Global Economics & Market Strategy

Economics Weekly View: Watch for Election Noise, Expect Short-Term Pull Back in Risk Appetite

28 June 2024
 

Barnabas Gan Acting Group Chief Economist & Head, Market Research

• Risk-taking appetite continued to see signs of rally fatigue in the recent weeks, reinforcing our view for some short-term pull-back in risk taking appetite in the week ahead. Our RHB risk sentiment index (Figure 9) continues to show relatively choppy behaviour, and any decline to below 1.0 in the following weeks will suggest a material deterioration of risk appetite. Per our latest Pathfinder 3Q24 report, we are arguably less optimistic than how we started in 2Q24, even as we stay above consensus for US and China GDP growth of 2.5% and 5.0%, respectively, in 2024. As such, we expect some profit-taking behaviour to persist in US-centric equities in 3Q24, especially should (1) US inflation pressures stay elevated and (2) market watchers gradually price out US Fed Funds Rate cut probability to one or zero in 3Q24. The caveat will be tonight’s US core PCE inflation print, where any faster-than-expected dissipation of inflation pressures may continue to raise an earlier FFR cut in September 2024. 
   
• Some risk-off behaviour may be exacerbated by brewing US election-centric noise, albeit last night’s US presidential debate may have little market impact. DXY likely saw safe haven flows overnight, with the index rising above its 106 handle in today’s intra-day trading, while UST10Y yields declined to its 4.28% handle before returning to its 4.32% levels. US fund flows (Figure 30) continue to stay high and have supported DXY strength, where we think more upside bias towards 107, with the balance of risks, tilted towards 108, may be on the cards in the following weeks should market watchers gradually digest the high-for-longer US rate trajectory. What is clear is that odds by PredictIt suggest that Donald Trump’s popularity is up to 60%, from pre-debate of 53%. Overall, the market reaction is one of mild, yet temporal, risk-off behaviour. 
   
• Beyond the US election, Europe-centric political noise may be worth watching, which is a crucial determinant of global risk-taking behaviour. France is gearing up to cast its first-round ballots this Sunday, with the Bank of England warning that “policy uncertainty associated with upcoming elections globally has increased”. Elsewhere, UK polls indicate a potential landslide win for the Labour Party, with its leader Starmer targeting an ambitious annual growth of at least 2.5% should he move into 10 Downing Street. We think political noise may be hard to determine, albeit unless there is a threat to (1) policy continuity and/or (2) escalation of geopolitical frictions, the path of least resistance is for political noise to be temporal and market reaction likely short-lived and muted. 
   
• Our broad global economic views remain unchanged – we expect one 25bps US Fed Funds Rate (FFR) cut in December 2024 against the current swap pricing of two cuts. We do not expect more ECB rate cuts in 2024, while BOJ rate hikes may be less probable than it looks despite the latest uptick in Japan’s inflation pressures, as higher prices appear to be more supply-led than demand-driven. Inflation pressures in ASEAN continue to climb, with Singapore’s headline and core CPI rising 3.1% YoY in May 2024. Closer to home, we revise Malaysia’s headline inflation projection to 2.6% in 2024, from our prior forecast of 3.3%, given (1) limited impact on overall prices from higher diesel prices, while (2) we expect RON95 rationalisation only to take place towards the end of this year. 

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