For internal circulation only
CIMB-Principal Weekly Updates
4 – 8 July 2016
Market Snapshot
The S&P 500 index narrowly missed setting a new closing high on last Friday as a surprisingly strong
employment report fuelled stocks to rally and Wall Street finally recouped all of its 'Brexit' related losses. The
payroll count for May was revised down to only an 11,000 increase from the previously reported 38,000. However,
latest jobs data showed that the U.S. economy created 287,000 jobs in June, far exceeding estimates of 175,000
jobs. The nonfarm-payrolls report boosted investor confidence. However, a tepid wage growth suggested the
Federal Reserve (“Fed”) will likely to keep interest rates on hold for time being. The average hourly earnings rose
0.1% in June, disappointing expectations of a 0.2% gain. A soft wage growth could possibly imply a lack of
inflationary pressure. As such, investors remained sceptical about the possibility of a rate hike this year. The CME
Group’s FedWatch tool is currently pricing in just a 24% of a rate hike by December. Odds for a June 2017 rate
increase stood at around 35%.
China’s services sector accelerates in June signalling the mainland’s rebalancing away from the manufacturing
sector was continuing apace The Caixin/Markit services PMI surged to 52.7 from 51.2 in May, marking the fastest
pace in 11 months. However, China reported consumer inflation in June moderated to 1.9% year-on-year mainly
because of weaker gains in food prices and it was the slowest pace since January. With a sustained period of
moderate inflation, the data seems to suggest that China will likely to keep interest rates low and more
government stimulus to support China’s economy. Further measures are also needed because Brexit vote has led
to U.S. dollar soaring and a fall in Chinese yuan. In search of safe haven from the decline in the yuan, Chinese
investors are increasing bets on Hong Kong stocks through Shanghai-Hong Kong Stock Connect Scheme.
Provided Hong Kong dollar shares hold their value, Hong Kong shares provide a hedge against a falling yuan
because the Hong Kong currency is pegged to the U.S. dollar. Money also flowed into Hong Kong via mutual
funds under the China’s Qualified Domestic Institutional Investor (QDII) scheme, another of the main channels for
outbound investment. China is likely to reach its regulated limits if the amount of money entering Hong Kong
continues at the current pace. This raised expectations that China might increase quotas for outbound investment
and could launch the long-expected Shenzhen-Hong Kong Stock Connect Scheme this year.
Brexit continue to weigh on U.K. with the pound sliding down 2.36% vs the USD, hitting a 31 year low. At one
point, pound managed to hit the intraday low of $1.2796 GBP/USD. M&G Investments, the fund management arm
of Prudential, suspended withdrawal on its UK property portfolio following a strong demand to withdraw funds.
The halt marks the third U.K. asset manager to do so after the Brexit vote sparked a flurry of redemptions. In
Europe, A majority of economist predict Bank of England will cut interest rates for the first time since 2009 to
stabilise economy.
The International Monetary Fund (“IMF”) has also cut Eurozone’s growth forecast on the back of Brexit vote. The
IMF predicts the gross domestic product of 19-country bloc to grow at 1.6% in 2016, slowing from its previous
prediction of 1.7% before the Brexit vote. In 2017, IMF predicted the growth to slow further to 1.4%, down from
1.7% forecasted previously. Adding to the pressure, Italy’s banking system is the latest trouble spot for the
Eurozone. Italian banks are struggling with massive bad debt of non-performing loans (NPLs) worth €360bn
(£307bn), equivalent to about a fifth of the country's annual economic activity. The share prices of Italian banks
have suffered from steep declines. The stock price of Banca Monte dei Paschi di Siena, the oldest bank in the
world and one of Italy’s most troubled lenders, is down 80 per cent in the last 12 months. The Italian government
is looking to shore up their banks but faced questions from European Central Banks over the methods to bail out
Italian banks. Under European Union rules, it was agreed a bank’s creditors (its bondholders in particular) would
have to face losses before taxpayer steps in.
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any recipient for any other purpose. It should not be construed as an offer or a solicitation of an offer to purchase or subscribe. The
information contained herein has been derived from sources believed to be reliable and is current as at the date of publication. No
representation or warranty is made nor is there acceptance of any responsibility or liability made as to the accuracy, completeness or
correctness of the information contained herein. Expressions of opinion contained herein are subject to change without notice. Persons
wishing to rely upon this information should consult directly with the source of information or obtain professional advice.
Japan’s Topix index declined 4.1% for the week, amid a strengthening yen that could hurt exporters’ profits and a
fall in core machinery orders. Japan’s core machinery order which is an indicator for future capital spending fell
1.4 percent in May from a month earlier, missing economists’ estimates for a 3.2 percent gain. However, with
Shinzo Abe winning convincingly in Japan elections, investors will now focus on introduction of further fiscal
stimulus to combat deflation and stoke economic growth.
Disclaimer: This document is provided to you for information purposes only and it may not be reproduced, distributed or published by
any recipient for any other purpose. It should not be construed as an offer or a solicitation of an offer to purchase or subscribe. The
information contained herein has been derived from sources believed to be reliable and is current as at the date of publication. No
representation or warranty is made nor is there acceptance of any responsibility or liability made as to the accuracy, completeness or
correctness of the information contained herein. Expressions of opinion contained herein are subject to change without notice. Persons
wishing to rely upon this information should consult directly with the source of information or obtain professional advice.