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Singapore markets left vulnerable over fears of a repeat Fed tightening tantrum

The Federal Reserve (Fed) is likely to sanction another interest rate increase in December and there are fresh doubts surrounding both the Chinese economic outlook and yuan trends.

That puts Singapore in a vulnerable position, concerning a renewed sell-off in Singapore equities and a repeat of severe turbulence seen at the beginning of 2016.

There was severe turbulence surrounding the Singapore economy and markets early in 2016 with the Straits Times Index (STI), for example, declining from just below 2,900 at the end of 2015 to near 2,500 in the third week of January.

Confidence in the regional and global economy was undermined by negative reaction to the Fed’s decision to raise interest rates at the December Federal Reserve Open Market Committee (FOMC) meeting, while another move by the People’s Bank of China (PBOC) to let the yuan depreciate was also an important trigger in undermining global confidence.

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As the fourth quarter develops, there will be increased nerves over the risk of a repeat performance in late 2016 or at the beginning of 2017 with the STI index still trading slightly below early 2016 levels.

 

Federal Reserve close to raising rates again


Source: Thinkstock/Getty Images
Source: Thinkstock/Getty Images

Source: Thinkstock/Getty Images

The Fed had been expecting to raise rates four times in 2016 but after the move to raise rates in December 2015, there has been no further move to continue policy normalisation so far in 2016. The FOMC was looking to raise rates at the July meeting, but the sudden bout of market turbulence post-Brexit and poor US employment data forced this plan to be abandoned.

Pressure for a rate increase has gradually increased and three members of the committee dissented from the decision to hold rates steady at the September meeting.

The employment data has remained firm with a 156,000 increase in payrolls for September while unemployment edged higher to 5.0% from 4.9%. The jobless claims data has remained very strong at close to 40-year lows.

Inflation has gradually started to increase as the impact of previous weakness in oil prices has come out of the calculation, although the core PCE rate is still below the 2% target rate.

The FOMC will find it very difficult to make a move to increase rates at the November meeting given political constraints with the Presidential and congressional elections due to be held less than a week later. The FOMC still wants to continue the process of normalisation and a small rate hike is very likely in December.

The overall impact should be less this time around, especially with reduced expectations of an aggressive series of rate increases during 2017. There will, however, still be some nervousness over the implications of a further increase in rates, especially given the overall regional debt profile.

There has also been upward pressure on US bond-yields with 10-year yields moving to four-month highs around 1.80%. Any increase in yields to 2.0% or higher by the end of 2016 would increase the risk of downward pressure on US and global equities.

Markets will be hoping that instability surrounding the US Presidential election will be averted and there would be some initial comfort from a victory by Democrat contender Clinton. There would still be concerns surrounding trade policies and any shock victory for Republican nominee Trump would be a further destabilising influence.

 

Yuan back in focus


Source: Thinkstock/Getty Images
Source: Thinkstock/Getty Images

Source: Thinkstock/Getty Images

China’s third-quarter economic data releases contained no major surprises with PMI readings holding generally steady at close to the 50.0 expansion threshold. The yuan was also relatively stable from late June with the dollar hitting resistance just beyond the important 6.70 level.  

There was stabilisation in Chinese currency reserves after the very heavy declines seen during the first quarter of 2016.

There was considerable speculation that the PBOC was looking to keep the currency stable ahead of its inclusion in the IMF’s SDR basket at the beginning of October and there was certainly evidence that the bank was maintaining tight market control.

Since the beginning of October, however, there has been significant yuan depreciation. The PBOC has consistently set weaker fixes with a succession of six-year lows. Although partly related to a generally stronger dollar, the yuan has also weakened on a trade-weighted basis.

There has also been evidence of renewed capital outflows from China with September reserves falling by the largest amount in four months, reinforcing concerns surrounding medium-term stability risks.

There have been fresh concerns surrounding the property sector with many cities introducing more controls on property buying while the build-up in credit has continued to unsettle global investors.

The latest Chinese trade data was also weaker than expected with a decline in annual exports in yuan terms for the first time in six months which triggered fresh concerns surrounding the Chinese and regional trade outlook.

If the Chinese data shows renewed signs of deterioration, there will be the risk of a sharp deterioration in sentiment and fears over a destabilisation in economy which would also have an important impact in undermining regional confidence.

There would also be further concerns over a renewed sharp slowdown in trade volumes which would undermine the Singapore economy.

(By Tim Clayton)

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