SGX Market Strategist, Equity & Fixed Income, Singapore Exchange Ltd (SGX)

Geoff Howie

SGX Market Strategist, Equity & Fixed Income

Asia’s leading multi-asset exchange

Singapore Exchange Ltd (SGX)

Singapore Exchange is Asia’s leading and trusted market infrastructure, facilitating the exchange of capital and ideas to create value for people, businesses and economies. As a multi-asset exchange operating equity, fixed income and derivatives markets to the highest regulatory standards, SGX is a vertically integrated business that provides listing, trading, clearing, settlement, depository and data services.

With about 40% of listed companies and over 80% of listed bonds originating outside of Singapore as well as established linkages across the region and in Europe, SGX is Asia’s most international and connected exchange. Offering a full suite of derivatives products across Asian equity indices, commodities and currencies, SGX is the world’s most liquid international market for the benchmark equity indices of China, India, Japan and ASEAN.

As Asia’s pioneering central counterparty, SGX is globally recognised for its risk management and clearing capabilities, and was one of the first globally to adopt the Principles for Financial Market Infrastructure.

Headquartered in AAA-rated Singapore, SGX has over 800 employees including offices in Beijing, Chicago, Hong Kong, London, New York, Mumbai, San Francisco, Shanghai and Tokyo.

Equity Bottom-Up



By Macro Hive

 

SGX Asia Currencies Insights


Moderate CNH appreciation continues despite bout of dollar strength.
	Rupee remains rangebound for now as RBI pushes money market rates higher.  
	Equity outflows leave won underperforming.   
	TSMC’s dominance in global semiconductors will support TWD strength.     
	Success in vaccine rollout will drive risk sentiment and with it SGD performance.

 

SGX Commodities Insights (Iron Ore)


Steel mill margins appear to have peaked.
	Wet weather continues to impact supply.
	Modest further ore price consolidation likely.
	The Baltic Dry Index (BDI) recovery is now likely complete.

 

China Growth Tracker


Iron ore prices have recently lost some momentum, but the annual growth rate remains elevated. Copper and Chinese bond yields are showing higher growth rates.
	While oil prices and the BDI have relinquished some gains recently, their annual growth rates have picked up. Together the China-related markets continue to signal robust Chinese growth. Recent data on industrial production and investment confirm this.
	In our previous report, we suggested copper could outperform iron ore prices, which indeed materialised (copper has outperformed by almost 4%). This time, we focus on how iron ore prices appear too high relative to oil prices, which we think selling iron ore (SCOJ1) and buying oil (COJ1) could benefit from.

 

 

SGX Asia Currencies Insights

Spotlight View #1: Yuan Starts the Year as Asia’s Best Performer

Joe Biden’s inauguration last week as the 46th US president marks a new era for China. It does not guarantee a frictionless US-China relationship ahead, but it offers a chance to reset from the fractious Trump presidency. President Xi Jinping used his virtual Davos speech earlier this week to signal China’s intention to continue its own domestic agenda. And while he avoided mentioning Biden directly, he called for a return to multilateralism and reduced barriers to trade and investment. Given Biden’s busy domestic policy agenda, we expect no change to China policies for now, leaving Beijing to focus on its dual circulation policy set out in its latest five-year plan.    

The change of US president has come with some moderate dollar strength and a subdued performance for many EM currencies. The Chinese yuan remains Asia’s best performing currency, now 0.9% stronger than at the start of the year. But at around 6.47 this week, USD/CNH is modestly weaker than the lows of 6.43 in early January. And despite the recent consolidation, the yuan remains around its strongest level since mid-2018.

New COVID Spike Unlikely to Dent the Ongoing Recovery

A renewed COVID outbreak earlier this month triggered China’s most stringent restrictions since early last year, including some localised lockdowns. New daily cases have exceeded 200 this month, the highest since July, albeit a fraction of those at the peak outbreak in early 2020 (Chart 1). Next month’s Chinese New Year holiday increases the urgency of containing the outbreak – the holiday prompts large-scale domestic travel, causing significant risks for the virus to spread.       

But unlike a year ago, we expect the new restrictions to have little impact on the macro data. China’s factories remain open, exports are unaffected, and the restrictions are too small-scale to jeopardise the recovery in consumer spending. Recent data also confirm a still-robust recovery. Export outperformed yet again in December, up 18.1% YoY and up 3.6% for 2020. With low commodity prices and weakness in domestic demand, imports contracted 1.1% last year (+6.5% in December). This left a trade surplus of $535bn, the highest since 2015.

The trade surplus with the US also widened. At $317bn for 2020, it was higher than at the start of the Trump presidency, despite China’s commitments under the Phase 1 trade deal. Next month’s annual review of the deal will be the Biden administration’s first trade policy test. And with China’s imports of US goods falling well short of the agreed amounts, the PBoC will likely want to maintain a strong currency versus the USD to contain US concerns over Chinese competitiveness. As appreciation of the CFETS basket (5.2% since Jan. 2020) is more contained than versus the USD (7.3% since Jan. 2020), the yuan remains competitive on a trade-weighted basis.        

Q4 GDP at 2.6% QoQ pushed the YoY rate to 6.5% (versus 6.2% in Q3) and left annual growth last year at 2.3%. China is one of only a handful of economies globally to avoid an annual contraction in output last year. And with December IP at a better-than-expected 7.3%, the strong momentum carried through to the end of the year. More generally, China’s H2 GDP expansion leaves a very significant sequential carryover of 5.9pp for this year (Chart 2). In other words, even with zero QoQ growth through this year (which is not our expectation), China would still record 5.9% GDP growth in 2021.   

Policy Tightening in Focus, but Still Some Time Away

With China’s recovery expected to continue, and importantly to broaden out, the removal of policy stimulus will increasingly garner focus. This week’s unexpected liquidity draining operations and a PBoC official’s warning of asset price bubbles pushed short-term rates sharply higher and raised some concern over faster-than-expected policy normalization. Yet with CPI at just 0.2% YoY and PPI still in deflationary territory, albeit gradually easing, any rapid tightening in monetary policy is unlikely. Nevertheless, yield pickup will remain attractive for the yuan, and we continue to expect strong portfolio inflows.  

China’s secure recovery, strong external position and reduced tensions with the US leave a constructive outlook for CNH. Fundamentals remain solid, and, with a resumption of risk appetite, we continue to expect a move to the pre-trade war lows of 6.25 on USD/CNH in the coming months.  



      
    
    202101_1E


Spotlight View #2: INR Rangebound Despite Higher Short-Term Rates  

INR has started the year quietly. The currency has traded in a tight range through January, with USD/INR stuck around 73 and SGX INR/USD futures around 137. India’s stock market has risen in line with others in EM, but a drop back in foreign inflows has eased pressure for rupee appreciation. Optimism over the country’s vaccine rollout remains high, with 1mn doses administered in the first six days and over 2mn since the programme began on 16 January. A successful vaccination effort will support the recovery and allow India to export vaccines globally given the vast local production. But considering the population size, the process will most likely face setbacks along the way.

Updated IMF projections for India see GDP growth at 11.5% this year. This marks a 2.7pp improvement versus the last forecast round, which the Fund attributes to the carryover from last year’s stronger-than-expected performance. Q4 GDP is not due for release for another month, but the strong momentum looks to have continued. Following the upside surprise on the calendar Q3 GDP reading India has seen a continued rebound in IP and exports, and the composite PMI remains firmly expansionary at 54.9.  This broadening in the recovery should shift any calls for a weak rupee to support exports.   

RBI Lifts Short-term Rates Back Within Corridor

As India’s recovery continues, the RBI is slowly adjusting the parameters of its liquidity operations. The bank surprised by setting the cutoff yield for its 18 January liquidity draining operation at 3.55%, versus 3.35% on the reverse repo (and 4% on the policy, or repo, rate). This has helped push three-month rates back above the lower bound of the RBI corridor (Chart 3). And with three-month rates now up around 35bps YTD and yields on 10-year bonds just 5bps higher, the yield curve has flattened. The overall amount of liquidity provision has remaining broadly unchanged, with surplus liquidity remaining stuck around INR6tn. But with the liquidity normalization now underway, this should support the rupee.    

The 1 February budget announcement will play a key role in the liquidity outlook. Market borrowing increased 55% in FY2021, with the increased supply a key reason behind the earlier steepening in India’s yield curve. Improved revenue collection should allow a narrower deficit this year, even with some increased spending. A reduced borrowing need should therefore take pressures off yields and allow for a reduced liquidity surplus. The recent improvement in inflation also frees up space for rate cuts and lowering borrowing costs.     

Das’s Comments on Reserve Justify Past Actions, Not Future Policy Shift

Reduced fiscal concerns, higher money market rates and ongoing risk appetite should all be rupee positive. Even with RBI rate cuts, the current 488bps in yield pickup over USTs leaves significant space to remain attractive. One ongoing uncertainty is RBI FX policy. Governor Das recently discussed the need for EMs to build reserves buffers, regardless of any cost from being added to the US Treasury’s monitoring list for currency manipulators (India was added in the December report). But with $112bn in reserve accumulation last year, Das may be justifying past action rather than signalling a future policy shift (Chart 4).

With vaccine rollout, yield support, strong equity market performance, a much-improved BoP and accelerating macro momentum, we remain positive on the rupee. USD/INR broke below 73 this week, and we expect a continued move lower (and SGX INR/USD futures to hit 138).    



      
    
    202101_2E


Spotlight View #3: Won Struggles on Equity Outflows   

The Korean won continues to underperform elsewhere in Asia. The currency has lost another 1% over the past fortnight to leave it 1.6% weaker YTD. A pull back in risk sentiment – due to worries over vaccine rollout and uncertainties over the US stimulus package’s size – has seen EMFX trade slightly weaker over recent days. The most risk-sensitive currencies, such as BRL and ZAR, fared worst. USD/KRW is now back above 1100, and SGX KRW/USD futures are down close to 0.9. But similarly to elsewhere in the region, the won remains around its strongest level since 2018, leaving recent weakness modest in comparison with the 2020 gains. And given that ongoing KRW weakness coincides with a bout of moderate dollar strength, we retain our view that this is more a period of consolidation in a longer-term appreciation trend.

Outflows from Korea’s stock market are the main driver of recent won weakness. Compared with very strong inflows through Q4 (and in particular November), foreigners have been net sellers of Korean stocks. Versus the high of $6.5bn in inflows through mid-December (one-month rolling basis), this has now turned negative (Chart 5). But with locals remaining bullish, this has not dented KOSPI performance: the index reached a new all-time high earlier this week. The retail-dominated Kosaq also passed 1,000 for the first time since September 2000.

Economic Momentum Continues to Improve

Latest data out of Korea have also been encouraging. Q4 GDP data came in at a better-than-expected 1.1% QoQ (versus consensus at 0.9%), taking the YoY rate to -1.4%. Renewed COVID restrictions at the end of last year left a clear impact, with private consumption contracting 1.3% – the first quarterly decline in consumption since Q1. A rebound in construction investment helped prop up domestic demand and overall left a more balanced growth composition than in Q3. Domestic demand continued to subtract from headline growth, but less so than in Q3 (Chart 6). For 2020, the Korean economy contracted by -1.0%, a very modest decline compared with Europe and the US but a worse performance than China or Taiwan.

Expectations for continued strength in electronics bodes well for Korea’s recovery. Samsung expects strong Q4 profits, and the company’s share price hit a new all-time high earlier this month. That chip prices are up sharply since December should also boost Samsung and Korea’s C/A surplus, and by extension the Korean won.     

Policy Tightening Unlikely Anytime Soon

Korea’s ongoing domestic recovery and still-buoyant exports (January 20-day exports were reported at 10.6% YoY) are unlikely to translate into policy tightening anytime soon. The mid-January BoK policy statement noted that monetary policy was set to remain accommodative given subdued inflation and a ‘modest’ economic recovery. The bank again highlighted risks to financial stability from high household loan growth and rising house prices. We see macroprudential measures rather than higher borrowing costs as the most likely outcome, particularly because any rapid rise in rates could derail the domestic recovery.

A gradual improvement in domestic momentum, strong demand for tech exports and cyclical support from a vaccine-driven global recovery should all support KRW. But until equity inflows pick back up, a meaningful move lower in USD/KRW seems unlikely.  



      
    
    202101_3E


Rest of Asia FX

TWD – Semiconductor Dominance Will Secure Further FX Gains  

As Taiwan’s economy continues to power ahead, the country’s central bank continues to battle currency appreciation and, most recently, possible FX speculation by corporates. Since August the CBC had been investigating transactions done on behalf of grain firms, which it deemed were impacting FX stability. And earlier this month, the banks involved were sanctioned for their use of NDFs. But investigations into specific cases and pleas from the CBC cannot change the fundamental flow imbalance. Taiwan’s double-digit C/A surplus is set to continue, and avenues for capital outflows are increasingly sparse.  

TSMC’s dominance in the global semiconductor market also ensures Taiwanese export growth will remain robust. Recent shortages in auto chips reportedly prompted Germany’s economy minister to approach Taiwan’s authorities directly. And the company itself recently announced a huge $28bn investment spend for this year (half of projected annual revenues), signalling the tech boom has a long way to run yet.

Booming electronics exports and ongoing foreign inflows to the country’s equity market (despite TSMC’s stock price being up more than 100% YoY) will remain the main drivers of TWD strength in coming months. CBC intervention will continue to slow the pace of appreciation but not the trend, and we retain our view for USD/TWD to move lower. At around 28.2, USD/TWD remains its strongest level in over 20 years, with a break below 28 the level to watch. SGX TWD/USD futures should head towards the December high of 0.36 and TWD forwards back to the recent lows around 27.8.

SGD – Weak Price Pressure to Keep MAS Policy Accommodative 

The recent pull back in risk sentiment has left the Singapore dollar trading slightly weaker over the past fortnight, and now down around 0.4% YTD. This is a better performance than for the Korean won, but worse than CNH, TWD and INR. With USD/SGD close to 1.33, S$NEER continues to trade around the midpoint of the band.

Weaker core inflation through year end points to MAS maintaining its accommodative stance at the next policy review. December core deflation deepened to -0.3% YoY, versus -0.1% in November, driven by weakness in services prices. By contrast, headline inflation improved, with December reported at 0% YoY – up 0.1pp from a month earlier on higher transport prices. Singapore’s MTI/MAS projections see core inflation turning positive later this year as higher oil prices feed through and the impact of last year’s subsidies drop from the base.

Domestic inflationary pressures are of course linked to the pace of recovery. Recent data have been encouraging: a better-than-expected IP reading, strong non-oil domestic exports and improving retail sales. Further improvement is contingent on containing any further COVID cases. Limited vaccine rollout has just begun in Singapore, and full rollout is scheduled from mid-February. Singapore has recorded around 30 new cases each day in recent weeks, up from low single digits through late 2020. New restrictions are reportedly being considered ahead of next month’s Lunar New Year holiday.

Success in vaccine rollout globally will be a key driver of risk sentiment and SGD performance. We continue to expect vaccines will ensure a robust global recovery, a return to stronger risk sentiment and a weaker dollar. USD/SGD should therefore move lower.

 

SGX Commodities Insights (Iron Ore)

Price Consolidation Continues

Iron ore prices appear to have settled into a new, albeit high, range. Final steel demand remains strong, but mill margins have declined of late due partly to elevated coal prices. There are also initial signs of tightening credit conditions in China, which are likely to dampen demand somewhat over the coming months.

On the supply side, seasonal weather patterns are having only a slight limiting effect, but simmering trade disputes with Australia bear watching. Nervous mill operators might consider stockpiling in advance, and, perhaps sensing this, portside de-stocking appears now to have ceased.

Given the overall balance of factors, some further price consolidation remains likely. And a return to the $100-125 level that prevailed prior to the sharp recovery in Q4 last year cannot be ruled out if the overall Chinese growth picture slows. Near term, the $160 level provides support.



      
    
    202101_4E

For reasons related to the above, the recovery in freight rates is now probably complete. The BDI has effectively closed the gap from Q4 last year, as ore and coal prices led the recovery. Now at over 1800, some moderate consolidation is likely assuming that mill margins have peaked, ore and coal stockpiles are mostly adequate, and the overall Chinese growth picture stabilises following the strong H2 2020 recovery.


      
    
    202101_5E


China Growth Tracker

Macro Hive research for SGX has found that iron ore, along with several other commodity and bond markets, tracks Chinese growth closely. Therefore, the direction of these markets can indicate future reported Chinese growth. And divergences across them can be exploited. Here are their latest developments:


Iron ore prices have recently lost some momentum, but the annual growth rate remains elevated. Copper and Chinese bond yields are showing higher growth rates (Charts 1 and 3).  
	While oil prices and the BDI have relinquished some gains recently, their annual growth rates have picked up (Charts 2 and 4). Together the China-related markets continue to signal robust Chinese growth. Recent data on industrial production and investment confirm this.  

In our previous report, we suggested copper could outperform iron ore prices, which indeed materialised (copper has outperformed by almost 4%). This time, we focus on how iron ore prices appear too high relative to oil prices, which we think selling iron ore (SCOJ1) and buying oil (COJ1) could benefit from.  



      
    
    202101_6E

      
    
    202101_7E

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs. This content has been produced by Macro Hive Limited. While SGX has participated as a sponsor, SGX  has not had any input into the content and neither SGX nor its affiliates shall be responsible or liable for the same.)


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Taiwan Semiconductor Manufacturing Company Ltd. manufactures integrated circuits based on its proprietary designs.  The Company offers a comprehensive set of integrated circuit fabrication processes to manufacture CMOS logic, mixed-mode, volatile and non-volatile memory and BiCMOS chips.  Taiwan Semiconductor is an affiliate of Philips Electronics N.V.

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Asia Currencies and Commodities Insights

By Macro Hive SGX Asia Currencies Insights Moderate CNH appreciation continues despite bout of dollar strength. Rupee remains rangebound...

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