Insurance cuts supportive of equities; still like USD over EUR

Fed rate cuts could benefit equities in Hong Kong, Singapore, Philippines and Indonesia. The support for the USD Index (DXY) remains intact around 96.5.
Joanne Goh, Philip Wee14 Jun 2019
    Photo credit: AFP Photo

    Equities: Insurance cuts supportive of Asia equities

    We think the next Fed cut looks like an insurance cut similar to the one in 1995. Back then, the first rate cut came in July 1995 after a 6-month rate pause and after a aggressive one-year rate hike cycle. Concerns that Fed’s rate hikes may be overdone, growth and inflation were both moderating, and the presence of a president seeking a re-election, are some of the parallels between then and now. Fed eventually cut rates thrice back then in between 1995 – 1996. The US market did very well throughout the cycle, from one month before the rate cut to six months after. In Asia, the Hong Kong market, Singapore and the Indonesia market did fairly well. We think that is due to the direct transmission of US rate cuts for Hong Kong and Singapore rates that kept the markets buoyant.

    While circumstances under each rate cut is different, as long as rate cuts don’t come too late, we think Asia equities should be well supported. Our preferred markets in Hong Kong, Singapore, Philippines and Indonesia are direct beneficiaries of Fed rate cuts.

    FX: Downside risks higher for Europe than the US

    The relative strength of the US dollar has been shaken but not shattered by Fed cut expectations. The US 10Y bond yield has held above the Fed’s 2% inflation target. Hence, there is little incentive to pile into the euro where negative EU 10Y bond yields have been falling to new lifetime lows below their Japanese counterparts. The support for the USD Index (DXY) remains intact around 96.5 on the euro’s failed attempts to break above 1.13.

    The fragile Eurozone economy is also at risk to a disorderly Brexit. Tory candidates looking to succeed Theresa May as prime minister appeared determined to deliver Brexit on October 31 with or without a deal. Leading Brexiteer Boris Johnson secured the most votes (114 vs a distant second of 43) at the first ballot to select the Conservative Party leader. UK lawmakers earlier voted 309-298 against legislature to block a no-deal Brexit. Having fallen back to last December’s low around 1.26, when Mrs May faced a party leadership challenge, the British pound is at risk extending its fall to its 2016 post-referendum low just above 1.20.

    Joanne Goh

    Regional Equity Strategist

    Philip Wee

    FX Strategist - G3 & Asia

    The information herein is published by DBS Bank Ltd and PT Bank DBS Indonesia (collectively, the “DBS Group”). It is based on information obtained from sources believed to be reliable, but the Group does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. Any recommendation contained herein does not have regard to the specific investment objectives, financial situation & the particular needs of any specific addressee. The information herein is published for the information of addressees only & is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Group, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Group or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Group & its associates, their directors, officers and/or employees may have positions or other interests in, & may effect transactions in securities mentioned herein & may also perform or seek to perform broking, investment banking & other banking or finan­cial services for these companies. The information herein is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation. Sources for all charts & tables are CEIC & Bloomberg unless otherwise specified.

    DBS Bank Ltd., 12 Marina Blvd, Marina Bay Financial Center Tower 3, Singapore 018982. Tel: 65-6878-8888. Company Registration No. 196800306E.

    PT Bank DBS Indonesia, DBS Bank Tower, 33rd floor, Ciputra World 1, Jalan Prof. Dr. Satrio Kav 3-5, Jakarta, 12940, Indonesia. Tel: 62-21-2988-4000. Company Registration No.