Stay invested but expect more bouts of volatility

What a difference a month makes. While post-Brexit uncertainties continue to linger, global risk appetite, especially for equities and emerging markets assets, has recovered quickly in July. Interestingly, the Bank of England chose to withhold monetary easing this month, although market speculation for such a move at the Aug 4 policy meeting remains intact.

Meanwhile, market concerns over the solvency of the Italian banking sector and yuan weakness continues to hover in the background. The International Monetary Fund, World Bank and Asian Development Bank also recently trimmed their 2016 global growth forecasts post-Brexit in light of somewhat softer momentum in first-half growth.

On balance, investors should not be surprised if more bouts of volatility pop up for the rest of the year, especially with the United States presidential elections in November, but the lesson here is that the doom-and-gloom story in the immediate aftermath of the Brexit referendum has quickly dissipated for the world at large.

To recap, the US Federal Reserve is still blowing hot and cold on the prospects of a rate hike later this year, while the European Central Bank and the Bank of Japan are both currently anticipating rather than executing immediate monetary policy stimulus. For the upcoming Fed policy meeting on July 28, expectations for a rate hike have been very depressed, with the futures market pricing in only a 8 per cent probability of such a move.

Turning to China, market sentiment has stabilised since the start of the year. The Chinese economy chalked up steady growth of 6.7 per cent year-on-year in the second quarter, also bringing first-half growth to 6.7 per cent year-on-year, which is within the 6.5 to 7 per cent forecast range anticipated for the whole of 2016. Looking ahead, we expect China’s monetary and fiscal policies to remain supportive, but do keep your eye on the 6.7 rate for the US dollar/yuan in the short-term.

For Singapore, the June industrial production data due tomorrow could shed some light on whether the flash second-quarter gross domestic product growth estimate of 2.2 per cent year-on-year (0.8 per cent quarter-on-quarter seasonally adjusted annual rate) will be revised. Given that headline inflation is likely to be in the negative territory for the rest of this year, short-term domestic interest rates are likely to remain very subdued.

The three-month Singapore Interbank Offered Rate and Swap Offer Rate is currently just under the 0.9 per cent and the Singapore dollar nominal effective exchange rate is trading on the stronger side of its parity band, even though the window remains open for future monetary policy easing. In this economic environment, staying invested still makes rational sense.