Oct 20, 2014

    Will STI rebound like Wall Street did?

    AN IMPRESSIVE rebound on Wall Street on Friday is raising hopes that the stock market here will do the same today, and perhaps all week - after what's been a fairly bleak month so far.

    The Dow Jones Industrial Average surged 263.17 points or 1.63 per cent to 16,380.41, the first increase following six straight sessions of losses and its second-largest one-day points gain this year.

    A slew of positive United States economic data drove the buying spree.

    US consumer confidence rose strongly this month, the highest in seven years, while housing starts rose 6.3 per cent, another sign of improvement in the world's largest economy.

    More importantly, investors took heart that earnings from top US companies have held up well, allowing the focus to return to companies' performance.

    General Electric's third-quarter net profit rose 11 per cent to US$3.5 billion (S$4.5 billion). A recent bullish comment by the conglomerate's chief executive, Jeffrey Immelt - that the US is probably in the best state since the global financial crisis in 2008 - gave a confidence booster to the market.

    Industrial giant Honeywell's profit rose 18.2 per cent to US$1.17 billion, while investment bank Morgan Stanley reported a near doubling of its third-quarter profit to US$1.71 billion.

    "The market has a buy-the-dip mentality right now. The disconnect between the sharp market drops this week and the pretty good US fundamentals might have got some people interested in buying again," John Canally, an economic strategist at LPL Financial, told Bloomberg.

    Prior to the rally on Friday, investors were on edge last week as global stock markets gyrated wildly on increased sensitivity to every piece of news.

    Of the five trading sessions last week, the Dow saw swings of more than 1 per cent on three occasions: A 1.35 per cent drop on Monday, 1.06 per cent decline on Wednesday and Friday's 1.63 per cent hike. It ended down by 1 per cent for the week as volatility returned with a vengeance.

    Investor fear, as measured by the Chicago Board Options Exchange's Volatility Index, has jumped by 55 per cent since the start of the month, hitting 26.25 on Wednesday, the highest level since 2012.

    A heady mix of poor US economic data, slowing growth in China, serious recessionary risks in Europe, a drop in oil prices and fears of the Ebola virus spreading all added to the general unease.

    The main risk of contagion, though, came not from Ebola, but the crisis of confidence that filtered down to Asian markets, including Singapore.

    All the gains so far this year by the Straits Times Index (STI) were erased last week.

    After months of being in a slumber, with the STI not deviating by more than eight points from its previous close on most days from July to last month, trading this month has become more fitful.

    On three of the 12 trading sessions this month, the STI has ended more than 1 per cent lower than its previous close, with one ending 1 per cent higher.

    During the third quarter, there was only one day when the STI moved beyond 1 per cent - on Sept 16 - when it dropped 1.2 per cent over fears of possible US interest-rate hikes.

    The US Federal Reserve could continue to support markets with easy money as talk of a possible fourth round of quantitative easing (QE4) surfaced.

    San Francisco Fed chief John Williams mooted the idea of additional asset purchases, while St Louis Fed chief James Bullard suggested delaying the end of QE3 if inflation stays low.

    QE3 is widely expected to end this month, so Wednesday's release of the US consumer price index data would fuel further speculation about Fed moves and their impact on the market.

    But first, investors would have to digest China's third-quarter gross domestic product results, out tomorrow. The consensus forecast is for an expansion of 7.2 per cent, the lowest in more than five years.

    So perhaps you should follow the advice of analysts to keep calm and carry on buying quality stocks when prices have dipped.

    If not, perhaps just wait on the sidelines.