Have equity markets discounted the US Federal Reserve’s pause and a China slowdown? Based on the chart pattern of DBS Group Holdings D05 that may well be the case for Singapore’s largest company by market capitalisation and potential earnings this year.
While the US economy continues to “run hot”, the latest inflation figures have enabled the US Fed to halt its punitive rate hike momentum, albeit temporarily.
JP Morgan Asset Management indicates that a soft landing is still likely despite elevated inflation. “Perhaps what is more notable is the updated dot plot. Of the 18 FOMC members, nine see rates ending the year between 5.5%–5.75% while three see rates above 5.75%. This now suggests the median FOMC member anticipates two more rate increases, a hawkish surprise compared to market expectations,” JP Morgan says.
“Having said that, we do not think further tightening is appropriate at this stage given growth is slowing and labour markets are already loosening. Moreover, we anticipate another soft inflation print for June driven by base effects, normalising rent inflation and used car prices. The Fed’s announcement made it clear that the committee still needs more compelling evidence that inflation is under control and could very well tighten at least once more this summer,” JP Morgan adds.
Similarly, abrdn says it is not expecting a US economic recession to occur this year. “[We] see current cuts priced in by markets for 4Q2023 to be washed out, as the markets move towards Fed guidance. With this backdrop, we expect the USD to remain resilient,” abrdn says.
The Fed has revised up its GDP expectations from +0.4% to +1%. “This was accompanied with more tolerance for inflation, revising up its core PCE expectations for 2023 from 3.6% to 3.9%, supporting the desire to slow down the speed of hikes,” abrdn adds.
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While murmurs that the US economy is able to sidestep a recession increase, China’s slowdown — still understated — has triggered a rate cut of 10 bps to 2.65% of its one-year policy loans, announced by the PBOC on June 14. During DBS’s Investor Day on May 22, group CEO Piyush Gupta indicated that DBS’s geographies balanced between developed and emerging markets as their growth and outlook tend to be countercyclical. This adds resilience to DBS’s earnings.
Bloomberg has reported that China’s economic recovery weakened in May as growth in industrial output and retail sales slowed. Industrial production rose 3.5% y-o-y in May, the National Bureau of Statistics said on June 15. This is in line with economists’ expectations. However retail sales of 12.7% growth y-o-y missed estimates.
Elsewhere, growth in fixed-asset investment (China’s major source of growth) slowed to 4% for the first five months of the year, weaker than forecasts of a 4.4% growth.
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“In Asia, domestic demand continues to recover while exports struggle. China is still the key despite weak investor confidence. Expectations are building that additional stimulus will come from Beijing and this could be the much needed catalyst for the Chinese market to overcome a disappointing first half,” JP Morgan says.
A minor short-term double-bottom chart pattern is visible in DBS’s price chart. Despite its declining moving averages, a positive divergence, developed in the past four weeks, is evident between indicator and price. The neckline-breakout is at $31.80, with a successful breakout indicating a short-term upside of $33.60, a level that coincides with its 200-day moving average.
On the other hand, a potential negative cross on the chart of the Lion-OCBC Securities China Leaders ETF (China Leaders) between the 50- and 100-day moving averages at $1.59 coupled with a weakening short-term RSI may stymie any attempts by China Leaders to move higher from current levels ($1.554).
