Warrants Highlight

China A-shares Drop, Global Inflation Picking Up 

Yesterday, the China A-share market continued to fall further with the FTSE China A50 Index reaching multi-year lows of 7265.77. The FTSE A50 Index tracks the performance of the 50 largest A-share companies listed on the Shanghai and Shenzhen stock exchange. Macquarie's A50 warrants allow investors to gain direct exposure on the China A-share market through call and put warrants.

Last week's highlights*
Other than the A-share market sell-off and some unconfirmed speculation about senior Chinese leaders still fighting over who is or is not getting the top jobs in the next government, last week was a relatively quiet week for news flows from China. Premier Wen spoke a couple of times about the importance of maintaining economic growth and a healthy job market. But over the last couple of weeks following the very weak July data, Macquarie Equities Research (MER) said that investors have been anxiously waiting without success for the widely anticipated RRR cut, which seemed to be purposely delayed due to signs of home price stabilization – in July, 50 cities (out of the 70 tracked by NBS) saw prices rise.

Outside China, there were many data points, some of which were conflicting. In general, retail sales were stronger than expected (the US and the UK), somewhat dashing hopes of QE3, but industrial production was weaker than had been hoped (New York Fed July manufacturing index was far below expectation and Canada June manufacturing sales declined unexpectedly).

While inflation numbers around the world have been soft (US July CPI 1.4% was below consensus of 1.6% and India July inflation came in at a 32- month low), MER is seeing some signs that inflation in parts of the global economy is picking up – UK July inflation came in at 2.6% (consensus 2.3%) and German wholesale prices in July rose 2% (consensus 1.3%). With minimum wages in countries like China increasing steadily, global inflation trends need to be closely monitored.

*Excerpts from MER report dated 20th Aug

Key Macro Data this week
Wed 22 Aug: US Existing Home Sales (Jul), FOMC Meeting Minutes
Thu 23 Aug: PRC HSBC Flash Manufacturing PMI (Aug), US Initial Jobless Claims, US New Home Sales (Jul)
Fri 24 Aug: US Durable Goods Orders (Jul)

Singapore Market Wrap

STI - flat for the day

Yesterday, the STI started strong in the morning, adding approximately 1% day-on-day (dod) by noon. However in the afternoon, the index erased gains and closed at 3062.89, flat for the day.

Premier Wen Jiabao said that slower inflation has given China more room to adjust monetary policy and investors' sentiments turned positive. However, a report that showed foreign direct investment (FDI) fell 8.7% year on year overshadowed Premier Wen's comments. The Bloomberg survey had only expected FDI to fall 2.5%. The HSI breached the 20,000 level and closed at 19962.95, down 0.5% dod.

In Singapore, private home sales increased 42% in July as compared to June. An article in the Straits Times highlighted that "reasonably priced new launches in popular areas like Tampines and Punggol, where there is pent-up demand, helped lift overall sales".

STI 3100MBeCW121031 (Q1AW) exercise level 3,100.*
STI 2950MBePW121031 (Q0ZW) exercise level 2,950.*

HSI19800MBeCW120927 (Q1DW) exercise level 19,800.*
HSI20400MBePW120927 (Q1SW) exercise level 20,400.*

Singtel's response to Moody's
On Wednesday, Moody's revised Optus' rating to negative from stable. The credit rating agency expects "a trend of elevated leverage over the next 2-3 years as Optus considers additional acquisitions", as mentioned by Ian Lewis, Vice President of Moody's. As such, he expects that the financial leverage ratios will be raised to a level that is inconsistent of a Aa3 rating.

However, Moody's did mention that Optus' parent, Singtel "would highly likely to have both the ability and willingness to step in and support Optus, in a distress situation" and that "rating outlook could revert to stable with improved profitability or strengthened financial profile".

Yesterday, Singtel responded by posting an announcement on SGX stating that "Optus remains financially-disciplined in its approach to investments and is committed to maintaining an investment-grade credit rating".

Investors reacted on Moody's downgrade and Singtel closed at $3.29, down 1.5% dod.

Call warrant SingTelMBeCW130301 (PB6W) exercise price $3.30.*

DBS bid for Alliance taking "longer than usual"
Since early April, DBS has won approval to start talks to buy a 14.2% stake in Alliance Financial Group (AFG), Malaysia's seventh-biggest lender by market value. DBS CEO Piyush Gupta told reporters that he is "keen on the Malaysian market".

However, their bid seems to have hit a road block as reported by The Straits Times. The national newspaper stated that Bank Negara, Malaysia's central bank, is taking longer than usual to give the go ahead. Currently, foreign institutional ownership of domestic banks in Malaysia is capped at 30% and there is talk that Langkah Bahagia may be interested to sell its holding in Vertical Theme to DBS. This would raise the potential effective stake in AFG to 29%. This is possibly the reason why it is hard to get past Bank Negara.

DBS closed at $14.66, up 0.3% dod.

Call warrant DBS MB eCW121101 (QZ1W) exercise price $15.00.*
Call warrant DBS MB eCW121102 (Q0NW) exercise price $14.00.*
Put warrant DBS MB ePW121101 (Q4UW) exercise price $15.00.*

Overnight Market Wrap

US indices remain flat

Last week, US consumer confidence unexpectedly rose in August. In the month of July, the index read 72.3 and the Bloomberg survey expected the index to show little change in August. However, it increased to 73.6, boosting the prospect of a stronger household spending this quarter. The rising consumer sentiment may indicate that consumers are feeling the benefits of growing payrolls, Bloomberg said.

In another report, the index of US leading economic indicators also rose more than forecast, climbing 0.4%, when the Bloomberg survey expected an increase of only 0.2%. This is a sign of sustained expansion but the US indices were relatively unchanged on Friday, with the S&P adding a mere 0.2% gain.

Yesterday, Germany's Bundesbank reiterated its opposition towards the European Central Bank's bond-buying programme and this sent US indices falling initially. However losses were erased as the Federal Reserve research showed that most of the damage inflicted on the US labour market is reversible. Hence there is a possibility that additional stimulus will be effective in reducing joblessness and the S&P ended the day flat.

Overnight Markets

Indices	Last	Change
STI	3062.11	-0.0%
HSI	20104.30	-0.1%
DJIA	13271.60	-0.0%
S&P 500	1418.13	-0.0%
Nasdaq	3076.21	-0.0%
China A50	7265.77	-0.6%

Corporate News

Corporate Announcements

F&N agreed to sell its entire 39.7% APB stake to Heineken for $54bn, or $53 a share.

Results announcements:
Tue 28 Aug: Olam 4Q12

Ex-dividend dates:
Wed 22 Aug: Wilmar ($0.02)
Thu 30 Aug: Sakari ($0.02), UOB ($0.20)
Wed 26 Sep: SGX ($0.15)