Jan 26, 2015

    Expect volatile week ahead for STI

    AFTER the euphoria comes the reality, as markets turn their attention away from stimulus measures to fundamentals this week.

    Many stock markets around the world, including Singapore, enjoyed a week-long rally, courtesy of the European Central Bank's (ECB's) massive bond-buying programme.

    A bigger-than-expected 1.1 trillion euro (S$1.7 trillion) worth of Quantitative Easing (QE) measures, above the 500 billion to 600 billion euros that economists were expecting, bolstered investor sentiment.

    The Straits Times Index (STI) rose 110.8 points or 3.4 per cent for the week, logging its first weekly gain this year.

    Investors and markets long used to the idea of cheap money have been lapping up the different rounds of monetary stimulus packages unveiled by various central banks.

    Recall the Bank of Japan's surprise move in announcing an additional 20 trillion yen to its asset-buying scheme in October, making it a total of 80 trillion yen (S$913 billion) annually.

    That helped the STI to jump 40 points or 1.2 per cent on the same day of the announcement.

    Three rounds of QE in the United States started in November 2008 have not only swelled the Federal Reserve's balance sheet from some US$870 billion in the pre-global financial crisis days of 2007 to around US$4.5 trillion (S$6 trillion) currently.

    They also fuelled a six-year rally in the US that led to 38 new highs on the Dow Jones Industrial Average and 53 record high closings on the S&P 500 last year.

    The STI has also recovered from levels around 1,500 during the dark days of the 2009 lows to 3,411.5 as of Friday.

    Hopes that markets will continue to do well this week with the assurance of high liquidity sloshing about in global financial systems due to the ECB's move will have to be tempered. US investors are already focusing on company earnings as the ECB afterglow fades.

    The Dow dropped 141 points or 0.8 per cent while the S&P 500 lost 11 points or 0.6 per cent on Friday after profit warnings issued by conglomerates UPS and Kimberly-Clark.

    Economists have also warned that monetary stimulus is no panacea for Europe's woes.

    "Deep structural reforms are required in order to raise Europe's potential trend growth," said Schroders senior European economist Azad Zangana.

    "Without structural reforms, the ECB may be forced to add additional stimulus in the future as growth falters again."

    A potential disruptor to growth and contributor to market volatility comes in the form of a change in government in Greece, where parliamentary elections were held yesterday.

    Opinion polls suggest that the opposition Syriza party opposed to austerity measures could take pole position in the race.

    The party had campaigned on a platform of higher public spending and a write-down of Greece's 320 billion euro of debt, sparking fears of a default and even an exit from Europe's monetary union.

    European policymakers would also have to deal with a slew of data out this week, including retail sales today, consumer confidence on Thursday, as well as inflation and unemployment rates on Friday.

    It will be a data-heavy week in the US too, where new home sales will be out tomorrow and preliminary estimates for fourth-quarter growth will be released on Friday.

    Crucially, the Fed will hold its two-day interest rate policy setting meeting starting tomorrow.

    Even though it is not expected to change its stance of keeping rates at a record low of zero to 0.25 per cent, all eyes will be on whether it will give further forward guidance on when it may raise rates.

    Get set for what could be a bumpy ride this week.