Jan 27, 2014

    Investors skittish as Horse Year looms

    ONE week before the Horse Year gallops in, Wall Street has already suffered the equivalent of being thrown off the saddle.

    On Friday, the Dow Jones Industrial Average dropped nearly 320 points, or 2 per cent. This brought its loss for the week to over 3.5 per cent - its worst one-week plunge in two years.

    In the wake of such a big loss, it is only natural to expect regional markets to suffer a knee-jerk sell-off when they reopen for trading today.

    This is not exactly the kind of hongbao investors expect to receive as they welcome the Chinese New Year later this week.

    As it is, there is nothing much to celebrate so far. The Straits Times Index ended with a 2.27 per cent drop last week, while Hong Kong's Hang Seng was down 2.95 per cent and Tokyo's Nikkei-225 Index lost 2.18 per cent.

    And if the dour mood continues, this will mark the first time since early 2009 - when the global financial crisis was at its peak - that local stock prices fail to produce the traditional Chinese New Year rally.

    Wall Street's loss of nerves could have been pinned on anxiety over China. Concern has risen over the slowing growth of the world's second-largest economy, following some disappointing economic releases, a spike in Shanghai money-market rates, and the possible default of a high-yield investment product from China's largest bank.

    But the Shanghai stock market remained unfazed, ending the week on a high note with a gain of 2.47 per cent.

    A more likely explanation for Wall Street's skittish behaviour is the fear overtaking United States stocks after an exuberant run-up that saw both the Dow and the widely watched S&P 500 Index each surge by over 23 per cent last year.

    Tellingly, the so-called fear gauge on Wall Street - the Vix Index, which tracks the volatility of the S&P 500 counters - jumped by 30 per cent on Friday, flagging investors' increasing nervousness concerning the stock market. But, from the latest Citi Investment Research fund-flow report, it would seem investors are not exactly panicking over equities just yet.

    For the week ended on Wednesday, foreign funds bought about US$893 million (S$1.1 billion) worth of Asian equities, loading up on stocks in markets such as Taiwan and India, while selling off in Thailand.

    They also pumped US$2.4 billion into funds that invest in US equities and US$4.3 billion into European equity funds.

    But another worry looms - whether the US central bank will continue to put the squeeze on the liquidity that it has been pumping into the financial system with its massive bond-buying programme, which was responsible for the big run-up in US equities last year.

    Mr Shane Oliver, AMP Capital's head of investment strategy, noted that the big focus this week is whether the Fed would announce another cut in its massive bond-buying programme by US$10 billion to US$65 billion.

    Last month, Fed chairman Ben Bernanke set into motion the cutbacks by making the decision to trim the monthly bond-buying from US$85 billion to US$75 billion.

    Now, as he chairs his final meeting before handing over the reins to Dr Janet Yellen, the big question is whether he makes another move towards dismantling "quantitative easing", which will be remembered as the hallmark of his tenure at the Fed.