On the surface, the less hawkish (or more dovish, depending on how you see it) tone from the FOMC minutes, which showed an absence of a smoking gun pointing at September rate hike, should support the equity markets.
This was not what we saw. As I mentioned earlier, the market is likely positioned bearishly, mulling over China slowdown, commodity slump and deflation risks.
The market has quickly pared back expectations of a September Fed move. The implied probability is now 38% from 48% prior to the FOMC minutes. Interestingly, odds of a December action were also tempered slightly to 66.5% from 67.6%. Inflation remains a major concern for the Fed officials.
The US inflation data continued to fall short of the progress that the FOMC wants to see before giving the thumbs up. Needless to say, market participants will scrutinise consumer price data in the coming months to speculate whether a rate hike is even on the table this year.
China closed lower, as the apparent absence of the ‘National Team’ in the last hour of trading sparked more sell orders. The SHCOMP lost almost 80 points in the final half an hour of the session to close at the lowest in two weeks. Some analysts believed that the government prefers to keep the buying support unpredictable, deterring investors from attempting to game the system.
The line in the sand appears to be drawn at the 3500 level. However, I reckon that the 200-day moving average would need to be convincingly broken first before the 3500 mark is poised for a test.
We think the greater concern is capital outflows, which was brought about by slowing growth momentum and partially from thedecline in the stock market. This may provide another explanation as to why the Chinese government is committed to stabilising domestic equities. Persistent capital outflows are putting pressure on liquidity, where the PBOC has to plug the gaps with short-to-medium term infusion of monies, through various liquidity management tools.
Many analysts are calling for a more powerful response, in the form of more reserve requirement ratio (RRR) cuts. I feel there is still room for RRR to go down, given that the current 18.5% is considerably higher than its historic average of around 12%. Several quarters even expect the RRR to go as low as 10%.
STI tests key 3000
Risk off sentiments accelerated downward pressure on the Straits Times Index (STI) today, as the index declined towards psychological level at 3000. The STI has tested the 3000 mark five times in the past three years, staying below the level for about two weeks in mid-November 2012. The ferocity of the recent plunge may be sufficiently forceful to pierce the barrier. Bullish investors should wait for reversal signals, and not try to catch a falling knife.