Friday, 21 May, 2021 [email protected]

Global Economics & Markets Research Email: [email protected] URL: www.uob.com.sg/research

Markets Overview

HIGHLIGHTS AHEAD

. UK retail sales for Apr will be out in the afternoon, with consensus expecting a sharp rebound of 36.8%y/y (4.5%m/m), from 7.2% (5.4%m/m) in the previous month. Preliminary PMI reports in May for manufacturing and services sectors will be released for UK and across Europe including Germany and France. In addition, Eurozone consumer confidence report for May is expected to improve marginally to -7.5 from -8.1 in Apr.

. In the evening, US Apr existing home sales will be released (Bloomberg Est 0.7% m/m from -3.7% in Mar). The market will also be looking out for preliminary US PMI reports for May, with consensus forecasts expecting a flat reading for manufacturing at 60.2 (Apr: 60.5) and services at 64.5 (Apr: 64.7).

. The Asian docket today will include Thailand’s trade data, where market watchers are pencilling another month of export recovery at +10.2% y/y in April 2021. Elsewhere, Malaysia and Thailand are scheduled to release their foreign reserves data, while Hong Kong will publish its CPI Composite for April 2021.

. The Shangri-La Dialogue which is scheduled to be held on 4 and 5 June 2021 in Singapore has been cancelled due to COVID- 19 risks, according to the International Institute for Strategic Studies (IISS). The organization added that “Unfortunately, the global Covid-19 situation has recently deteriorated, in part because of the rise of infectious new COVID variants” and “there has been a rise in (Singapore) cases… and the prospect of further tightening cannot be ruled out”.

CENTRAL BANK OUTLOOK

. Friday (21 May): The Dallas Fed hosts a virtual technology conference and speakers include Fed presidents (), Robert Kaplan (Dallas) and Thomas Barkin (Richmond). Euro-area finance ministers and chiefs hold an informal meeting, and a larger group of EU finance ministers and central bank chiefs will meet Saturday (22 May).

. US chief turned up the heat on cryptocurrencies on Thursday, saying they pose risks to financial stability, and indicating that greater regulation may be warranted. Powell's message underlining cryptocurrency risks came from an unusual video message posted on Fed's website that also laid out a clearer timetable as the Fed explores the possibility of adopting a digital currency (CBDC) of its own. While highlighting the potential benefits of advances in financial technology, Powell said cryptocurrencies, stablecoins and other innovations "may also carry potential risks to those users and to the broader financial system." Transcript is available on the Fed website (PDF link).

. The Philippines central bank, Bangko Sentral ng Pilipinas (BSP), governor Benjamin Diokno commented that the country’s credit rating remains on solid footing despite the increased fiscal cost due to the COVID-19 response. Note that the Philippines saw a surge in debt-to-GDP ratio to 54.5% to date, up from a historical low of 39.6%, on the back of unplanned spending amid social distancing measures that limited business activities. Diokno added that the government is aiming to limit the rise of debt-to-GDP ratio to a cap of 60%, as revenue collection should pick up in the year ahead.

FX

. US dollar index (DXY) retreated right from the start of session and sank back below the 90 level, reversing the rebound on Wednesday as concerns faded over US Fed's FOMC meeting minutes released early Thursday morning. DXY dropped 0.4% to 89.808 late Thursday, the lowest level since early January 2021. The euro gained 0.4%, at $1.2228, and the USD/JPY pair fell 0.4% to 108.80. GBP gained 0.5% to 1.4190, reversing all the 0.5% loss on Wednesday to reach level last seen in April 2018. AUD/USD rose 0.5% to 0.7768 while NZD/USD advanced 0.4% to 0.7196.

. The Asian currency space saw little direction. Gainers which appreciated against the greenback included the THB (+0.25%), SGD (+0.24%), INR (+0.09%) and HKD (+0.03%), while losses were seen in IDR (-0.59%), KRW (-0.17%) and MYR (-0.15%). Accounting for the movements, the Asian Dollar Index rose 0.17%. The SGD NEER is currently trading at 0.515% above the mid-point. We expect the SGD NEER to trade between +0.2% and +0.8% around its midpoint, which implies a USD/SGD range of 1.3270 - 1.3350 today.

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EQUITIES

. US equity markets rose broadly on Thursday, ending three straight days of losses as technology shares staged a comeback. The Dow Jones Industrial Average rose 188.11 points, or 0.6%, to 34,084.15. The S&P 500 gained nearly 1.1% to 4,159.12. The Nasdaq Composite climbed 1.8% to 13,535. Despite Thursday’s comeback, the Dow is still down 0.9% so far for the week, after losing 1% last week. The S&P 500 has fallen 0.4% this week, while the Nasdaq managed to eke out a small gain for the week.

. A mixed day for Asian equities at yesterday's closing, with more declining bourses which included Nifty 50 (-0.8%), PSE (-0.8%), TWSE (-0.6%), Hang Seng Index (-0.5%) and SET (-0.5%). On the flip side, bourses that rose included HCM (+1.2%), JCI (+0.6%) and STI (+0.2%). Accounting for the movements, the MSCI Asia (Ex-Japan) was flat.

US TREASURIES/BONDS

. US Treasury yields fell on Thursday as investors digested comments from the US Federal Reserve, suggesting it might taper its asset purchases if the economy continues to recover rapidly. 10-year Treasury yields fell 4bps at 1.63% late Thursday after rising as much as 5.3bps in the previous session in response to the US Fed's FOMC minutes, while 30-year Treasury bond yield fell to 2.343%.

. While the latest FOMC meeting minutes provided hints that some Fed officials are thinking about beginning the conversation to taper Fed’s QE program, they remain in the minority and it is not signaling a Fed policy shift. Recent commentary from various FOMC voters remain aligned with FOMC Chief Powell to keep the current accommodative policy stance intact despite the increasingly positive US economic outlook. Our base case remains for the Fed to stay on hold for most of 2021, at least, and the taper discussion will only start in late 2021/early 2022 unless the Fed indicates a clear change in its policy stance. For more details on the US FOMC meeting minutes, please refer to our report released yesterday: US April 21 FOMC Minutes: A Hint Of Policy Change?

. Bond yields across Asia continued to stay mixed across the region. In the 2y- space, yields were higher in Malaysia (+0.4bps), South Korea (+0.2bps) and Thailand (+0.1bps), while lower in Indonesia (-4.0bps) and China (-1.4bps). In the 10y- space, yields rose in Malaysia (+1.9bps) and Thailand (+1.9bps), but lower in China (-2.5bps), Vietnam (-1.2bps) and India (-0.6bps).

COMMODITIES

. Crude oil prices fell more than 2% for a third day of losses on Thursday after diplomats said progress was made toward a deal to lift sanctions on Iran, which could boost crude supply. Extending the 3% losses on Wednesday, Brent crude fell $1.55, or 2.3%, to settle at $65.11/bbl while US West Texas Intermediate (WTI) crude oil fell $1.31, or 2%, to settle at $62.05/bbl. Iranian President Hassan Rouhani said in a televised speech that sanctions on oil, shipping, petrochemicals, insurance and the central bank had been dealt with in the talks, though European diplomats said success was not guaranteed and very difficult issues remained, while a senior Iranian official contradicted the president, CNBC reported Thursday.

. Gold hovered on Thursday close to a more than four-month peak reached in the previous session, fueled by a dip in the dollar and US yields as concerns faded over the Federal Reserve’s hints on possible tapering of economic support measures. Spot gold rose 0.6% to $1,880.22/oz on Thursday.

ECONOMIC NEWS & DATA

. US President Joe Biden will unveil the first detailed budget proposal of his term in office on 28 May, a day later than originally planned, the White House said on Wednesday. No reason was given for the delay. The budget blueprint will cover the fiscal year starting in October. It will be the first exhaustive list of the programs Biden wants to expand or cut – from foreign aid to immigration and policing.

. Corporations around the world should pay at least a 15% tax on their earnings, the US Treasury Department said Thursday as part of its push for a global minimum for businesses. The final rate could go even higher than that, according to a Treasury release that said the 15% minimum is a “floor and that discussions should continue to be ambitious and push that rate higher.” US-based companies currently pay a 21% rate, a level that was slashed during the Trump administration. Under a proposal from President Joe Biden, the tax rate would be lifted to 28%, part of a plan to raise levies on both companies and the highest earners. Previously, the top rate had been 35%.

. US Treasury Department announced on Thursday it will require any transfer of cryptocurrencies worth $10,000 or more to be reported to the Internal Revenue Service. Bitcoin last traded up 3% at around $40,000.

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. The US weekly initial jobless claims fell to a new post-pandemic low of 444,000, from a revised 478,000 in the prior week, which was revised upward by 5,000, suggesting that the steady recovery in the labor market remaining on track as the economy reopens. The outcome was better than expectation of 450,000. The number of continuing claims rose however, by over 100,000 to 3.751 million.

. The Philadelphia said on Thursday its business activity index fell to 31.5 in May from 50.2 in April, below expectation of 43.0. The employment index slowed to 19.3 from 30.8 the previous month while the price paid index rose to 76.8 from 69.1 in April.

. US Commerce Secretary Gina Raimondo was holding a pair of meetings Thursday with senior US auto industry leaders and other industry executives on a semiconductor shortage that has cut production, according to Reuters, citing sources briefed on the matter. The meetings - which are taking place at two separate times on Thursday to accommodate schedules – include the largest automakers in the US.

. The US government has been weighing changes for more than a month to sweeping travel restrictions that bar much of the world's population from coming to the US, but has reached no decisions, Reuters reported on Thursday citing government and industry officials. European Union countries agreed on Wednesday to ease COVID-19 travel restrictions on non-EU visitors from "safe" countries ahead of the summer tourist season, a move that could open the bloc's door to all Britons and to vaccinated Americans.

. German producer prices rose by 5.2%y/y in April, vs. expectation of 5.1% and 3.7% gain in March, for the biggest increase in nearly a decade, data showed on Thursday. The gain in prices suggests that supply bottlenecks are leading to increased inflation pressure in Europe's largest economy. The supply bottlenecks and overall economic recovery are expected to push up price pressures in Germany, with the government forecasting consumer price inflation to jump to 2.2% this year and to ease to 1.5% next year.

. Germany has made "excellent use" of its spending power with unprecedented support measures to fight the COVID-19 pandemic, the International Monetary Fund (IMF) said on Thursday, urging the country to stay vigilant as risks to growth remain. "While the pace of mass vaccinations is picking up, the recovery path remains uncertain and beset with risks," the IMF said in its latest country report on Germany.

. Pfizer and German partner BioNTech said Thursday they have reached a new agreement with the European Commission (EC) to supply up to 1.8 billion additional doses of their COVID-19 vaccine. The companies said the agreement is to provide 900 million doses initially with an option for the EC to request up an additional 900 million doses. The new agreement adds to the 600 million doses already committed to the European Union through 2021.

. Britain wants to use its independent post-Brexit tariff regime to help make domestic manufacturers more internationally competitive, launching a scheme for firms to apply for a suspension of tariffs on their imported manufacturing inputs. The scheme replaces an equivalent European Union (EU) programme which applied to Britain before it left the bloc and was temporarily rolled over when that exit was completed at the end of 2020. Under the EU scheme, suspensions had to be assessed by all member states. "Now we have left the EU we can use suspensions to give UK firms the maximum possible benefit," trade department minister Greg Hands said in a statement.

. Britain will create a new public railway operator called Great British Railways (GBR) in the biggest reform in a quarter of a century of a network plagued by expensive fares, packed commuter carriages and blunders over timetables. After the privatisation of British Rail from 1994-1997, the rail sector was fragmented into a bewildering array of different companies, fares and bosses, Reuters reported Thursday.

. Japan: 1Q 21 GDP Dipped 5.1%, Uncertain Outlook Ahead Hopes for a sustained recovery into early 2021 was dashed with the resurgence of COVID-19 infections in Japan. Its 1st preliminary estimate of 1Q 2021 GDP slipped back into decline as it recorded -5.1% q/q annualized rate (-1.3% q/q) after two quarters of expansion in 2H 2020.

. Australia: Jobless Rate Falls To 5.5% In April Australia's jobless rate fell to 5.5% in April, from a revised 5.7% in March (5.6% previously). This was the sixth consecutive fall in the unemployment rate, down from 6.9% in October 2020. The economy shed 30,600 jobs, led by a 64,400 drop in part time roles, while full time positions advanced by 33,800 (from a revised fall of 21,100 in March), as the government's JobKeeper wage subsidy ended.

. Despite seeing COVID-19 infections on the rise in Malaysia, the Malaysian Iron and Steel Federation (MISF) is reportedly calling the government to avoid a full lockdown to maintain business confidence. Nonetheless, the organisation views that there can be tighter curbs on public mobility and further implementation of work-from-home practices. Note that the MISF’s comments come after the Malaysia Semiconductor Industry Association (MSIA)’s announcement it is not in favour of a total lockdown despite the rise in COVID-19 infections.

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. Taiwan has imposed the toughest COVID-19 measures on 19 May 2021, following the spike of COVID-19 infections within its shores. The Central Epidemic Command Centre (CECC) extended the Level 3 Epidemic Alert from Taipei and New Taipei areas to the rest of the island. The Level 3 Alert for Taipei and New Taipei areas has been imposed for two weeks from 15-28 May. Masks are mandatory when outdoors while indoor and outdoor gatherings are limited to 5 and 10 people respectively. We are keeping our full-year 2021 growth forecast for Taiwan at 6.5% as we continue to monitor the domestic pandemic development. For more details, please read our report.

. The People’s Bank of China (PBOC) kept its Loan Prime Rate (LPR) unchanged with the 1Y LPR and the 5Y & above LPR set at 3.85% and 4.65% respectively today. The move is in line with PBOC’s decision to keep its 1Y medium-term lending facility (MLF) rate which the LPR is pegged to, unchanged at 2.95% on Monday (17 May) after injecting CNY100 billion of 1Y MLF funds to match the maturity. We maintain our forecast for both the 1Y LPR and the 5Y & above LPR to be kept unchanged at 3.85% and 4.65% respectively for the rest of the year. For more details, please read our report.

. China’s Human Resource Ministry commented that the labour market is expected to stay stable in 2021. The comments come from the Vice Minister of the Human Resources and Social Security department, Li Zhong, which further added that there remain uncertainties over China’s labour market as its economic recovery is not on solid footing, and targeted and effective policies to implement “jobs-first” policies are needed to further insulate the labour market from economic uncertainties.

. Hong Kong’s jobless rate fell for the second straight month in April, suggesting that the economy has continued to recover from the pangs of COVID-19. The jobless rate fell to 6.4% in the February-to-April period from 6.8% previously. Note that this is also the first time that the unemployment rate has fallen for two straight months since 2013.

. Indonesia’s exports and imports continue their recent positive performance as the global economy recover; with China, a crucial trading partner of Indonesia, playing a big role in supporting both supply and demand. Exports grew by 51.9% y/y while imports expanded 29.9% y/y in April 2021. Overall, this brought Indonesia to post another trade surplus of USD2.2bn in April, which widened from USD1.6bn in the previous month. For more details, please read our report.

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