China’s non-reaction to Wall Street’s plunge should cushion Asian market falls and signal that regional markets including Singapore may not suffer a steeper fall of up to 8-10% for the time being.
China’s stock market has largely ignored the Dow’s plunge last week, with major indices gaining while the rest of the world were mostly down.
This sign of decoupling unlike at end-Feb/March when Wall Street reacted adversely, plunging over 450 points on the day Shanghai plunged 9% could see a repeat of market behaviour then when the STI rebounded quickly from its 11.6% in a week with a new high seen in a month.
In coming days the local market my remain touchy to Wall Street even as it made a spirited rebound this morning. The index has rebounded above the 3500 psychological level as we had talked about in latest market view but it is too early to call for a bottom at Friday’s 3444 low.
If Wall Street continues to fall this week, breaking 13000 and next support around 12800, the STI is likely to fall back to 3400, which means an 8% pullback from 3688. But if the Dow rebounds to 13600-700, then the STI should rally to 3550-80, covering more of last Friday’s breakdown gap between 3576 to 3504.
We had warned of a pending pullback in the latest two market views with the first report on July 18 calling for a fall to 3580 from the then 3688 record high on July 16 but felt it was still possible for the STI to test 3700 in August. The STI fell to 3578 on July 18 but rebounded to 3669 on July 24.
The next report on July 25 after Wall Street’s overnight plunge exceeding 200 points warned of a significant market pullback in the months ahead and that the STI could see a 8-12% fall instead of the usual 3-5% pullbacks seen in recent months. A 10% fall could see the STI back to around its first major high of 3316 early this year.
So far the index has dropped 244 points or 6.6% from 3688 to 3444 last Friday. The end Feb/early March correction was more severe, down 385 point or 11.6% as the sub-prime woes had just started. It is well known now and its bearish impact on Singapore should be less.
The factors causing the worldwide market correction then are about the same that caused Wall Street’s latest scare mainly the sub-prime mortgage woes. There is certainly a worsening of this issue with the US housing market in depression and fears that it can only get worse with repercussions on companies’ earnings and GDP growth.
Thus Wall Street is expected to remain unsettled as the ramifications of the housing crisis can drag for a long time. This is proven by the resurfacing of the sub-prime issue after a few months. A choppy Wall Street remains a drag on Singapore as the US remains our biggest export market.
But strong regional fundamentals will re-assert themselves and bring back investors to regional markets. Already we have seen some choice sectors led by O&M, construction/building materials, commodities and tourism sectors remaining resilient.
Property counters have already plunged with Capitaland and CityDev down about 20% from their recent all-time peaks and are taking the rebound lead. They should help in cushioning the STI’s fall together with the other bullish sectors.
The reporting season is going full swing now and while overall sentiment is still sensitive to Wall Street, strong earnings reports from such blue chips as the banks, SIA, SingTel, ST Eng, SembCorp and Venture should also support the market as earnings upgrades may continue to be justified despite the market fall.
A minor rally cannot be ruled out next month with the STI testing 3550-3600 but we are unlikely to see the 3688 high being tested until year-end. Prospects for the following months from September to November remain uncertain at this stage. But we expect 3300-50 to be a strong support during those months.
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