DBS Group Holdings will release its first-quarter earnings on May 3.

UOB KayHian, which has a buy call on the bank, expects DBS to maintain profitability despite a difficult operating environment in the first quarter.

"The bank should benefit from year-on-year net interest margin expansion and maiden contribution from the bancassurance partnership with ManuLife. Investors should be relieved as there is no material deterioration in asset quality," it said.

Its loans to the oil and gas sector totalled $17 billion as of Dec 15.

"DBS disclosed that loans to the offshore support services segment were unchanged at $7 billion. There are 10 to 12 customers within this space and the average loan quantum is $500 million to $600 million (mostly larger corporations), and 80 per cent of these loans are secured by collaterals," the brokerage said.

Even assuming crude oil stays at US$20 a barrel over the next two years, DBS management does not expect its specific provisions to exceed $200 million, UOB KayHian noted, adding that most of DBS' customers have sufficient cash holdings and positive cash flow to service their debt obligations this year.

Investors are also awaiting the announcement by Sembcorp Marine of its first-quarter results after market trading hours on Wednesday.

Its shares have rebounded strongly in the last two weeks, but could continue to come under selling pressure today on news that the shareholders of Sete Brasil, a major customer, have agreed to a plan to file for bankruptcy protection.

Late last Friday, SembMarine said it had begun arbitration proceedings against Sete Brasil's subsidiaries to protect its interest.

Sete Brasil has not paid Sembcorp Marine for orders worth billions since November 2014. The rig builder has seven drillships for Sete Brasil on its order books. "If the rig builder is prudent, it should have made provisions for impairments this quarter," remisier Alvin Yong said.

Trading activity will likely be cautious ahead of the outcome of the US and Japanese central bank meetings this week.

"In the absence of clarity, investors will grasp at any market developments and economic data to ascertain trends. The chase for yields, given extremely low or negative bond returns, may also push money managers into stocks," IG market strategist Bernard Aw said.

While investors are not expecting a rate hike this week, given the dovish speech by Fed chairman Janet Yellen on March 29, they are watching for Thursday's statement to shed light on the June meeting.

As for the BOJ, additional stimulus is expected sometime this month.

A version of this article appeared in the print edition of The Straits Times on April 25, 2016, with the headline 'Fed and BOJ hold market in their thrall'. Print Edition | Subscribe