Risky moves

There is some head scratching where we see all-time highs recorded in the US markets despite a renewed rebound in bond yields and Greece concerns.

Greece flag
Source: Bloomberg

S&P 500 and Dow Jones Industrial Average ended at record highs of 2129.2 and 18299 respectively.

Admittedly, the up-move was a slow grind higher but investors remained optimistic of the Fed’s reluctance to lift the interest rate.

They even shrugged off Fed Chair Janet Yellen’s warning that stock valuations are ‘quite high’. In the face of a rather dubious April data, their optimism may not be ill-placed.

Not even the hawkish comments made by Chicago Fed President, Charles Evans (also FOMC voter), can deter the market.

While there are several drivers underpinning the rise of the global equities, almost none of them appeal to the fundamental investor. We have the flood of liquidity from major central banks as well as years of ultra-low interest rates supporting the price of risk assets.

Put differently, when these supports are withdrawn, equities may be in for a nasty correction. At some point in time, fundamentals have to match these high valuations. However, there could be less of a concern in emerging markets than developed markets.

As things stand, the MSCI World Index, which included only developed economies, has a current price-to-earnings ratio (P/E) of 19.1x, higher than its 10-year average of 16.8x. In comparison, the current P/E of MSCI Emerging Markets Asia Index is at 15.2x and below its 10-year average of 17.9x.

Greece flirts with default

By all records, Greece is steeped in debt and has trouble servicing them. Greek newspaper Kathimerini reported that Greece came close to defaulting on a €750 million repayment last week.

In June, the Greek government has to come up with €1.5 billion, with a €309 million repayment due as soon as 5 June 2015. With deposits fleeing from the local banks, Athens is only kept afloat by ECB’s emergency liquidity assistance (ELA) programme, according to a report by the Bundesbank.

This generated talks of an ‘endgame’ for Greece where chances of a default are almost certain, should this funding lifeline is cut off in one way or another.  Although international banks’ exposure to Greece has substantially reduced since 2009, the impact of a Greek default on Asia cannot be brushed aside.

Ahead of the Asia open

Despite positive leads from overnight markets, the directionless trade seen in the previous Asian session is likely to continue on Tuesday. Already we have seen the Nikkei trading higher, while ASX 200 is on the backfoot.

On the calendar, we have RBA minutes and Bank Indonesia monetary policy. Ahead of the Asia open, we are calling CSI300 4526 -49, Hang Seng 27573 -18, Nifty 8355 -18, and MSCI Singapore 388.90 unch.

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