Indonesia, 30 Aug 2024 - Twin headwinds: US labour market weakness and the unwinding of yen carry trade. The global de-risking that started last week continued today as Asian and European markets plummeted across the board. Apart from weaker-than-expected US labour data, risk sentiments also took a severe hit as the unwinding of the yen carry trade intensifies across the globe. The acute sense of market panic saw traders pricing in a 100% probability of a 50 bps policy rate-cut at the upcoming September FOMC meeting.

Given the current risk-off mode in financial markets, listed below DBS CIO’s cross-assets views:


Asset allocation

• DBS CIO asset allocation is well positioned for the current market sell-down as we are Underweight on equities and Overweight on fixed income, gold, private assets, and hedge funds.
• On a quarter-to-date basis, bonds and gold are up 4.3% and 4.0% respectively while equities are down 1.7%.

Equities

• Equity carnage has been driven predominantly by valuation multiple contraction amid broad-based derisking and unwinding of yen carry trade. There is little bearing on corporate fundamentals.
• Unless the US labour market deteriorates sharply from here (which is not our base case), corporate earnings outlook remains intact.
• Sell-down in Tech presents entry opportunities for the A.I. theme via exposure to Big Tech.

Rates

• Weakening data cements the start of easing cycle in September; odds of an aggressive recalibration cycle are now more significant.
• As policymakers execute rate-cuts in the coming quarters in light of growth risks, front-end rates will benefit more, which likely results in the bull steepening of the US rates curve.
• On the back of changes in expectations, DBS CIO has revised our Q4 projections of the 10Y yield to 4.05% (from 4.50%) by end-2024, and to 4.10% (from 4.50%) by end-2025.

Credit

• Negative economic surprises have impacted credit modestly – since end-June 2024, IG spreads have widened c.11 bps and HY spreads have widened c.44 bps. We maintain a preference of IG over HY.
• Continue to advocate a duration barbell of (a) short-duration (1-3Y) IG credit to mitigate reinvestment risk, and (b) longer duration (7-10Y) IG credit for wider spread premiums and larger sensitivity to a declining rates environment.

FX

• Lowered forecast for USD (after Fed signalled interest rate cuts in September) is on the table, a decision further reinforced by July's unemployment figure of 4.3% (vs 4.1% in June).
• AUD/JPY fell 5.2% last week due to various factors, including disappointing Chinese economic data, potential Fed cuts, and Japanese monetary policy changes. The Reserve Bank of Australia's upcoming meeting will be closely watched for its stance on future rate cuts and inflation targets.

Gold

• Continue to overweight gold amid softening economic conditions; impending rate cuts and rising recession probability bode well for bullion.
• Safe haven gold to benefit from general risk-off conditions, elevated geopolitical tensions and volatility from US elections in November.
• Long-term tailwind in the form of strong central bank buying, driven by monetary debasement, fiscal sustainability concerns, and de-dollarisation.

About DBS
DBS is a leading financial services group in Asia with a presence in 19 markets. Headquartered and listed in Singapore, DBS is in the three key Asian axes of growth: Greater China, Southeast Asia and South Asia. The bank’s “AA-” and “Aa1” credit ratings are among the highest in the world.

Recognised for its global leadership, DBS has been named “World’s Best Bank” by Global Finance, “World’s Best Bank” by Euromoney and “Global Bank of the Year” by The Banker. The bank is at the forefront of leveraging digital technology to shape the future of banking, having been named “World’s Best Digital Bank” by Euromoney and the world’s “Most Innovative in Digital Banking” by The Banker. In addition, DBS has been accorded the “Safest Bank in Asia“ award by Global Finance for 15 consecutive years from 2009 to 2023. DBS Indonesia is ranked second in the top as World’s Best Bank in Indonesia for three consecutive years from 2020 to 2022.

Established in 1989 as part of the Singapore-based DBS Group, PT Bank DBS Indonesia (Bank DBS Indonesia) is one of the banks with the longest history in Asia. Currently operating 1 Head Office, 13 Branch Offices, 16 Assistant Offices and 4 Functional Offices and 3,011 active employees in 15 Major Cities in Indonesia, Bank DBS Indonesia provides comprehensive banking services in the corporate, SME and consumer banking segments that focuses on the customer experience to 'Live more, Bank less'. We also see a purpose beyond banking and are committed to supporting our customers, employees and the community towards a sustainable future.

PT Bank DBS Indonesia is licensed and supervised by The Indonesian Financial Services Authority (OJK), and an insured member of Indonesia Deposit Insurance Corporation (LPS).

DBS is committed to building lasting relationships with customers, as it banks the Asian way. Through the DBS Foundation, the bank creates impact beyond banking by supporting businesses for impact: enterprises with a double bottom-line of profit and social and/or environmental impact. DBS Foundation also gives back to society in various ways, including equipping underserved communities with future-ready skills and helping them to build food resilience.

With its extensive network of operations in Asia and emphasis on engaging and empowering its staff, DBS presents exciting career opportunities. For more information, please visit www.dbs.com.