Risk consolidation escalates as growth bottoms out

Asian economies, including Singapore, will recover after hitting their lowest growth rates in Q1 and spur risk appetite.

Upbeat sentiment is predicted to drive Q2 momentum forward even though recent profit-taking has suggested otherwise, according to OCBC in its SGS Review & Strategy report.

Here's more from OCBC:

Risk markets may kick off Q2 with a consolidation phase, but underlying sentiment remains positive. After a strong January-February risk rally, markets appeared susceptible to some profit-taking going into the quarter-end as concerns of Europe and China’s slowdown returned. We see this merely as a consolidation phrase, with positive market sentiment to underpin Q2 momentum – in particular, we look for signs of a Q1 bottoming in GDP growth for many of the Asian economies.

Since the impending conclusion of the Fed’s Operation Twist in June is unlikely to be immediately followed by QE3 given the US economic signals have been slowly but gradually improving and the second Fed stress test results revealed improving bank balance sheets, the risk is for selling pressure to resurface again in the near-term even though the 10-year US Treasury bond yield appeared to have recently retreated from the 2.38% high seen on 19 March.

Eurozone’s enhancement to its EFSF-ESM firewell will be key. China’s setting of a slightly lower growth target at 7.5% has fuelled speculation of a sharper slowdown and policy support.

Singapore to see elevated inflation even as growth stalls in Q1 2012 before staging a gradual H2recovery. Singapore’s Q1 GDP growth is also expected to flat-line around 0.1% yoy, before seeing a gradual recovery for the rest of 2012. Full-year GDP growth is anticiapted around 2%, which is within the official 2-3% forecast range.

Note that headline and core inflation are expected to stay elevated around the 5% and 3% yoy handle in the nearterm. In particular, electricity tariffs are expected to rise 4.3% in Q2 due to rising fuel prices, and COE premiums remain high due to quota constraints.