M6 — CM-EIP: Securities, CIS (EIP) and Foreign Exchange
Key Drivers of Market Movements
Chapter 3 explains why whole markets and asset classes move: the business cycle and the sectors that ride it, the indicators that signal each phase, inflation and GDP data, interest rates and the yield curve, monetary and fiscal policy, exchange rates, commodity and event shocks, liquidity and credit conditions, company earnings, investor behaviour and market efficiency. The exam rarely asks for a definition alone. It gives you a scenario (a Fed hike, an oil spike, an inverted curve, an MAS policy statement) and asks which way prices move and why. Singapore is the twist: MAS runs monetary policy through the exchange rate, not an interest rate, so S$ interest rates largely follow global rates.
7 sections·~6 min read
✓Checked against the IBF CM-EIP syllabus chapter 3 (checked 13 Sep 2026); MAS Monetary Policy Framework page, MAS FAQs on Singapore's Monetary Policy Framework sections 2 and 3, MAS Past Monetary Policy Decisions, MAS 'How do we measure inflation?' and 'How does MAS carry out monetary policy?', MAS Monetary Policy Statements of 29 Jan 2026 and 27 Jul 2026, SingStat CPI and National Accounts explainers, SIPMM Singapore PMI page, Federal Reserve federal funds rate FAQ and FOMC page, checked 13 Sep 2026. Unofficial prep, not endorsed by MAS or IBF.
★
Must-know for the exam
✓Business cycle: expansion, peak, contraction, trough. Rule of thumb for a technical recession: two consecutive quarters of negative quarter-on-quarter real GDP growth.
✓Cyclical sectors (cars, travel, industrials, discretionary retail) swing with the cycle; defensives (consumer staples, healthcare, utilities) hold earnings better but can still fall in bear markets.
✓Indicators: leading = PMI and new orders, building permits, stock index, consumer expectations; coincident = industrial production, real personal income excluding transfers; lagging = unemployment rate.
✓Singapore PMI (SIPMM): a diffusion index; above 50 = manufacturing generally expanding versus the previous month, below 50 = generally declining.
✓Real growth = (1 + nominal growth) / (1 + inflation) - 1. Singapore compiles real GDP in chained (2015) dollars (SingStat, as at 13 Sep 2026).
✓CPI measures average price changes of a fixed household basket, not absolute price levels; 2024-based CPI (SingStat, as at 13 Sep 2026). MAS Core Inflation excludes accommodation and private transport.
✓Higher discount rates cut present values, most of all for distant cash flows: long-dated bonds, growth shares and income assets such as REITs are the most rate-sensitive.
✓Yield curve: normal = long yields above short; inverted = short above long and has often preceded recessions, but with no fixed lag and no guarantee.
✓MAS's intermediate target is the S$NEER, a trade-weighted basket. Policy levers: slope (rate of appreciation), width and level of the centre of the policy band. Primary tool: spot FX intervention in US$/S$.
✓A steeper appreciating slope = tightening, the exchange-rate equivalent of a rate hike. MAS has never set a negative slope; it re-centres the band lower for a sharp easing.
✓MAS Monetary Policy Statements: four a year, in January, April, July and October, since 2024 (semi-annual April/October from Oct 2003 to Oct 2023).
✓With open capital markets, S$ rates such as SORA generally track global rates such as US SOFR, at a discount when the S$ is expected to appreciate (MAS FAQs 2.5).
✓Home-currency return on a foreign asset = (1 + asset return) x (1 + currency return) - 1.
✓EMH is nested: weak (past prices) sits inside semi-strong (all public information), which sits inside strong (all information, including private).
The business cycle and sector rotation
•Markets move with the economy's cycle of growth and slowdown. The exam tests whether you can place a scenario in the right phase and pick the sectors that should do well or badly next.
•Expansion: real GDP, jobs and profits rise; spare capacity is still being used up.
•Peak: capacity is stretched, wages and prices accelerate, central banks tighten.
•Contraction: real output falls, unemployment rises, earnings weaken, credit spreads widen.
•Trough: output stops falling; unemployment is still high and earnings depressed, but share prices often start rising because they price expected earnings.
•Use real GDP, not nominal GDP, to judge the phase. Nominal GDP can rise purely because prices rose. SingStat compiles real GDP in chained (2015) dollars. GDP measures market output only; it does not include unpaid work such as volunteering.
•Cyclical businesses sell things people can postpone: cars, hotels and travel, semiconductors, capital goods, luxury goods. Defensive businesses sell necessities: food and household staples, healthcare, electricity and water. Sector rotation moves money towards cyclicals as a recovery begins and towards defensives when leading indicators roll over, the yield curve inverts and credit spreads widen.
•Trap: 'defensive' means less sensitive to the cycle, not immune to losses. Defensive shares still carry market risk and still fall in a bear market, usually by less. A second trap: a cyclical share that has already fallen is not a defensive holding; its earnings can drop further.
•Takeaway: place the economy in its phase, then ask whose demand can be postponed. Rotate before the lagging data confirm the turn.
•Indicators are classified by timing against the overall economy. Examiners mix them up in one list and ask you to sort them.
•Leading (move before the economy): PMI and new orders, building permits, the stock market index, consumer confidence and expectations, the yield-curve slope.
•Coincident (move with the economy): industrial production, real personal income excluding transfer payments.
•Lagging (move after the economy): the unemployment rate, because firms wait for clear evidence of a turn before hiring or laying off staff.
•The Singapore PMI is published monthly by SIPMM. It is a composite diffusion index built from new orders, production, employment, supplier deliveries and inventories. A reading above 50 means manufacturing is generally expanding compared with the previous month; below 50, generally declining. It is not a growth rate or a capacity percentage.
•The CPI (compiled by the Department of Statistics) measures average price changes of a fixed basket of goods and services commonly bought by resident households. It tracks changes, not absolute price levels. The basket is rebased every five years; the latest base year is 2024 (as at 13 Sep 2026).
•MAS watches two measures. CPI-All Items (headline) inflation covers the whole basket. MAS Core Inflation excludes accommodation and private transport, because they are heavily influenced by supply-side administrative policies (such as COE prices under the vehicle quota system) and are volatile. MAS places the most importance on core inflation in its policy deliberations.
•Worked example (inflation): CPI rises from 110.0 to 113.3. Inflation = 113.3 / 110.0 - 1 = 3.00%. Not 3.30% (that is index points), and not 3.3 / 113.3 = 2.91% (wrong base).
•Worked example (real GDP): nominal GDP +6%, deflator +4%. Exact real growth = 1.06 / 1.04 - 1 = 1.92%. The shortcut 6% - 4% = 2% is only an approximation.
•Cost-push inflation comes from higher input costs such as oil, food and imported materials, and can occur while demand is weak. Demand-pull inflation comes from demand running ahead of capacity.
•Trap: the US 'ex food and energy' core measure is not the MAS definition. MAS Core Inflation removes accommodation and private transport.
•Takeaway: leading indicators forecast, coincident confirm, lagging lag. MAS Core Inflation excludes accommodation and private transport.
CMFASPrep