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Rising tide lifts all boats

Buoyant sentiments were in full display across Asia as regional bourses flashed green on Wednesday. Risk is back in vogue, and the European traders clearly embrace it as well. 

Singapore Stock Exchange
Source: Bloomberg

We are seeing a strong start in early Europe, with FTSE 100, DAX and CAC opening considerably higher.

Market participants cheered China’s plan to ramp up infrastructure spending as well as rolling out expansionary fiscal measures, such as income tax cuts. Chinese equity markets posted a second day of gains.

The Shanghai Composite Index (SHCOMP) closed at the highest in over two weeks at 3243. Shares of smaller firms led the recovery, with the ChiNext climbing 3.5% to end above the key 2000 level. The expectation of fresh stimulus measures may have encouraged demand for the small caps.

However, China was not the star performer today. It was Japan who surged an impressive 7.7%, the largest one-day advance since October 2008. The Nikkei 225 rocketed through 18,000 and added over 1300 points. Part of the surge was due to hedge funds covering their short positions. The Nikkei 225 closed down 2.4% on Tuesday, where short-selling accounted for 41.2% of trades, near to the record 41.6% seen last week.

The pickup in global risk appetite also helped lift Japanese equities amid oversold conditions. In addition, Prime Minister Abe’s pledge to reduce the corporate tax rate of 35% by at least 3.3 percentage points next year, bolstered the outlook for Japanese companies. Japan’s corporate tax rate is already the second highest among the G7 economies.

Singapore tracks regional equities higher

The Straits Times Index (STI) has done well today, responding positively to improved market sentiments. The index easily punched through the 2900 level early on, and extended higher to one-week highs.

The recent violent movements in global equities had a bearing on Singapore shares. To put things in perspective, the STI is consolidating in a wider range of 2800-3000 over the past three weeks. There are also concerns that the recent movements were driven by declining volumes.

The weekly trading volume in the week ending 4 September dropped to the lowest in six weeks at 1.28 billion units, compared to last week’s 2.24 billion, which was the highest since February 2012 (also known as the Black Monday week).

With the STI on a downtrend, further dragged by the global stock rout, valuations may have become more attractive for investors to upsize their longs. The three Singaporean banks have seen their share prices tumble 13%-16% since August, which saw their price-to-earnings (P/E) ratio drop to lowest since early 2014.

Despite the four-year rally in banking counters since 2012 until the recent selloff, the P/E ratios remained below its longer-term average. Admittedly, worries over the growth prospects of the three local banks amid slowing Chinese economy, decelerating loan growth, and uncertainty over the timing of US interest rate hike, may have deferred some investors’ plans to scoop up cheaper bank stocks.

The STI may find it more difficult to overcome the 2950 resistance in the shorter trading week. Market participants are likely to stay on the sidelines on Thursday as the financial markets will be shut on Friday for polling day. Clearly, global market movements on Friday will dictate how the STI perform next Monday. For now, the mood is buoyant, but it may turn cautious next week as FOMC approaches.

USD/SGD pulled back from a six-year high of 1.4296, to trade around mid-1.41 on Wednesday. The daily MACD suggested potential weakness in the pair. The MACD line crossed below the signal line, and heading towards zero.

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