Markets Insights

Fed rates, trade tensions will drive market sentiment

Market observers are now expecting the Fed to lower interest rates twice by late January next year in order to ease worries of a global growth slowdown.
Market observers are now expecting the Fed to lower interest rates twice by late January next year in order to ease worries of a global growth slowdown.PHOTO: AFP

US tariffs may hurt Asian assets, but some traders expect lower interest rates this year

Last week, regional markets saw some reprieve from last month's slide, starting this month on hopes that the United States Federal Reserve would subscribe to rate cuts.

With that in mind, investor sentiment over the Fed's possible moves is likely to remain a central theme driving markets this week, especially with the relatively weak US job data reading released last Friday.

Charles Schwab Singapore managing director Greg Baker noted that the weak job data reading "comes on the back of last week's gross domestic product figures, when US economic growth was revised down, albeit by less than expected".

As a result, market observers are now expecting the Fed to lower interest rates twice by late January next year, in order to ease worries of a global growth slowdown.

"However, we believe that a rate cut following next week's Federal Open Market Committee meeting is unlikely, and economic data would have to deteriorate much more for a rate cut to come to pass near-term," Mr Baker explained.

The US' trade issues with other countries will also be at the front and centre of investors' attention.

FXTM market analyst Han Tan said: "Another unexpected ramp-up in US-led trade tensions could trigger more risk aversion, which may result in further weakness for Asian assets."

In the local market, April's retail sales figures are due on Wednesday, while the final print of the unemployment rate for the first quarter will come on Thursday, with consensus estimates at 2.2 per cent.

"Although Singapore is set to release its April retail sales and Q1 unemployment numbers, the Singapore dollar is likely to be driven primarily by external factors, like most Asian currencies," Mr Tan said.

Last week, investors here took up more positions in real estate investment trusts (Reits) on the increasing likelihood that the Fed would look to lower interest rates.

Dealers expect attention within the Reits segment to switch to those that were not overbought in the past week, as well as telecommunications stocks that did not participate in last week's rally.

"They offer potential capital gains when the market recovers and their dividend payouts can cushion negative market volatility," one dealer said.

The economic docket in China will be heavy this week - and heavily scrutinised to see how the Chinese economy has held up against US tariff measures last month.

China will release last month's trade data today, foreign direct investment figures tomorrow and inflation figures on Wednesday. Industrial production and retail sales figures are due on Friday.

IG market strategist Pan Jingyi said China's trade numbers for last month are "expected to deteriorate to reflect the softening in external conditions". That said, "Friday's retail sales number could remain resilient according to the current market consensus," she added.

"As regional economies continue contending with global headwinds and the heightened trade tensions, signs of economic resilience in China could help bolster sentiment surrounding Asian assets, while providing some measure of support for Asian currencies," said FXTM's Mr Tan.

A version of this article appeared in the print edition of The Straits Times on June 10, 2019, with the headline 'Fed rates, trade tensions will drive market sentiment'. Print Edition | Subscribe