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Game of calm

It is quite clear that the market is experiencing a less stressful time since the middle of last week. The VIX index fell to around 12 from 20 at the height of the Greece tussle. Signs of stability in the Chinese equity markets also contributed to the steadier market tone.

China data board
Source: Bloomberg

The calmer situation is even more pronounced if you look at the five-year average (2010-2014) in the VIX index, which stands at 18.9. Generally, any value above 30 is considered to be highly volatile arising from heightened investor fears or great uncertainty.

In contrast, VIX values less than 20 is associated with a less stressful and possibly complacency in the markets. Benchmarking against these, recent years have thrown up relatively complacent markets.

You can’t really blame investors for feeling optimistic on the financial markets, particularly equities and bonds, amid the era of ultra-easy monetary conditions. Global equities are generally in the positive on the year, although the varying degrees of market participation in the rally, suggests that some of those upswings are not as robust as others.

Chief Market Strategist Chris Weston looked at market breadth in his note today. A further implication from a rising stock market amid poor market breadth is the increased risk of a strong reversal, as the number of firms participating in the move higher tapers off.

Eventually, the tide of lower share prices will turn the stock index in the opposite direction. Therefore, it is important to pay attention to various technical momentum indicators, and not just the headline move.

China is quite a different animal. The trend has firmly switched to consolidation mode, with the government’s heavy-handed approach to the recent stock slump still hand-holding equity plays. Volatility has certainly fallen off in a big way, and sustained signs of stability are allaying investor’s fears, at the very least, fears of further declines.

The Shanghai Composite is moving towards 4500, the level where Chinese brokers have said they will withdraw support measures. The SSEC has rebounded 17.5% since the government restricted short selling earlier in July. I reckon that Chinese equities are going to grind sideways for a while longer as market conditions return to normalcy, with the authorities carefully scaling back the support measures. On the aside, 18% of A-shares is suspended.

Commodity ‘rout’ gaining more airtime

While the record highs of US indices and the big fall in Chinese stocks received much coverage in the mainstream media, the bearish commodity market saw considerable fewer treatment.

The Continuous Commodity Index (CCI) fell deeper, which reinforced broader concerns that the global economy is not seeing a solid recovery. Part of the explanation for the weakening commodity prices revolved around China, given its importance as an end-demand for raw material.

The restructuring of the Chinese economy, moving towards more consumption-driven than investment-led, meant that there is lesser need for infrastructure. By extension, this would affect demand for iron ore, steel and copper. Is it any wonder that the prices for these hard metal are on the decline?

Gold and oil led the decline, and they have their individual reasons for the weakness. For the shiny metal, the most immediate reason is the strong dollar. The second reason is the increasing prospects of higher interest rates. As gold brings no yield, higher interest rates increase the opportunity costs of holding it.

Other reasons include the low inflationary environment as well as the recent bunch of positive geopolitical news such as progress on the Greece bailout deal and Iran’s nuclear agreement. For oil, signs of a worsening supply glut pounded on crude futures, which saw WTI prices eyeing March lows, around $42-$45.

Clearly, falling prices would affect commodity producing nations, not just in the domestic financial assets but also the real economy. Lower prices would pressure their export receipts, leading to loss of jobs and drop in capital investment. Hence, we are seeing Australia, New Zealand and Canada looking to act to support their economies via further monetary easing. This damaged the value of their respective currencies, and we have seen AUD/USD, NZD/USD and CAD/USD falling to six-year lows.

Singapore holds up, Noble did not

Singapore blue chips held up within its new range fairly well, although interest seems very low, looking at the daily candlestick chart. The 200-day moving average at 3363.41 is seen as a good support ahead of the 3350 handle. The global calm in risk markets appeared to have extended to Singapore, although that’s not necessarily a good thing for the moribund domestic trade.

On the other hand, Noble came under strong selling pressure, with prices heading to fresh over six-year lows early on, falling almost 7% at one point. While the overall weak commodity outlook certainly dimmed the company’s revenue growth, the ongoing debacle about its accounting practice also reduced confidence in the counter.

Investors are probably cautious ahead of the PwC review. The commodity trader is expected to release its Q2 earnings before the National Day long weekend on 7 August, and the management report should be keenly watched. However, I feel that whatever they say is unlikely to build confidence. The management still need to adequately address the critics’ questions, including the public disclosure of Yancoal valuation model.

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