Uncertainty to drive sentiments

It has been more than two days since the Fed refrained from raising interest rates and add to its litany of requirements to hike

Price ticker reflection on US trader
Source: Bloomberg

In these two days or so, market participants remained confused over the impact of the FOMC inaction on their trading views. Instead, they reacted to bits and pieces of event.

At first, they were worried about global growth as the Fed’s cautiousness was translated into a lack of confidence of the US economic outlook. Naturally, armed with such a view, they sold US assets and bought safe-haven sovereign bonds.

Over the weekend, and on Monday, a trio of Fed officials’ comments corroborated a narrative that the Fed will still increase rates this year. This reinforced Janet Yellen’s comment that the October meeting is a ‘live’ one. This is not my view.

October is extremely unlikely, and the markets agreed, pricing in only a 20% probability of a rate hike. There will simply be insufficient data to justify a shift in the Fed’s view. December is still possible as there will be more economic data and probably more time for global developments to blend into a genial picture.

Moreover, the fact that most of the Committee members are still of the view that there would be at least one rate hike this year will put their reputation on the line if Fed remains muted in the next two meetings.

The quick shifting of market sentiments based on Fed rhetoric is quite flimsy, and this means we would see some volatility this week, given the data-heavy calendar. China’s manufacturing data will be pivotal to the trading tone, as many investors alluded Fed’s reference to developments abroad to mean China slowdown and stock markets’ weakness.

China markets closed higher for the second time this week. Some of the buying stemmed from hopes that prospects of a trading link between London and Shanghai will increase the profitability of Chinese brokerages.

However, falling volumes may be a concern for market players. The total turnover value of shares traded on the mainland stock exchanges fell to CNY 20.5 trillion at the end of August, less than half of the peak volume of CNY 47.1 at end-June. Volume in the Shanghai Composite was 27% lower than the 30-day average today.

While low volumes may heighten the volatility in the markets, China is quite a different beast. Substantial government intervention may yet curb excessive fluctuations, as the national securities regulator has pledged to do so on several occasions. In addition, state councillor Yang Jiechi stressed that the stock market crash does not reflect the health of the Chinese economy, adding that official measures to manage the slide is within reason.

In Singapore, the Straits Times Index swung into losses in the afternoon, as lower trading volume exaggerated price movements. The STI was trading near the top end of the 2850-2900 band before pulling back. The index closed down 0.5%. Trading volume was over 20% lower than the 5-day average. Keppel Corp and Sembcorp Marine were among the counters with the highest losses.

 

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