Markets Insights

US Fed rate decision takes centre stage

Local market focus on blue-chip earnings too, with DBS, OCBC and UOB set to post results

China’s official PMIs for manufacturing and services will be out on Wednesday, while the private survey for manufacturing is due on Thursday.
China’s official PMIs for manufacturing and services will be out on Wednesday, while the private survey for manufacturing is due on Thursday. PHOTO: AGENCE FRANCE-PRESSE

Hopes of accommodative central bank policies have been a key needle mover in global equity markets since last month, dictating sentiment in the face of US-China trade tensions.

With that in mind, the United States Federal Reserve's policy decision on Wednesday will be the week's main event, where investors are taking a rate cut of 25 basis points as a given, with further easing from September.

If cuts meet expectations, "it will inaugurate the beginning of a new Fed easing cycle but anything other will trigger an aggressive symmetrical response across a swathe of risk assets", Vanguard markets managing partner Stephen Innes said.

The Fed's decision is sandwiched between those of the Bank of Japan (BOJ) tomorrow and the Bank of England (BOE) on Thursday, though policy rates are unlikely to be changed at either central bank.

The BOJ may debate about changes to forward guidance, and reassert its easy monetary policy position, while BOE policymakers may need further clarity from Brexit before any talk of rate cuts commences, UOB senior economist Alvin Liew wrote last Friday.

In the local market, data releases will be on the backburner as attention shifts to the corporate earnings season, which has kicked into full gear. Singapore's Straits Times Index (STI) ended last Friday at 3,363.76, down 0.4 per cent or 14.2 points on a see-sawing week.

A third of STI components are due to report earnings for the April-June period this week, starting with banking stalwart DBS Group Holdings' second-quarter earnings today. OCBC Bank and United Overseas Bank (UOB) post results for the quarter on Friday.

Jefferies Singapore analyst Krishna Guha noted that earnings for the banks "may be influenced by gradual pickup in loan growth, sequential increase in Singapore and Hong Kong interbank rates and steady growth in annuity fee income streams".

Traders said they are expecting a positive showing from DBS, which could see shares in OCBC and UOB being given a lift before the two banks' results are released. "There are opportunities to sell into the rally," one trader added.

Early this month, Ms Tan Min Lan, the Asia-Pacific head of UBS' chief investment office, said the Swiss bank favours the trio among Asian equities for being "high cash-flow-generative names that can reinvest for faster growth, or can return cash through higher payouts and dividends".

Singapore Airlines will report first-quarter earnings on Wednesday. UOB Kay Hian analyst K. Ajith, who has a "hold" call with a price target of $9.50, is expecting a 5 per cent year-on-year fall in net profit, with incremental passenger revenue expected to be offset by weaker cargo earnings.

Other STI components to report earnings this week include the Singapore Exchange, UOL Group, Genting Singapore and the Jardine quintet.

Singapore's July Purchasing Managers' Index (PMI) - out on Friday - is likely to reflect growing headwinds from global trade tensions. If PMI continues to contract, there may be "some downward pressure on the Singapore dollar, which has been moderating towards the 1.37 mark against the US dollar in July", FXTM market analyst Han Tan said.

Elsewhere in the Asia-Pacific, China's official PMIs for manufacturing and services will be out on Wednesday, while the private survey for manufacturing is due on Thursday.

ING's Asia economist Prakash Sakpal acknowledged that while China's PMI figures have tended to steal the limelight since the trade tensions were reignited in May, "we don't think the upcoming Chinese PMI data will be telling us anything different from recent releases". The trade skirmish has hurt Chinese exports and manufacturing but activity in the services sector has held up for now, Mr Sakpal added.

Other key trade data for the week includes Thursday's second-quarter gross domestic product print for Taiwan and Friday's July trade figures for South Korea. Both economies have felt the pinch of the global tech slowdown, but Seoul faces additional issues with Tokyo over trade, which dented economic prospects further.

A version of this article appeared in the print edition of The Straits Times on July 29, 2019, with the headline 'US Fed rate decision takes centre stage'. Subscribe