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Paint the town red

Sellers painted Asian equity markets red today, and it was a horrible sight to behold. The weakness was also a reaction to the steep decline in US stocks last Friday. 

Singapore's Exchange
Source: Bloomberg

I never care for the word ‘swoon’ to describe falling equity markets because the word is used in Mills and Boons romance novels to describe one-dimensional female characters falling hopelessly in love with equally one-dimensional male characters. But I digress.

It is undeniable that the trend for global equities is facing south. It has been for the last few months and the downtrend has just gained more force lately. The fact of the matter is there is no easy explanation for the sharp move lower.

Some blamed it on the yuan devaluation and the Chinese PMI readings. Some said the broader conditions of slowing global growth, falling commodity prices and deflation risks dragged equities down.

They could all be right. I feel that the lack of clarity on what was the trigger for the stock slump makes it difficult to get a sense of the market. This suggests that the selloff could still have some room to go.

Sellers painted Asian equity markets red today, and it was a horrible sight to behold. The weakness was also a reaction to the steep decline in US stocks last Friday. None of the regional indices were spared, with Chinese stocks leading the way lower.

The Shanghai Composite (SSEC) plunged 8.5%, trading down -300 points and was pressing 3200, which was seen as the next key support, ahead of 3000. The Chinese government announced over the weekend that USD 540 billion pension funds are now allowed to invest up to 30% of their total net assets in equities for the first time.

But such a move was deemed insufficient to arrest the downward spiral as bearish sentiments bashed through. Perhaps the market was also disappointed that the PBOC did not announce any cuts to the reserve requirement ratio (RRR).

There is a lot of fear in the markets. There are talks that the repeat of the China stock market decline may force more devaluation of the yuan, which could ignite a so-called currency war in the emerging markets.

In the currency markets, CHF and JPY remain the favourite currencies to purchase against the background of risk aversion. EUR was also a surprise ‘winner’, strengthening against the dollar, but failed to break the 1.15 barrier. Commodity currencies were among the worst hit, as falling raw materials, especially crude oil, dampened the outlook for commodity-producing countries. AUD, NZD and CAD were embattled.

The Bloomberg Commodity Index slid to a 16-year low. Meanwhile, diminishing expectations of interest rate increase have seen USD pare back recent gains and GBP staying range bound today. The market has scaled back hopes of a September rate move, with the implied probability standing at 30% chance as of today. The current situation of a global stock collapse would also stay the hand of the Fed, for fear of aggravating the market volatility.

Singapore stocks plunge

The Straits Times Index (STI) plummeted 4.3%, or 128 points, the worst one-day drop in almost seven years since 24 Oct 2008. While many investors were excited after the index ended last week below the psychological 3000 level, the steep fall in US market on Friday precipitated the slump that we saw today.

The STI closed below 2850, and judging from the performance in the early European markets, we may be seeing more downward pressure in the coming sessions. Therefore, bargain hunters should beware of catching a falling knife. The 2800 will be the next key support to watch. Longer-term investors, of course, can still practice dollar-cost averaging method to ride out the massive volatility.

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