Weekly Market View (July 14 - 18, 2008)

Economic
US: The Federal Reserve Chairman Ben Bernanke told the senate banking committee and the House of Representatives panel that tight credit, weak housing market, and soaring oil prices were vital factors threaten the US economic stability. He insisted that restoring financial market stability was his top priority. Market changed its expectation on interest rate from a hike to a hold at 2.0% after Bernanke’s testimony. The statement also dragged oil prices down sharply, as investors concerned that a slowdown in the US economy might bring demand for oil down.

Europe: Euro zone inflation rose 4.0% in June, the highest level since the economic union was settled, as food and energy prices soared. Germany producer price index (PPI) rose 6.7% YoY in the same month, hit the highest level in 26 years. Excluding oil, which rose 17.9% YoY, Germany PPI rose 3.0%.

UK: Producer Price Index rose 10%, while production costs surged 30% in June. Inflation rose 3.8% YoY in June compared to 3.3% YoY in May. Analysts believed that rising inflation would force the BoE to hike rate.

Japan: The BoJ kept its policy rate unchanged at 0.5% as expected and revised GDP for the fiscal year ended March 2009 down from 1.5% to 1.2%.

China: China economy grew by 10.1% in 2Q08, slowed from 10.6% in 1Q08, led by slower exports and the PBoC’s tightening policies. However, China growth remained robust, while inflation rose 7.1% in June. Analysts expected the central bank would keep its tightening stance for a while in order to keep inflation in check and avoid economic overheating.

Thailand: The Monetary Policy Committee (MPC) tried to curb inflation by raising the benchmark interest rate by 0.25% as expected. The MPC’s statement showed that the policymakers expected that rising oil prices would result in higher inflation, and the BoT would act as needed. Top management of large Thai commercial banks commented that current BoT’s action would not have much affect on loan growth. The Center for Economic and Business Forecasting, University of the Thai Chamber of Commerce reported that higher living costs, political instability, and depreciation of Thai baht dragged Thai consumer confidence down to 70.8 in June from 71.8 in May.

Fixed Income Market
Bank of Thailand raised RP 1 day interest rate by 0.25% with hawkish tone of statement. Most of the Asian countries are forced to hike rate in respond to the inflationary pressure. However, government bond yield dropped for 10 - 30 bps during the week led by sell-on-fact momentum and sharp dropped of crude oil price by ~ 10 USD. We believe that Thai yield curve still facing upward pressure by worsening inflation in 3Q08 and new supply to be announced in late September.

Equity Market
Market has plunged another 9% this week to lowest level in 15-month as US financial jitters over troubling mortgage backers span the globe. Risk aversion is mounting on concerns of widening credit-market losses and slowing global growth will hurt earnings. Growing unease about politics at home i.e. efforts to amend constitution also exacerbated selling pressure. Consumer confidence in June also dropped to lowest level of this year, while BoT decided to hike benchmark rate by 25bps to 3.50% to catch up with inflation as widely expected. Government has unveiled relief measures to help alleviate soaring living costs, but the handouts weren’t enough to overcome bearish sentiment. Oil prices slumped more than $10 a barrel from lifetime high as Fed Chief testified that US economy is facing significant risks to growth, which triggered fear of dampening oil demand and, therefore, a broad sell-off in energy counters.

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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