Mizuho Daily – Variable variant, Singapore’s Q2 sequential slip

By Vishnu Varathan, Head, Economics & Strategy, Asia & Oceania Treasury Department , Mizuho Bank, Ltd., Variable Variant ... It is not without some amusement that your scribe read headlines declaring "crude slips on variant threat" while observing that US equities pursued fresh highs (albeit at a less aggressive pace) ahead of earnings. Apparently the delta variant has variable effects across asset classes. It is almost as if equities have been effectively inoculated while crude and other commodities are more exposed to the shadow cast by the more infectious variant. As flippant as that suggestion sounds, there is some truth to this. Two main reasons why the "variant risk" manifest differently across equities and commodities. First, the selection bias of equities (large, connected, firms) bestows the resilience of scale and access (to workarounds during restrictions as well as to finance). Second, the odd phenomenon of Covid contagion catalyzing a contagion of equity market bulls; as stimulus (be it fiscal or monetary) in response to Covid (and consequent restrictions) stirs institutional and retail investors into a buying frenzy feeding off each other. Whether this is from FOMO (fear of missing out) magnified by social media or bona fide belief in the fundamentals of these equities, the result is a leg up for equities despite a pandemic. In sharp contrast, commodities are exposed to the raw, real economy; where a lockdown and resultant dampening in demand for fuel and other commodities is quicker to transmit. To be sure, Brent dipping momentarily below $75 alongside measured slippage in industrial metals is not worlds apart from 0.2-0.4% gain on Wall St. To some extent the commodities impact may even be blamed on a firm USD and slightly firmer UST yields. But the nuances of market psyche are certainly worth contemplating; and tracking. Meanwhile, EUR appears to have realised some support above mid-1.18 as ECB chief Lagarde teased reporters about a "new guidance" entailing "some interesting variations and changes" that the ECB will reveal in 10 days. The ECB's "variations" trained on "variant risk" is not lost on us. Elsewhere, sub-0.75 AUD still appears to be held back by commodities showing less conviction on traction. USD/JPY edging towards mid-110 on firmer UST yields and buoyed above 1.35. Singapore Q2 GDP: Sequential Slip The benefit of the most acute low base effect (from Q2 2020) means that Singapore's Q2 2021 GDP numbers tomorrow will be a buoyant, if not a breath-taking, double-digit print. Market consensus is for 14-15% YoY (Mizuho: 13.3%) surge from a muted 1.3% growth in Q1. But a buoyant Q2 headline masks a sequential slip; as anyone looking at QoQ data will be quick to note that GDP probably slipped ~2.0% QoQ from a 3.1% expansion in Q1. The blame is pretty easy to lay. A resurgence of Covid requiring re-tightening of restrictions, inevitably setting back recovery in restaurants, entertainment and hospitality. In addition, construction and business output probably also eased. This however ought to disappoint, but not alarm. Afterall, a bumpy recovery from Covid was always the main expectation. And the silver lining is that rapidly rising vaccination rates in Singapore set the path for a more durable resumption of activity by year-end (albeit in a calibrated manner). Nonetheless, the elephant in the room is how lagging vaccine rollout in wider ASEAN, which continues to suffer a outbreaks of Covid "delta" variant, is will impede a fuller recovery. Upshot: Singapore's inoculation lead doesn't eradicate bumpiness from recovery; being a small, open economy dependent on a more pervasive exit from Covid around the region. None of this though distracts from the likelihood of 2021 growth exceeding the 4-6% target range as Singapore's financial, property, Pharmaceutical sectors help lift off from a low base. Credit: Mizuho Bank Ltd

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