Expect a rocky ride ahead for stock market

RATE HIKE SOON? US Federal Reserve chairman Janet Yellen testifying on Capitol Hill in Washington on Wednesday. The Fed announced another cut in its quantitative easing programme, raising the possibility of an interest-rate increase.


    Aug 04, 2014

    Expect a rocky ride ahead for stock market

    IF THE first trading day of this month is anything to go by, traders can expect a more volatile time ahead for the stock market in August.

    Suddenly, all the risks that investors had been ignoring for months as they partied away and pushed stock prices to fresh high levels have come back to haunt them.

    The biggest worry as they scrambled to lighten their positions last week was a fear that the United States central bank might start to raise interest rates sooner than expected.

    On Wednesday, the Fed announced another cut in its quantitative easing (QE) programme - the controversial modern equivalent of printing money. Starting from this month, it is cutting its monthly rate of bond purchases by US$10 billion (S$12.5 billion) to US$25 billion.

    And if the pace at which it keeps reducing its bond purchases continues, it will be on track to exit QE in October.

    So, with an eye on the possibility that the Fed may soon raise interest rates after that, it gave traders no solace to find that US employers had added 209,000 jobs last month.

    While that was shy of the 230,000 jobs eyed by economists, it marked the sixth straight month of more than 200,000 job increases in the US and suggested that the US economy is on the mend.

    Also compounding their misgivings was the strengthening of the US dollar, which rose last week against a range of currencies such as the euro, yen and pound.

    In the past, a weak dollar had partly helped to fuel the global stock market rally as hedge fund managers would borrow massively in greenback to make huge gambles on other currencies and higher-yielding assets such as emerging-market stocks.

    They did this in the hope that when they have to repay their dollar loans, they would also be able to make a gain from any further weakening in the greenback.

    And when the US dollar strengthens, this triggers a sell-off in emerging-market stocks, as hedge fund managers are forced to liquidate their holdings in order to repay their US-dollar loans.

    Along with the renewed interest-rate jitters was the sell-off in the US junk bond market last month.

    In recent years, yield-hungry investors had been snapping up junk bonds because of their higher yields, as interest rates fell to almost zero with the US Fed's QE programme.

    But the US junk bond market's potentially frothy valuations and the impending end of the Fed's money-printing programme are making investors jittery and this has led to a worry that the stock market may be dragged down by any big sell-off in the bond market.

    Traders have also finally awakened to the escalating tensions in Europe, as the European Union turned up the heat on Moscow by including Russia's biggest bank, Sberbank, on its list of sanctions targets.

    Their mood was further soured by growing concerns over Portuguese lender Banco Espirito Santo, which unveiled a huge first-half loss that left its shares reeling and raised concerns over the economic health of the euro zone.

    Against the backdrop of all these worries, investors continued to pour funds into Asian markets last week.

    Citi Investment Research noted that last week, there was an inflow of US$5.3 billion into emerging-market funds. "This is the largest single-week inflow since January last year," it said.

    In particular, funds investing in China equities contributed US$1.4 billion to the inflow, as investors were cheered by the stimulus which Beijing was injecting into the Chinese economy.

    But whether global investors can sustain their interest in the China market if sentiment turns sour elsewhere remains to be seen. That will, in turn, have an impact on counters listed on the Singapore Exchange such as DBS Group Holdings and CapitaLand, which have substantial exposure to the mainland economy.