Sep 29, 2014

    Ghost of Octobers past has traders spooked

    OCTOBER is almost upon us.

    Going by the precedents established in previous Octobers, traders are concerned that the market may be in for a rough ride.

    In October 1987 and again in October 1989, Wall Street inexplicably crashed, triggering a global sell-off of stocks.

    Six years ago, stock prices registered some of their worst losses in October as the world's financial system teetered on the brink of collapse after United States investment bank Lehman Brothers' demise the previous month.

    It is understandable that traders are anxiously hoping history does not repeat itself this year.

    So far, so good. The local stock market appears to be in a fitful slumber. The Straits Times Index ended 0.39 per cent lower at 3,292.21 last week, as it continued to gyrate in a tight range within the 3,300 support level.

    Last Friday's turnover of $718.2 million was also lower than the far more lively daily average turnover of $1.14 billion encountered in the first half of the year.

    But on Wall Street, it was a different story. Last week, stock prices got swept up in a new wave of volatility, with the Dow Jones Industrial Average registering triple-digit moves each day.

    To explain the weakness in the US stock market, the usual suspects were trotted out: Concerns that the US central bank may raise interest rates earlier than expected, worries over China's economic growth, and anxieties related to a host of geopolitical factors.

    As US stock prices weakened, investors fled to the safety of the bond market, with data from financial information provider EPFR reflecting a US$3.8 billion (S$4.8 billion) inflow into bond funds last week.

    For emerging markets, the biggest headache is the rising US dollar as it strengthened against regional currencies such as the Singdollar and the Japanese yen.

    This, in turn, caused an outflow of funds investing in regional equities.

    Data from EPFR shows that investors sold a net of US$1.8 billion in Asian equity funds last week - the biggest one-week outflow since January.

    The strengthening greenback also puts downward pressure on commodity prices. Brent crude, for example, fell to a near two-year low of US$97 a barrel.

    The softer raw material prices also dampened the performance of commodity-heavy markets such as Jakarta, which lost 1.8 per cent, and Sydney, which was down 2.2 per cent last week.

    As the third quarter draws to an end this week, the focus will be on this month's US job report out on Friday, with economists tipping the creation of 211,000 jobs - outpacing the disappointing 142,000 new jobs last month.

    Some traders are hoping this month's job number will give them an indication as to whether the economic recovery in the US is on track. This, in turn, will enable them to predict how soon the Federal Reserve may raise interest rates.

    AMP Capital's head of investment strategy, Shane Oliver, said: "Shares remain at risk of further short-term weakness, particularly ahead of the end of US quantitative easing next month, the US mid-term elections in November, and as we are still in a seasonally weak part of the year for shares."

    But he stays convinced that any drop in stock prices would be a healthy correction, allowing shares to let off a bit of steam.

    He said: "Any market correction should be seen as a buying opportunity, as the cyclical bull market in shares has further upside."