Downside risks in focus
10Y UST yields broke technical support at 2.36%, setting the stage for further downside in the immediate term. With China-US trade tensions simmering and US equities threatening a more serious wobble, the path of least resistance for US yields is to the downside. US Treasuries are also supported by the relentless push lower in developed market yields. Since the start of the year, DM yields (average of G10 excluding the US) have fallen by 31bps with 10Y German yields drifting below -0.1%. Aside from trade tensions, weak Eurozone economic numbers and Brexit risks have also supported DM govvies.
In the short term, without any respite from the negative trade war narrative, US yields are likely to be held down. This premium in Treasuries could linger for an extended period even if the Fed does not cut rates. The technical setup for 10Y yields point to another 20bps of downside. However, we are wary chasing yields lower. Notably, yields at these levels already look stretched to the downside given US economic fundamentals and the significant Fed easing (3 cuts over the next two years) that the rates space is already pricing in.
FX: Euro and pound beset by political uncertainties
The euro could head below 1.10 if Euroskeptics secure more than a third (250) of the 751 MEP seats being contested at the European Parliament elections on May 23-26. Populist and far-right parties are seeking to increase representation in the European Parliament to exert more influence in reshaping the bloc. Pay attention to the three EU countries contesting the most MEP seats – Germany (96 seats), France (74) and Italy (73). In Italy, a strong showing for Matteo Salvini could widen the rift between his far-right Lega party and its left-leaning coalition partner, the Five Star Movement. The vote in France is considered a referendum on President Emmanuel Macron and a vehicle for far-right leader Marine Le Pen’s comeback. In Germany, the election will measure CDU Leader Angela Kramp-Karrenbauer’s credentials as Angela Merkel’s successor.
The British pound is also beset by political uncertainties. British Prime Minister Theresa May’s spokesman was not aware of any plans to announce her resignation today. Foreign Secretary Jeremy Hunt affirmed that Mrs May will be prime minister during US President Trump’s visit to Britain on June 3-5. Hunt was also the first cabinet minister to tell Mrs May to abandon her doomed withdrawal agreement. Instead of publishing her Brexit bill today, Mrs May could announce her exit from No. 10, possibly on June 10. Money managers do not view, Boris Johnson, the top contender to succeed Mrs May, as favourable for the pound. Neither do they favour Labour Party leader Jeremy Corbyn as prime minister. Increasingly, a no-deal Brexit is becoming the legal default outcome on October 31.
Equities: Singapore downside limited to 10%
Given the ongoing hostility between China and US over trade and tech issues, the Singapore market is unlikely to be spared from volatility and portends downside risks in the coming weeks. We however think the downside is less than 10% as there are many factors supporting the market. Following the recent correction, Singapore is now the cheapest market within Asia, trading at less than -1SD away from average, and has the highest dividend yield. Our calculations show that there will be 10% and 4% downside respectively if the markets were to test both the low valuations of 2016 and 2018. The 2016 market selloff was due to the Brexit referendum while the trade war grabbed headlines in 2018. These two niggling worries are still simmering at this point but we think the market has priced in most of the negatives, unless they get worse.
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