[NEW YORK] Federal Reserve chief Janet Yellen signalled that rational exuberance is just fine.

That, at least, is how some of America' s largest money managers interpreted her comments last Wednesday suggesting interest rates will remain low through 2016.

It reinforced their views that easy money means the US stock market rally has further to run despite notching a series of record highs already this year. That could easily put the S& P 500 benchmark on track to surpass 2000 for the first time, and to do so well before the end of the year.

Such a gain for 2014, after a 30 per cent rise in 2013, would surprise those who worried that stocks might be getting overvalued and were due for a sizable pullback.

 

It' s a high-five kind of week for investors.

The S& P 500 and the Dow Jones Industrial Average both closed at record highs Friday. The Dow made it to 16,947.08 and the S& P 500 hit 1,962.87.

All three of the major indexes closed the week with 1% or greater gains.

Oil and gold: Worry about the situations in Iraq and Russia have investors -- and the world -- keeping an eye on oil and gold prices. Crude oil was up slightly Friday, but fell short of the $107 level that set off alarm bells earlier in the week.

Gold had an incredible jump Thursday and finished well over $1,300. It ended the week at $1,315 an ounce.

 

THE Straits Times Index' s inability to mount a decisive attack on the 3,280 level stretched into a second consecutive day yesterday, when it finished a net 7.78 points lower at 3,269.02 after reaching an earlier intra-day high of 3,282.

Turnover picked up marginally to reach 2.1 billion units worth $1.1 billion, compared with $873 million on Wednesday. Excluding warrants, there were 221 rises against 203 falls.

Wall Street' s overnight rise after the US Federal Reserve meeting on Wednesday reassured markets that interest rates would remain depressed for some time, but did not have much of an impact here.

Instead, geopolitical concerns like the deteriorating situation in Iraq and economic-slowdown worries in China were said to be keeping the big money away from this part of the world.

 

THE Straits Times Index dallied briefly at 3,280 yesterday, before finishing at 3,276.80 for a net gain of 2.36 points. A firm opening in Europe in the late afternoon mitigated the earlier effects of a weak Hong Kong market, though a poor turnover of 1.9 billion units worth $873 million suggested that at least some players were waiting to see what the latest US Federal Open Market Committee (FOMC) meeting would yield after Wall Street' s Wednesday session.

The advance-decline score, excluding warrants, was 242-155 of the dollar value traded, $369 million or 42 per cent was generated by trades in the STI components.

 

' It' s a reflection of the increase in liquidity, low interest rates, and it comes down to people' s rate expectations.'
- JP Morgan' s Simon Page

It was obvious that the improving US economy would lead to capital flight from emerging markets and from bonds.

It was obvious that this was to be the year that companies would issue stock instead of bonds.

It was obviously wrong.

Debt issuance beat initial forecasts to turn in a solid second quarter and first half of 2014, as a benign rates environment and strong local currencies kept the bond party in Singapore and the region going longer than expected.

" At the beginning of the year, the feat about the sudden interest rate hike was more rampant," DBS head of fixed income Clifford Lee said.

" They started putting on trades to favour shorter tenures, and the entire market was proven wrong, so now people have to reverse the trade."

Singapore-domiciled companies raised US$6.7 billion from debt capital markets during the April-to-June period, almost double the US$3.5 billion raised a year earlier, according to preliminary data from Thomson Reuters. Year-to-date, debt issuance from Singapore issuers rose 8.3 per cent year-on-year to US$12.1 billion.

In terms of all Singapore-dollar issuance, second-quarter proceeds rose 18.6 per cent year-on-year to S$4.7 billion. That brought the first-half total to S$10.9 billion, a 21.4 per cent increase. Singapore outpaced the region in the first half, with South-east Asian aggregate volume up 16.1 per cent at US$32 billion, said Thomson Reuters. " It' s very much a record second quarter if you look at it on a US-dollar basis (in Asia)," ANZ head of Asia debt capital markets Jimmy Choi said.

Shows of strength were all around.

Hainan Airlines sold 1.7 billion yuan (S$341.5 million) of three-year offshore renminbi (RMB) bonds at a 6.25 per cent coupon last month to become the first corporate " Lion City" bond to be cleared and deposited in Singapore. Mr Lee said that investors in the offshore RMB space are looking more closely at credit now that the currency appreciation theme is no longer as assured.

" You don' t have that speculation, so that market is on more fundamentally solid ground," he said.

Perpetuals also made a comeback, with Trafigura Beheer BV selling S$200 million of 7.5 per cent step-up perpetual securities. Elsewhere in the region, Hong Kong-listed Far East Horizon sold US$200 million of perpetuals, while Thailand' s PTT Exploration and Production sold US$1 billion of perpetuals a week ago, a feat considering the country' s recent coup.

" It just goes to show how much liquidity there is in the market right now, with investors looking to move down the capital structure to pick up slightly more yield," said Simon Page, head of debt capital markets in South-east Asia at JP Morgan. " It' s a reflection of the increase in liquidity, low interest rates, and it comes down to people' s rate expectations."

That interest rates did not go up as much as expected emboldened some companies to do some opportunistic fundraising.

" Companies are taking as much long duration as they can," Mr Choi said.

The banks also helped to boost issuance. " What' s really driven the three bank-capital trades has been the strong market and the low interest rates," Mr Page said. " Both OCBC and UOB have old-style Tier 2 bonds maturing later this year and so they have been opportunistic in taking advantage of strong demand and low spreads to issue Basel III-compliant Tier 2' s."

The bankers said that they were cautiously optimistic that the momentum of the first half of 2014 will continue into the second.

" Our view is that over time, as you probably know, rates will have to trend upwards," Mr Choi said. " Rates will be rangebound, spreads will come in minimally tighter because monetary policy is very accommodative . . . The biggest headline risk is geopolitical risk."

 

After inching up 0.9 per cent in April, non-oil domestic exports (NODX) unexpectedly slipped 6.6 per cent from a year ago in the following month, returning NODX to negative terrain where it has languished in recent months.

International Enterprise Singapore, the government' s trade promotion agency that released the latest trade numbers yesterday, said NODX was dragged down by both smaller electronics and non-electronics domestic shipments.

Domestic exports to the European Union, the Republic' s biggest market, fell even more last month - by 22.6 per cent, more than double the 10.9 per cent drop in April. Shipments to the United States tumbled 8.8 per cent after an 11.7 per cent jump the previous month.

Meanwhile, the regional trade that has been propping up the local economy has also started to show signs of weakness. Non-oil re-exports, which go mostly to markets in the region, fell 4.7 per cent in May, reversing 13 straight months of growth.

UOB Bank economists Francis Tan and Jimmy Koh said in a brief note that this was due partly to a high base in the same month last year. But Citigroup' s Kit Wei Zheng thinks the growth momentum in the related wholesale trade was also waning.

Among its top 10 markets, domestic exports in May dropped in South Korea, Japan, Taiwan, Hong Kong and Thailand. China, Malaysia and Indonesia were the only exceptions.

Probably because of Thailand' s political crisis, Singapore' s NODX shipments to the country plunged 29 per cent last month - the steepest decline among the top 10 markets.

NODX' s disappointing showing in May came after private-sector economists, eyeing the recovery signs in the major economies, especially the US, had predicted an average 0.5 per cent on-year rise.

Month on month, NODX fell a seasonally adjusted 7.5 per cent in May, against a 9 per cent surge in April.

The economists had been looking at a 0.6 per cent increase. Disappointed, the UOB economists have downgraded their full-year NODX growth forecast from 7 per cent to 4 per cent - though this is still higher than the official forecast for one to 3 per cent growth.

Economists expect the electronics sector to be one of the biggest losers if Singapore fails to benefit from the projected recovery in the developed markets.

Electronic NODX extended their decline for a 22nd consecutive month with a 15.3 per cent decline in May, after an 8.7 per cent fall in April. While Barclay' s Wai Ho Leong reckons this was due more to the number of public holidays last month, especially in South Korea and Taiwan, he concedes that the drop was more pronounced than expected.

Philip McNicholas of BNP Paribas sees the electronics sector already in " secular decline" , while the UOB economists indicate that its share of total NODX has fallen from half a decade ago to 28.7 per cent in the first five months of 2014.

Citigroup' s Mr Kit is worried that electronics NODX' s under-performance against competitors in North Asia and South-east Asia may reflect Singapore' s loss of competitive edge in exports.

The situation has been compounded by a drop in the non-electronics NODX, which dipped 2.4 per cent in May, against a 5.5 per cent jump in April.

All this does not augur well for the economy in coming months.

" At best, the latest data suggests trade-related sectors have yet to contribute meaningfully to sequential GDP growth in the second quarter - though we look to May' s industrial production figures next week for confirmation," Mr Kit said.

Added Chua Hak Bin of Bank of America Merrill Lynch: " Slowing non-oil exports and re-exports in recent months amid further tightening of foreign worker policy will likely mean both weaker manufacturing and services growth in the second quarter."

 

OFTEN when stocks drift sideways for a prolonged period, this is a precursor to a breakout on the upside - provided there is evidence of large-scale accumulation ahead of a significant positive development. But this was not the case for the local market which, although it has been meandering sideways for many days, yesterday did not break out on the upside but instead slipped 15.82 points to 3,274.44.

Brokers, long resigned to this being a difficult year for them, were neither flattering nor overly encouraging in their assessment of existing conditions - hardly surprising, given that turnover has been poor for many sessions. Yesterday' s haul was a meagre 1.5 billion units worth $900.2 million and excluding warrants there were 152 rises versus 258 falls, these being statistics that would not be expected to set traders' pulses racing.

The slide in the index was attributed to expectations that the US Federal Reserve would probably lower its economic forecast for the US tomorrow and general caution in case the Fed says or does something unexpected.

Still, observers did point out that a tradeable opportunity will soon present itself for those willing to position themselves accordingly, referring of course to the upcoming end of the first half in a fortnight' s time when there is a strong chance that the STI will be propped up, or " window-dressed" to embellish flaccid 2014 performance.

 

Eurodollar futures, the world' s most actively traded short-term interest-rate contract, are underestimating the pace of tightening over the next two years, according to 55 per cent of 56 economists in the June 12-16 survey. Fed officials began a two-day meeting yesterday in Washington.

Investors in the contracts are assuming a slower pace of rate increases than the Fed itself, said Conrad DeQuadros, senior economist at RDQ Economics in New York. They may also be overlooking recent reports showing that the world' s largest economy is gaining strength after contracting in the first quarter, he said.

" I find it kind of odd that the market is not even priced for the median forecast

 

[SINGAPORE] DBS Bank has introduced a new benchmark for its mortgages - they are pegged to the bank' s fixed deposit rates, which it said is easier for customers to understand and is pretty transparent.

It' s the first time a bank is basing a mortgage on its fixed deposit rates.

Called the fixed deposit home rate or FHR, it takes the simple average of the bank' s 12-month and 24-month fixed deposit (FD) rates. The FHR is currently 0.40 per cent, based on DBS' 12-month FD rate of 0.25 per cent and 24-month FD rate of 0.55 per cent.

DBS continues to sell loans pegged to Sibor (Singapore interbank offered rate), which are also the most popular home-loan product at other banks, but said that customers are receptive to its new FHR package.

" The response has been encouraging," said Lui Su Kian, DBS Bank' s managing director and head of deposits and secured lending.

More than half of home buyers who opt for floating rates have taken up the FHR package since it was launched two to three months ago, she said. The others continue to go for Sibor. The rest of the borrowers go for the bank' s fixed rate packages, she said.

The FHR is an easy to understand and transparent pricing product, she added. " Most consumers lean towards Sibor rates - they want something simple and easy to understand."

Sibor rates, which are wholesale rates, can be accessed easily. They are administered by the Association of Banks in Singapore.

Ms Lui noted that Sibor formulas are quite technical.

Will the new product improve DBS' margins?

" The outcome we' d like to see is . . . that margins are stable and keep inching up," Ms Lui said.

Some bankers note that Sibor rates being wholesale prices are more volatile.

Over the past 24 months, there has been some volatility in the three-month Sibor which is the most popular tenor for home loans. It' s ranged from a low of 0.37083 per cent to a high of 0.40626 per cent it' s presently at 0.40376 per cent.

The last time DBS adjusted its 12-month and 24-month fixed deposit rates was in 2012, said Ms Lui.

" The popularity of interbank rates is a clear indicator that consumers desire transparency especially for large financial commitments such as mortgages," she said.

However, interbank rates such as Sibor have been known to fluctuate while fixed deposit rates are less volatile, she said. " Hence, FHR will appeal to home buyers who wish to take advantage of the low interest environment and yet have some protection from market movement."

Rival banks are sticking to Sibor-pegged home-loan packages, noting its transparency.

Said Dennis Khoo, United Overseas Bank' s Singapore head, personal financial services: " Home loans pegged to Sibor allow home buyers to capitalise on the current low interest rate, but the rate will vary along with interest rates movements."

" Likewise, home loans pegged to fixed deposit rates will be impacted by interest rates movements.

" Most customers prefer Sibor-pegged packages due to its open and transparent concept. It is determined by the banks in Singapore and published by the Association of Banks in Singapore," said Phang Lah Hwa, OCBC Bank head of consumer secured lending.

The stability of Sibor in recent years has also contributed to the popularity of these packages, said Ms Phang.

Our experience shows that most of the customers who take up our mortgages prefer an index-linked package as we offer the widest range of Sibor indices, said Peng Chun Hsien, Citibank Singapore head of secured finance and e-business.

We also allow customers to switch Sibor any time during their home-loan tenure with 30 days' notice or on the Sibor expiry date, said Mr Peng.

This flexibility adds to the attractiveness of our offering, he said.

" We believe that being pegged to fixed deposit rates does have some inflexibility for the customers who may have to stay within an agreed rate for a fixed period of time," said Mr Peng.

Though interest rates have been low for several years, they are forecast to start rising next year when US rates do so in response to improving economic conditions.

Borrowers should realise that when interest rates move, the movements can be steep, up or down.

In August 2011, Swap Offer Rates (SORs) briefly turned negative and borrowers thought they would benefit, that is, banks would pay them instead. SOR represents the synthetic cost of borrowing Singapore dollars, by borrowing US dollars for the same maturity and swapping these in return for Sing dollars.

But banks invoked a market disruption clause to reset the rates charged to customers and since then they have withdrawn SOR pegged home loan packages. SOR continues to be used by corporates.