Multi-Asset Weekly: Cautious Optimism Ahead of Central Bank Meetings

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Chief Investment Office18 Sep 2023
  • Equities: US equities traded lower on higher-than-expected CPI and PPI
  • Credit: Stay with quality credit as credit risks are likely ahead
  • FX: Potential for USD to extend its recovery into the final quarter; DBS currency forecasts revised
  • Rates: Hawkish pause in this week's FOMC widely expected with Powell stressing data dependency
  • The Week Ahead: US Change in Initial Jobless Claims; Singapore non-oil domestic exports
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Equities: Europe equities rise as ECB signals peak rates

Global equities rally as ECB signals peak of rate hike. Major global equity indices posted gains following hints from the European Central Bank (ECB) that it could be reaching the end of its monetary tightening. Global equities gained 0.5% for the week (ended 15 September), with Developed Markets and Emerging Markets rising 0.4% and 1.1% respectively.

US equities declined as higher-than-expected Consumer Price Index (CPI) and Producer Price Index (PPI) during the week reinforced the view that rates could remain elevated for a longer period. The S&P and Nasdaq recorded weekly losses of -0.2% and -0.4% respectively while the Dow Jones traded flat at 0.1%. The Europe market traded higher, with STOXX 600 and FTSE 100 rising 1.6% and 3.1% respectively. China equities ended the week flat as August data point towards economic stabilisation while the property sector continues to demonstrate weakness; both HSI and HSCEI traded flat at -0.1% for the week.

Topic in focus: Positioning for Japan reflation. Japan’s GDP registered growth acceleration in the first half of 2023, with nominal GDP expanding by 5.4% y/y in the second quarter. However, this growth was driven primarily by a surge in inflation to 3.3% and real GDP growth of 2%. While these figures surpass historical averages, their sustainability and implications for long-term growth remain uncertain. The Bank of Japan (BOJ) Governor Kazuo Ueda has dismissed the possibility of an imminent exit from ultra-loose monetary policy, arguing that inflation driven by robust domestic demand and higher wage growth is necessary for sustainable reflation.

We believe reflation trades need to be supported by earnings for them to be sustainable. These would include export stocks with leading global market share and government support measures are expected to highlight the economic significance of these sectors. One example is the substantial depreciation of the yen, with the JPY witnessing 25% decline since the beginning of the pandemic in early 2020. The undervalued yen enhances the competitiveness of Japan's exports and encourages the reshoring of production as more Japanese multinational corporations rebuild their supply chains in the post-pandemic landscape. The weakened yen has also contributed to the revival of the tourism sector.

Figure 1: JPY has fallen by more than 25% since 2020

Source: CEIC, DBS


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