Fed Chair affirms market doves; mildly constructive US equity sentiments

The Fed has affirmed the dovishness discounted by markets. The USD has proven resilient with attention turning to the rest of the world. We remain mild constructive on US equities.
Philip Wee, Joanne Goh12 Jul 2019
    Photo credit: AFP Photo

    FX: Fed cuts fully priced in, time to move on

    The US dollar index (DXY) did not close any day below 97 this week. The 2-3 Fed cuts priced in by markets are more than the total 50 bps of insurance cuts that leading Fed dove, St Louis Fed President James Bullard, has signalled for the year. With better-than-expected US jobs and inflation data discouraging aggressive Fed cut bets, the euro and the British pound will be pressured by their dovish central banks paving the ground to cushion their weak economies under pressure, not only from global trade risks but also a possible hard Brexit on the horizon. Our view remains for EURUSD and GBPUSD to trade below 1.10 and 1.25 respectively in 2H19.

    In Asia, attention is turning towards China slowdown worries. Consensus expects China’s GDP growth out on July 15 to slow to 6.3% YoY in 2Q19 after holding steady at 6.4% for two consecutive quarters. The big miss in Singapore’s advance GDP estimate for 2Q19 (0.1% YoY actual vs 1.1% consensus) this morning advises caution for disappointment. The -3.4% QoQ contraction was deeper than the -1.9% in 1Q15, the quarter that witnessed an off-cycle SGD easing in January 2015. We reiterate tour long-held view that the SGD NEER is too strong in the highest quartile of its policy band. This morning’s weak growth has opened the door an easing at the October review, which will be consistent with the two Fed cuts that we expect this year. In this regard, the SGD NEER should gravitate towards the lower half of its band. According to our model, USD/SGD should be looking to end the year in a higher 1.38-1.41 range.

    Equities: Bullish, but not overexuberant US retail investors signal upside for S&P

    According to a survey by the American Association of Individual Investors, US retail investor sentiments have picked up following a sharp dip at the end of May and is now back to above the -1SD level but still below average. In our view, there is room for the indicator to pick up, suggesting increasing optimism that the US market could build up. A dovish Fed, still moderately upbeat US data, and strong market could be reasons behind the optimism.

    The data also suggests that retail investor sentiment in the US market is not overexuberant and hence a sharp sell-off in the market is not imminent. We back-tested the indicator and find that it is useful as a reversal signal when it is at its extremes: excessive optimism (>+1SD) portends market weakness in the following eight weeks, while excessive cautiousness (<-1SD) suggests market upside in the same following period. When the indicator is within the band, such as now, there is a more than average chance that the returns for the S&P will be positive in the following eight weeks.

    Philip Wee

    FX Strategist - G3 & Asia

    Joanne Goh

    Regional Equity Strategist

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