Nov 03, 2014

    Central banks paved the way for rally across major markets

    TRADERS have often been told not to fight the United States Federal Reserve, given its significant clout.

    Now, that message appears to apply to other major central banks too.

    On Wednesday, as widely expected, the US central bank halted its bond purchases.

    But then, on Friday, the Bank of Japan (BOJ) did the opposite, stepping up its already aggressive bond purchases - taking the market by surprise. In buying bonds, the BOJ is essentially printing money. This forces down bond yields and weakens the yen.

    And when this happens, it encourages risk takers to borrow big sums in yen to fund their huge bets on stocks and higher-yielding currencies.

    Essentially, that means replacing the US dollar with the Japanese yen in the profitable but highly risky "carry" trade.

    The result was a rally in stocks across most major markets, with Tokyo's Nikkei Index jumping almost 5 per cent and Wall Street's S&P 500 Index hitting a record high of 2,018 points after gaining 1.17 per cent.

    In Singapore, the benchmark Straits Times Index rose almost 40 points, or 1.24 per cent.

    But, even before the BOJ stepped up its bond-buying efforts, the latest fund-flow data furnished by EPFR suggested that investors were finding their way back into the stock market after the jitters earlier last month.

    In the week ended on Wednesday, they poured US$20.4 billion (S$26.2 billion) into equity funds. This marked the first time in four weeks that investors had poured money into global stock markets.

    One reason for the improved sentiment in markets such as Wall Street was the better-than-expected quarterly earnings posted by US companies, which calmed the stock-market turmoil earlier in the month.

    In Singapore, sentiment was also buoyed by the strong earnings posted by banks which make up a significant percentage of the STI.

    Then there is the impact of falling oil prices on the stock market.

    In a recent report, CIMB noted that direct beneficiaries from lower oil prices would be the transport and mining sector, while the consumer sector benefits indirectly.

    But there may be cutbacks in oil exploration in areas such as ultra-deepwater drilling, whose costs can be economically justified only when oil prices are high.

    However, some investors suffered a slip-up on their favourite counters.

    Lifestyle-products group Osim International, for example, fell 18 per cent in price to $1.86 last week after posting a 28 per cent drop in its third-quarter profits to $16.4 million.

    CIMB, which slashed its target price to $2.37, described the results as a "shocker" and noted that the company's bottom line may be pressured by start-up costs incurred by gourmet beverage unit TWG Tea, as it beefs up its presence in China.

    Meanwhile, beverage giant Fraser & Neave may find itself in the spotlight on resumption of trading today, after announcing that it had lost a legal spat with a joint-venture partner that had been trying to force it to sell its 55 per cent stake in Myanmar Brewery, regarded by many as the crown jewel of its business.

    An arbitration tribunal had ruled that the JV partner, Myanmar Economic Holdings, was entitled to buy F&N's shares in Myanmar Brewery.