Macro Strategy: Singapore REITS; FX turbulence

Worst over for SG REITS; FX volatile in tight ranges
Chang Wei Liang, Philip Wee03 Jul 2020
    Photo credit: Unsplash Photo

    Credit: SG REIT spreads likely to compress

    Disruptions arising from COVID-19 this year had earlier led to a sell-off in SGD bonds of Singaporean real estate investment trusts (REIT). Community transmission in Singapore was outpacing that of Hong Kong, leading to stricter curbs. With non-essential businesses shut and offices closed, credit spreads for Singapore retail/commercial REITs rose sharply, resulting in differentials as wide as 80bps compared to equivalently rated Hong Kong REITs.

    Our equity analysts believe that the worst is over, with Singapore successfully moving into Phase 2 of its reopening. There are positive signs of a pick-up in retail sales momentum, especially in the food and beverage sector. Pent up demand could support a recovery to pre-COVID sales levels, which implies that retail REITs no longer need to provide significant tenant assistance. Commercial property demand is also likely to be stable for now, as businesses require time to assess their future office needs.

    Singapore REITs’ credit spreads have eased since May, but they remain about 30bps wider compared to equivalent Hong Kong REIT spreads today. With transmission under control so far despite reopening, there is a good chance that activity in Singapore will follow the normalization that we have seen in Hong Kong. More people could return to offices and visit public malls and restaurants. We could see further compression in Singapore REITs’ spreads to Hong Kong’s average level.

    FX Daily: Winding down after a tumultuous Thursday

    The real test for US stock markets comes next week. While the Dow has recovered from last week’s sell-off, it did not close above its 100-week moving average around 25,950. Investors were quick to book profits ahead of the Fourth of July long weekend after the stronger-than-expected US jobs report. Another 4.8mn jobs were added to nonfarm payrolls in June and May was revised up to 2.7mn from 2.5mn. The unemployment rate fell a second month to 11.1% in June from 13.2% in May. Initial jobless claims, however, held stubbornly above 1.4mn for the latest week ending 26 June, a reminder not to expect the same upside surprises for jobs in July.

    The coronavirus resurgence has led many US states to delay or rollback reopening or renew lockdowns. At last count, 45% of the new cases were reported in Arizona, California, Florida, Georgia and Texas; the five states account for a third of the population. White House health adviser Dr Fauci earlier warned that new cases could double to 100k daily from the 54k reported on Thursday. He also cautioned that the race to develop a vaccine would yield results regarding its safety and effectiveness only by early winter.

    Despite the rise of US equities this week, exchange rates have been tumultuous. EUR has been particularly volatile, quick to reverse its ups and downs within a tight 1.12-1.13 range. While AUD has been more consistent in rising with US equities this week, it was prone to sharp pullbacks. For example, AUDUSD returned all of Thursday’s gains from Asia and Europe trading within an hour shortly after US markets opened. Overall, AUDUSD is still range-bound between 0.68 and 0.70, vacillating between recovery hopes and a resurgent virus that has returned hot spots in Victoria and Melbourne into lockdown. The Reserve Bank of Australia has, ahead of its next meeting on 7 July, started to sound more cautious than optimistic about the economy.

    KRW could be hit by possible negative surprises from North Korea over the Fourth of July weekend. Pyongyang test fired its first intercontinental ballistic missile on US Independence Day in 2018. Last month, North Korea destroyed an inter-Korean joint liaison office. On 25 June, the 70th anniversary of the start of the Korean War, state-run media released a report by the Ministry of Foreign Affairs Institute for Disarmament and Peace that the country was prepared to “counter nuclear with nuclear” over the hostile policy of the US. USDKRW could bounce off the floor of its 1200-1220 range in the coming sessions.


    Chang Wei Liang

    Credit & FX Strategist


    Philip Wee

    FX Strategist - G3 & Asia

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