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Are regional equities MERS-merised?

It would be insensitive to downplay the seriousness of the Middle East respiratory syndrome (MERS), but it would be equally irresponsible to exaggerate the impact of the virus on market sentiment.

Women wearing mask in South Korea
Source: Bloomberg

On Saturday 13 June, the World Health Organisation (WHO) said that the spread of the respiratory virus in South Korea was slowing thanks to effective control measures.

As of today, there are 154 confirmed cases so far, with 19 deaths reported, according to the South Korean health ministry.

While the MERS outbreak may breed fears of another severe acute respiratory syndrome (SARS) episode, there is little risk of it impacting investor sentiment at the moment, simply because the situation appeared to be under control.

Instead, the current widespread risk aversion emanated from headlines out of Greece and ahead of a major Fed policy meeting. Mirroring overnight performance in European and US markets, equity markets in Asia were also pessimistic today.

In addition, there were also regional drivers to consider. Chinese equities continued to fall, as retail investors were once again worried that a huge liquidity lockup ahead of the subscriptions for 25 IPOs may drain interests from existing shares.

The China A50 and the CSI 300 indices chalked up another day of heavy losses. Softening trading volume may also be behind the drop with volumes on the Shanghai Composite around 5% lower than the 30-day average today.

There was also news that 94% of the Shanghai Composite shares are trading at higher valuations compared to the index. Perhaps this also struck fear into retail investors’ confidence.

Recent tightening moves on margin lending have also let some air out of the red-hot Chinese markets. Looking at China A50, the index has fallen 8.8% since Monday 8 June to today.

Likewise, the CSI 300 dropped 5.4% in the same period, but that level of volatility in China is becoming fairly unremarkable of late given the retail-driven nature. For now, it looks like the Chinese stock market may grind sideways until the locked up IPO funds flow back into it, estimated to be on 24 June.

The 50-day moving average of 4910.5 should pose as the first line of defence for further declines in the China 300 cash (a close proximate of the CSI 300 cash), which traded at around 5040-5045 on our platform.

Singapore markets hamstrung by global risks

The Straits Times Index (STI) gapped down for the second consecutive session today. This could be partly a function of a jittery global tone as investors grapple with the possibility of a Greece fallout and uncertainty ahead of the FOMC meeting.

There may be concerns that Singapore would be significantly affected via the trade channel if a Grexit contagion spreads throughout Europe and the US financial system. The index swiftly made a run below strong 3300 support early on, and made quick work of short covering interests. Financials continue to slip today while Noble’s initial bounce was short-lived, with prices relatively unchanged from the previous session.

Headline risk around Greece will jostle for market attention alongside FOMC, and tonight’s Euro working group may shed more light on the negotiations ahead of the Eurogroup meeting on Thursday.

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