Dec 23, 2013

    Three forces shaping 2014 stock market

    AS THE trading year winds down, there are three powerful forces pulling the global financial market in different directions.

    The first and most obvious force at work is the symbolic gesture last week by departing United States central-bank chief Ben Bernanke to kick-start the scaling back of the vast money-printing programme, which he started five years ago to fight the global financial crisis.

    That gave Wall Street a fillip on Wednesday when the Federal Reserve made the move to cut the monthly bond purchases from US$85 billion to US$75 billion (S$108 billion to S$95 billion).

    Regional markets reacted positively at first, but this soon gave way to fears as traders agonised over the impact that a strengthening US dollar may have on Asian equities and commodity prices.

    Coupled with this worry is a fresh concern about China as the aftermath glow from the so-called Third Plenum - a meeting of the policymaking committee of the Chinese Communist Party - which painted a rosy picture of the Chinese economy, starts to wear off.

    In a move to try to prevent a repeat of the cash crunch in China, whose fallout rattled regional markets earlier this year, the Chinese central bank injected 300 billion yuan (S$63 billion) last week to provide cash-strapped mainland lenders with money.

    The banking crisis reignited fears that the Chinese economy might be headed for a hard landing, as Chinese lenders hoarded cash ahead of the year end.

    The severity of the Chinese cash crunch was reflected by the 2 per cent drop in the Shanghai stock market on Friday, as it extended a nine-day decline.

    To some market pundits, the spate of banking crises in China resembles in some ways the growing-up pangs experienced by the US over a century ago as it coped with its own numerous financial crises on its way to financial-superpower status.

    But that is scant consolation for the traders bleeding with losses from trading China stocks, as the People's Bank of China struggles to cope with the flow of funds into the Chinese economy.

    It is sitting on over four trillion yuan of deposits, yet the banks it oversees are struggling to find cash.

    The third powerful force at work is the Bank of Japan's massive money-printing programme, which aims to surpass the Fed's efforts in magnitude.

    It has flagged that it would print 60 trillion to 70 trillion yen (S$730 billion to S$852 billion) a year to try to rouse the moribund Japanese economy.

    The impact on the market of these three powerful forces is mixed, depending on where one is invested.

    Wall Street has been on a roll as more and more investors are drawn into US equities by hopes of a huge improvement in corporate profitability, now that the US economy is on the mend.

    The widely watched S&P 500 Index has gained about 27 per cent this year, to record levels.

    As for Japan, the efforts to weaken the yen with the massive money-printing programme has lifted the Nikkei-225 Index about 52 per cent since January. The sharp drop in the Japanese currency has given a sharp boost to Japanese exports.

    On the other hand, jitters over the Chinese banking system have taken a heavy toll on the Shanghai market, which has fallen 8.1 per cent for the year.

    With foreign fund managers pulling out their funds to put into the red-hot US stock market, regional equities have taken a back seat and look destined to end the year on a flat note.

    Since January, Hong Kong's Hang Seng has been up 0.7 per cent.

    Singapore's Straits Times Index is down 2.3 per cent, while Bangkok's SET Index is 3.5 per cent lower.

    The three forces are likely to continue to exert pressure on the market next year. A wise trader would do well to pay heed to what the world's most powerful central bankers are up to.