Asia calms

While many market participants were expecting Asia to be in a sea of red today, the regional markets actually did pretty well. It may seem that calmer heads have prevailed for now against memories of the recent stock rout.

Singapore Stock Exchange
Source: Bloomberg

One of the reasons could be because most investors were expecting the Chinese authorities to support the domestic equity markets ahead of the Victory Day commemoration tomorrow. They appeared not to have disappointed.

The Shanghai Composite started well and ended the day slightly lower at -0.2%, helped by moderate gain in blue chips. The A50 advanced 0.8% to float above the key 10,000 level.

State buying was suspected to be present in the final hour of the trade. However, smaller caps were not so fortunate. The Shenzhen Composite fell 2%.

Some think that the renewal in Beijing intervention was due to orders from the top echelons to preserve market stability ahead of the WW2 commemoration parade. If this is true, then the next question on the minds of many traders is ‘what will happen on Monday?’ Without the state buying, how will the Chinese markets fare?

The Chinese regulator has stated that the Chinese Securities Finance Corp (CSFC) will intervene in times of excessive volatility. In clear terms, this means that China will allow stocks to fall, as long as they fall in an orderly manner. This is probably as clear as it can get, and we are still quite vague about how the whole thing works.

Nonetheless, if the global markets behave fairly well over the next two days, i.e. signs of stabilisation, then we could see some sideways movement creeping into the Chinese markets when they return from the long weekend. Otherwise, the strong downward pressure might continue.

Fed-watching takes over

Heading into the rest of the week without China, focus will now shift to the Fed. While the US economy has clearly improved, there are still some data that needs to fall in place before the Fed can give the go signal. While Fed Vice-Chair Fischer refused to commit to a timing for the rate hike, his comments on inflation puts a September move back on the table.

He said ‘there is good reason to believe that inflation will move higher as the forces holding down inflation dissipate further’, before adding that the broader health of the economy provides a better measure. The clutch of US data will capture the market’s attention, starting with ADP reading tonight ahead of the more important nonfarm payroll. The market now sees a 32% chance of a rate hike in September.

Short-lived gains in oil

The amazing 27% jump in oil prices over three sessions is fast becoming a distant memory, as fundamental conditions remain unchanged. Oil gave back more of its gains today. WTI traded below $45, as API reported more supplies, and a Bloomberg forecast of an increase in US stockpiles. This perhaps is what the oil traders refer to as a bungee cord snap back.

While some are blaming the general risk-off tone for these wild moves, it seems like some are overlooking the influence global demand has on energy prices. It’s not just China’s manufacturing sector that is struggling, US, EU, Japan and emerging Asia are also making average progress.  

Steadfast STI

The Straits Times Index (STI) has been quite steady today, and has managed to ignore some of the noise from the overnight US markets. The support came from buying in banking counters. Investors are eyeing a potential rate hike in September to translate to improved interest income for the Singaporean banks.

Also, the recent slump in share prices have made these counters more attractive to hold. Some commodity companies are also performing well despite the slump in commodities. Looking ahead, I feel the index could move into a sideways trance for the rest of the week.

The SGD weakened slightly today, on a higher dollar. USD/SGD inched briefly past $1.4150, but remained under the level for most of today. The $1.42 level is still the level to break, although I feel we won’t see central bank interest until higher up. 

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