Weekly Market Report (26th– 30th May 2008)

Economic
US: GDP grew at 0.9% annual rate in 1Q08, slightly better than previously estimated of a 0.6% growth, as trade deficit narrowed, higher demand for local products, and a pickup in nonresidential building. On the interest rate policy, San Francisco Fed President Janet Yellen, Dallas Fed President Richard Fisher, and Minneapolis Fed President Gary Stern signaled that the Fed might increase interest rate to curb inflation. Fisher commented that even in the face of an anemic economic scenario, an increasing in interest rate could be employed if inflation risk continued to worsen. He expected a change of course in monetary policy to occur soon. Yellen said that the Fed would not repeat the same mistake as it did in 1970s, when they left inflation climbing up until it was out of control. She believed the positive effect of the economic stimulus package would be seen in the 2nd and 3rd quarter. Stern said that in order to keep inflation at low level, the key is likely to be timeliness and magnitude of decisions of reversing course.

Europe: Euro zone inflation rose 3.6% in May as energy and food prices climbed. Rising inflation diminished the chance of interest rate cut by the ECB. In Germany, despite the economy expanded at the fastest pace in 12 years at 1.5% QoQ, the Gfk survey reported poorer consumer morale, which dragged by inflation and financial market concerns. A 1.0% dropped in April retail sales also ruined German economic outlook.

Japan: Japan economy is under pressure as unemployment went up to 7-month high, household spending and industrial output dropped, and inflation is in upward trend. These factors implied that the Japan economy is confronting with a downside risk. However, the BoJ governor said that the recent policy rate is fitting with the recent economic condition.

Thailand: The Office of the National Economic and Social Development Board (NESDB) reported that the Thai economy expanded by 6% in 1Q08, and expected a 4.5 – 5.5% growth for this year. For April economic conditions, the BoT said that the overall economy continued to expand. Manufacturing production expanded by 10.1% YoY. Private consumption index rose by 7.8% YoY. Private investment index went up by 5.6%. Exports climbed 27.7% to USD13.631bn, while imports surged 41.5% to USD15.399bn, a trade deficit of USD1.768bn.


Fixed Income Market
THB bond yields rose sharply by 10-25bps over the week with medium- to long sectors being under highest pressure after some buying interests flooded into the short-end. Asian bonds tumbled especially Singapore where its 10year bond yields shot by almost 100bps as inflation fears linger. THB weakened by THB0.41per USD to 32.46 from equity outflows and expectation that Fed will raise rates soon. Major Thai commercial banks have been signaling about raising rates soon.


Equity Market
Market sentiment upturned to very bearish this week, resulting to heavy foreign & local institutions broad-based selling this week. The index plunged about 5% to 5-week low. Negative factors ranged from global inflation worries as oil prices at record to political woes on fierce street protest and government policy blunder on diesel subsidy at the expense of listed refineries. However, inflation worries were dissipated as oil prices later fell on concerns of global energy demand slowing and strength of USD countered biggest decline in US inventories since 2004. Oil prices were off by nearly 6% from lifetime record high last week.

The information contained herein is AYF's opinion at the time of its publication and subject to change without prior notice.

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