Weekly Market Highlights June (2)

Source: Amp Capital (here for full market update) & iCapital biz (subscription required)

United States
Economic data is good. ISM manufacturing conditions index rose, non-manufacturing conditions indexes remain solid, construction activity rose strongly, auto sales rose to their fastest pace since 2005, the trade deficit narrowed sharply and labour market indicators are strong; stronger than expected employment growth in May and a slight pick-up in wages growth. All of which indicates that the Fed is on track for a September rate hike albeit a very small hike. This will lead to more inflows of capital to the dollar. We are already witnessing the impact of such anticipation now: 1 US Dollar equals 3.75 Malaysian Ringgit.

Eurozone
Also saw some good economic data. Composite business conditions PMI revised up for May, retail sales up more than expected in April and unemployment falling more than expected. Inflation rose to 0.3% yoy in May and core inflation rose to 0.9% indicating that the risk of deflation is continuing to recede. Europe still has a long way to full recovery so it is good to see that ECB President Draghi reiterate the commitment to implement its quantitative easing plans in full (i.e. buying bonds out to September 2016). Negotiations on a “reform for funding” deal for Greece are continuing to drag on. Greece will likely continue to be a source of volatility through June. Whichever way it goes though, the threat of contagion to other peripheral countries is low compared to the 2010-12 period as they are in far better shape now and the ECB is buying bonds across Europe as part of its QE program.

Asia
The 140% surge in Chinese shares over 12 months. Another bubble that may be close to ending? The easy gains are probably over and a period of correction would be healthy. However, the Shanghai composite index on an historic PE of 21 times is still below its long term average and should benefit as further monetary easing comes through. China's official manufacturing PMI rose marginally in May, albeit it’s still at the low end of the range it’s been in for the last few years. More policy easing is likely required though to be confident.

In Japan there was a welcome rise in wages growth. However, at 0.9% year on year, it still has a fair way to go before the Bank of Japan (BoJ) can be confident it has broken the back of deflation.

In India, the Reserve Bank cut interest rates again with inflation being below target and growth in activity slowing in the March quarter. Further rate cuts are still likely.

In Malaysia contrary to what the government is saying a weaker myr is not helping our exports due to the decline of oil related exports and palm oil. As such the exports of major commodities continued to declined on a year-to-year basis for the 9th consecutive month. Imports would continue to stay low due to weaker domestic demand after the GST implementation. The broad trend in the Malaysian ringgit remains down as the Fed is likely to raise rates later this year unless BNM shores up support by selling foreign reserves. It is not likely to raise interest rates.