Technically, the Straits Times Index remains in its uptrend. It rose by 14 points week-on-week during the week of Dec 9-13, ending at 3,810, as the index re-tests a resistance area at current levels. On Dec 5, the STI made a new six year high of 3,822. The previous occasion the STI was this high was in 2018, when it tested 3,876.
Although short-term indicators show a series of negative divergences with the STI, this is not a sell signal as the trend of these short-term indicators is sideways and they have not fallen below important supports yet. Annual momentum is intact, ADX is up and the DIs remain positively placed. Quarterly momentum has eased, but it has not broken below any support. Against this background, the STI may attempt to break above its current resistance area if volume expands.
The STI is among Asia’s best performing markets, but remains behind the US markets.
Still waiting for China bazooka
On Dec 11 and 12, China’s leadership held its annual Central Economic Work Conference (CEWC) to lay out policy priorities for the year ahead. For the first time in at least a decade, “lifting consumption” was the top priority in the nine-point plan.
The meeting pledged to pursue “more proactive” fiscal policy next year. Significantly, the country will run a higher fiscal deficit as a share of GDP. This will be a historic break from previous norms, which put the official budget deficit target at 3% of GDP every year. The CEWC also promised to hike government spending, with a focus on buttressing key areas of concern.
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The action plan to stimulate consumption included consumer programs (likely an expansion of trade-in subsidies to include mobile devices). It also mentioned higher public spending on social safety nets. Specifically, the state will direct help towards lower-income families, pensions and subsidized healthcare. The state also encouraged development of novel consumer services, such as the “Silver Economy” and “Snow Economy”.
"The CEWC laid out the contours of the People’s Bank of China’s (PBOC’s) pivot from “prudent” to “appropriately loose” monetary policy. It said the PBOC will “cut required reserve ratios (RRRs) and policy rates at the right time”. We expect the RRR to be lowered by 100 bps by end-2025," note Maybank economists Erica Tay and Chua Hak Bin, in an update dated Dec 13.
The central bank is more likely to rely on RRR cuts than on policy rate easing next year, market observers say. “First, policy rate cuts tend to be asymmetric, lowering banks’ lending rates by a greater degree than deposit rates. With banks’ net interest margins already squeezed, the room for PBOC rate cuts has become increasingly limited,” the Maybank update says.
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“Second, pared market expectations of the Federal Reserve easing aggressively will stay the PBOC’s hand in cutting onshore rates, given concerns about interest rate differentials and capital outflows. We expect the 1-year Loan Prime Rate to be reduced by 25 bps to 2.85% (or 50 bps at most) in 2025,” the Maybank duo add.
A DWS APAC CIO View report dated Dec 13 says: “We believe that enhancing social security is key to reducing saving rates and unlocking domestic consumption potential.”
According to DWS, the downside risk of China equities may be limited due to the government’s commitment to supporting the economy, but the upside potential also looks uncertain. “Unless we see effective fiscal policies to stabilise the economy, the Chinese equity market could remain range‐bound,” DWS says.
Yield curve remains normalised
In the US, the danger of the yield curve inverting again has passed. The 10-year US treasury yield has once again moved higher, and as at Dec 13, stands at 4.32%, with the 2-year yield at 4.19%.
