Singapore Traders Spectrum
Wired Weekly
Page 2
While the attention may be on the ECB’s latest bond
purchase plan and the FED’s stimulus hopes, we think
investors should not overlook the Chinese government’s
vigilant attitude towards monetary loosening and adopting
an expansionary fiscal policy targeted at specific industries.
Our HK/China economist says this shows improving maturity
of macroeconomic management and adds that the Chinese
economy is not all that weak as investors think. Technically,
we believe that the SSEC bottomed out at 2030 last week.
We maintain our view for a counter trend rally panning out
in the months ahead to 2370 and 2582.
Investors may gain exposure to the SSEC through the iShares
FTSE A50 China Index (2823 HK). Among the S-chips, Midas
is a beneficiary of China’s industry specific fiscal stimulus
through expenditure on railway projects. Technically, we
maintain our view that the stock should work its way higher
to $0.48, which coincides with the fundamental target price
of $0.49.
Finally, DBSV Research believes picking the right SMC stocks
is the only way to beat the equity market as it currently
meanders in range-trading mode. Picks are Bumitama, Tiger
Airways, Hi-P, Nam Cheong, ASL Marine and Ausgroup for
their growth, Midas, Wing Tai, Kreuz and Pan United for
value.
ECB’s bond buying plan a zero-sum program
It’s 2 up for the central banks so far. ECB President Mario
Draghi brings out the bond purchase plan barely a week
after the FED kept stimulus hopes alive at the Jackson Hole
Summit and markets cheered. Although a step in the right
direction, we think it’s too early to bring out the victory flag.
A battle won; the war rages.
European policy makers agreed to an “unlimited” bondpurchase
program in an attempt to regain control of interest
rates in the Euro area and fight speculation of a currency
breakup. The ECB’s program, called Outright Monetary
Transactions, will target government bonds with maturities
of one to three years, including longer-dated debt that has a
residual maturity of that length. Purchases will be fully
sterilized, meaning that the overall impact on the money
supply will be neutral and the ECB will not have seniority.
Euro-area governments must stand ready to activate the
EFSF/ESM in the bond market when exceptional financialmarket
circumstances and risks to financial stability exist --
with strict and effective conditionality. In addition, the ECB
reserves the right to terminate bond purchases if
governments don’t fulfil their part of the bargain.
Mario’s usage of the word “unlimited” may have gotten
investors pretty excited. “Verbal bazooka” is one thing;
actual “physical bazooka” is another.
Our economist notes that this latest ECB program is similar
to the US Operation Twist. All bond purchases by the ECB
will be ‘sterilized’ (i.e. offset) by other actions. Simply put,
ECB buys this and sells that. With Op Twist, when the Fed
buys a 10-year bond, it sells a 2-year bond. The ECB hasn’t
said what it will sell to offset its bond purchases.
A sterilized program is a zero-sum program. Downward
pressure on interest rates here leads to upward pressure on
rates somewhere else. Who pays the higher rates remains to
be seen. Our economist also notes that the program isn’t
unlimited as advertised. At some point, the ECB runs out of
whatever it exchanges for Spanish and Italian sovereign
bonds. Long before then, however, someone starts to
complain that his rates have gone up. The ECB could
hammer those down – but they’d just pop up somewhere
else.
Bottom line - Sterilized intervention is zero-sum intervention.
Weak August payrolls numbers strengthen cases for
stimulus
August non-farm payrolls rose a lesser than expected 96,000
and lower than the 141,000 figure in July. The data also
revealed a 15,000 decline in factory payrolls, the largest
decline in 2 years. This coupled with the recent weak PMI
and ISM manufacturing numbers suggest that the
manufacturing sector is bearing the brunt of the global
slowdown.
The weak August employment data strengthens the case for
the FED to announce more stimuli at this Thursday’s FOMC
meeting, one day after the German constitutional court rules
on the ESM’s legality. US markets rose marginally despite
the weak employment data. Understandably, the USD Index
fell 0.79% to 80.25, gold price rose 2.05% to USD1740.5
an ounce while Brent crude futures gained 0.67% to
USD114.25pbl.
Downward pressure on the USD underpins oil price and
other USD denominated commodities (e.g. gold). The O&M
sector is an indirect beneficiary of the weak USD, which is
another plus in addition to the recent contract flows that
have benefited the sector. Our picks are Keppel Corp,
SembCorp Marine, STX OSV, Ezion, Nam Cheong, ASL
Marine and Kreuz.