Discla imer: This mater ia l that follows is a presentat ion of general background informat ion about the Bank’s act iv it ies current at the date of the presentation. It is informat ion given in summary form and does not

purport to be complete. It is not to be rel ied upon as advice to investors or potent ia l investors and does not take into account the investment object ives, f inancia l s ituat ion or needs of any part icular investor. This

material should be considered with professional advice when deciding if an investment is appropriate. UOB Bank accepts no liabil ity whatsoever with respect to the use of this document or its content.

Markets Strategy 1Q 2019 More stormy weather ahead

Heng Koon How, CAIA

Head of Markets Strategy,

Global Economics & Markets Research

Jan 2019

http://www.uobgroup.com/research

1) Rising Volatility and Increasing Risk

Credit cost is on the rise In general, credit cost has yet to surpass the peak seen in 2015/16

UOB Global Economics & Markets Research 3

Volatility in global asset classes is on the rise Crude oil volatility and VIX jumped in 4Q18

UOB Global Economics & Markets Research 4

GBP leading the jump in FX volatility But FX volatility also yet to surpass 2015/16 peak

UOB Global Economics & Markets Research

Global PMIs are all correcting lower towards 50 US manufacturing ISM fell hard in Dec 2018 to 54.1

UOB Global Economics & Markets Research 6

There will definitely be growth moderation in 2019 But we are far from the recession of 2009/10

UOB Global Economics & Markets Research 7

FED’s Beige Book manufacturing survey starting to turn lower Still some distance away from 2015/16 and 2008/09 slowdown

UOB Global Economics & Markets Research

Oversupply fears triggering 1/3 correction in Brent and WTI After this brutal correction, crude oil is now back at mid 2017 level

UOB Global Economics & Markets Research 9

US core PCE and core CPI continue consolidation around 2% But US hourly wage growth powering ahead due to strong job market

UOB Global Economics & Markets Research 10

Risk aversion triggered UST yield pullback in 4Q18 US yield curve has started to invert in the front end, i.e. 5s2s

UOB Global Economics & Markets Research 11

FED to be “more data dependent” and “more patient” Hikes likely to resume in 2H19 after near term pause

UOB Global Economics & Markets Research 12

But futures market expects zero rate increase in 2019 Some are even whispering of rate cuts from the FED

UOB Global Economics & Markets Research 13

FED continuing BSR at steady state of US$50 billion per month FED’s balance sheet has now fallen towards US$4 trillion

UOB Global Economics & Markets Research 14

USD 3.5 trn end 2019

USD 4.0 trn Jan19

USD 2.9 trn end 2020

USD 2.5 trn mid 2021

2) Is the USD starting to turn lower?

USD was dominant in 2018 against major and EM currencies The USD has recovered nearly all of its losses in 2017

UOB Global Economics & Markets Research 16

We are positive on gold as pace of FED rate increase slows Gold positioning recovers from decades low

UOB Global Economics & Markets Research 17

ECB likely to start its first rate increase in 4Q19 The ECB will only start raising rates as FED stops increasing

UOB Global Economics & Markets Research 18

BoJ has engaged in stealth tapering Its implied APP rate is now less than half of the JPY 80 trillion target

UOB Global Economics & Markets Research 19

Australia’s wage growth has started to recover But AUD remains depressed as RBA stays neutral

UOB Global Economics & Markets Research

GBP/USD still struggling below 1.30 ahead of Mar19 Brexit date Firmly stuck within the lower 1.20 to 1.40 broad trading range

UOB Global Economics & Markets Research 21

But GBP is still in the doldrums as Brexit confusion persists UK 5Y CDS has dislocated from Germany 5Y CDS

UOB Global Economics & Markets Research 22

3) Implications of the US-China trade conflict

Asian central banks rushed to increase rates in 2018 Higher rates provided some support for local currencies

UOB Global Economics & Markets Research

Impact of US-China trade tensions starting to show China’s New Export Orders PMI is now significantly below 50

UOB Global Economics & Markets Research 25

China’s car sales has been contracting for 6 straight months China’s retail sales growth falls towards 8% YoY

UOB Global Economics & Markets Research 26

China’s government bond yields continuing to head south Resulting in loss of long-term yield support for CNY

UOB Global Economics & Markets Research 27

China’s money market rates stay depressed Targeted reverse repo injections keep MM rates pinned below 3%

UOB Global Economics & Markets Research

A controlled pace of depreciation for the RMB Forward points are deceptively low

UOB Global Economics & Markets Research 29

What is the longer-term trend for USD/CNY ? We see further gradual weakness in CNY to 6.90 in 2H19

UOB Global Economics & Markets Research 30

Pre-WTO peg of 8.28

GFC peg of 6.83

Dec 16 high of 6.96

Nov 18 high of 6.97

Longer term positive of manufacturing relocation to ASEAN China’s wage cost is now higher that most of ASEAN

UOB Global Economics & Markets Research 31

There are many considerations for plant relocation It’s not just trying to reduce tariff costs

UOB Global Economics & Markets Research 32

Competitive

wage cost

Attractive tax

incentives

Strong intellectual

rights protection

Strong

infrastructure

connectivity Minimal disruption

to supply chain

Strong industry

ecosystem

Easy access to

local market

4) Singapore: MAS has kept the SGD relatively strong

Inflation outlook in Singapore remains constructive Core CPI still seen exceeding 2% in 2019

UOB Global Economics & Markets Research 34

But NODX and PMI are turning south fast Worth noting that NODX is inherently very volatile

UOB Global Economics & Markets Research

SGD short-dated rates are not coming down 3M SOR and 3M SGS bills trading above 2%

UOB Global Economics & Markets Research 36

SGD started 2019 on a strong note S$NEER now trading at strong premium to estimated mid-point

UOB Global Economics & Markets Research

SGD has diverged from ADXY MAS’ twin tightening in 2018 has kept the SGD strong vs Asian peers

UOB Global Economics & Markets Research 38

39

Disclaimer

This publication is strictly for informational purposes only and shall not be transmitted, disclosed, copied or relied upon by any person for whatever purpose, and is also not intended for distribution to, or use by, any person in any country where such distribution or use would be contrary to its laws or regulations. This publication is not an offer, recommendation, solicitation or advice to buy or sell any investment product/securities/instruments. Nothing in this publication constitutes accounting, legal, regulatory, tax, financial or other advice. Please consult your own professional advisors about the suitability of any investment product/securities/ instruments for your investment objectives, financial situation and particular needs. The information contained in this publication is based on certain assumptions and analysis of publicly available information and reflects prevailing conditions as of the date of the publication. Any opinions, projections and other forward-looking statements regarding future events or performance of, including but not limited to, countries, markets or companies are not necessarily indicative of, and may differ from actual events or results. The views expressed within this publication are solely those of the author’s and are independent of the actual trading positions of United Overseas Bank Limited, its subsidiaries, affiliates, directors, officers and employees (“UOB Group”). Views expressed reflect the author’s judgment as at the date of this publication and are subject to change. UOB Group may have positions or other interests in, and may effect transactions in the securities/instruments mentioned in the publication. UOB Group may have also issued other reports, publications or documents expressing views which are different from those stated in this publication. Although every reasonable care has been taken to ensure the accuracy, completeness and objectivity of the information contained in this publication, UOB Group makes no representation or warranty, whether express or implied, as to its accuracy, completeness and objectivity and accept no responsibility or liability relating to any losses or damages howsoever suffered by any person arising from any reliance on the views expressed or information in this publication.

UOB Global Economics & Markets Research