Sombre but not panic

Investors’ mood was notably sombre at the start of the week, as Friday’s terrorist attacks on Paris aggravated weak sentiments. 

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Source: Bloomberg

Market participants were also facing uncertainty regarding how global leaders would respond to the tragedy.

France has already retaliated with an air strike of the ISIS stronghold in Syria on Sunday, and there are questions whether other western countries will step up their military presence in regions infested with ISIS militants.

Understandably, Asia opened sharply lower on the news, and risk aversion was dominating the financial markets. However, as the day progressed, the market seems to be of the opinion that the negative impact of the terror attacks on the financial markets are likely to fade over the next week or so, if history is any indication.

Although we cannot say the same for the emotional impact. Since the 9/11 attacks, there have been four major terror attacks across the world. The local markets returned back to the levels before the attacks, soon after the initial selloff.

Of course, for some regional markets, domestic forces were probably more influential. Chinese markets shrugged off early losses to close up, despite soft sentiments and news of higher margin requirements. Shenzhen shares led the rally as investors expect the trading link between the Shenzhen and Hong Kong stock exchanges to be up and running in the coming months.

Hong Kong’s Oriental Daily reported that the CSRC international advisory committee member Ronald Leung hinted that the stock connect is likely to be announced before the end of the year and to begin operations in the first quarter of 2016. In addition, Shenzhen officials reportedly visited Beijing to lobby the central government for the trading link to start as soon as possible.

The Shanghai Composite rose above 3600 to close up +0.7%, whereas the Shenzhen Composite added +2.1%, led by information technology shares. However, Hong Kong equities remained under pressure. The rest of the Asian equities also were under stress. The ASX 200 and the Nikkei 225 dropped -0.9% and -1% respectively.

Japanese shares appeared to have lost pace ahead of the 20,000 barrier, with some worries over the local economy, after Japan entered into a technical recession in the third quarter. Q3 GDP was worse than expected at -0.2% quarter-on-quarter (QoQ), versus an estimate of -0.1%.

This, however, sparked off fresh speculation that the Bank of Japan (BOJ) will need to increase its monetary stimulus programme. I think this was reflected in the partial rebound in the Nikkei following an initial knee-jerk reaction to the GDP data where the index fell as much as -1.8%.

The Straits Times Index also fared poorly, tumbling below 2900 points to a five-week low. As of 4.05pm, Genting was the worst performer in the 30-stock index, posting losses of over 5%, as the tourism sector is commonly affected in the event of terrorist acts. Majority of the STI was in the red.

Meanwhile, UOB and SIA paid the dividend to their stockholders today, which could also have added to the downward pressure. UOB fell over -2% to pull below SGD20, while SIA shaved more than -1% off its share price, as of 4.13pm. Despite a soggy STI, SATS managed to rally around 2%, after Bloomberg noted that the company has one of the biggest increase in consensus analyst rating over the past four weeks.

While risk appetite has been curtained since the start of the month, and sentiments were dented earlier today as investors react to the news, the mood is more sombre than panic. Besides Asian equities paring back opening losses, currencies also displayed the same moves.

Early flight to safety saw the USD/JPY tumble by 1% to low-¥122 in the morning, but the pair rebounded sharply to high-¥122 in late Asia. EUR/USD also recovered from sub-$1.07 depths to mid-$1.07 levels. On the other hand, SGD remained elevated at S$1.4200+ levels, on broad-based dollar strength.

The fact that European stock markets were only moderately lower underscored the market sentiment. CAC slipped -0.8% in early trade.


What’s on this week?

European Central Bank president Mario Draghi will be speaking in Madrid later today. He had already dropped heavy hints that the ECB will ease further in December. With just three weeks before the policy meeting, his speeches between now and then will be closely watched, along with the other ECB speakers. US inflation data may also take some of the spotlight although some Federal Reserve officials have downplayed the role of inflation in the December rate decision.

Nonetheless, a weak CPI reading could raise concerns around the wisdom of a tighter monetary policy at this point. FOMC minutes will also be released on Wednesday, 18 November. The BOJ will be having its policy meeting this Thursday, 19 November.


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