Since opening this Monday, the bulls have taken flight at Dow Jones and the index is descending steadily towards March lows of 11850. As I mentioned before, if investors can or are willing to hold the fort here, we can look forward to a sustained upswing for the next week or so, barring unforeseen disasters.
The Straits Times Index ended the day at 2992.66, down by 47.43 points. Volume is weak (1.075 billion) and gainers/losers stand at 153/385. At one point, STI fell to 2980 but fortunately, recovered by a “comfortable” margin.
It is interesting to note that both STI and Dow Jones are facing the same fate and are at their key support level now. A strong rally on Wall Street will pave the way for our flagging local market. However, if the support level is breached, expect more bloodletting to continue.
Many investors believe that the Singapore and US markets are decoupling – what happens in America does not have much bearing on local stocks anymore. There is a modicum of truth because the influx of China stocks in recent years have shifted the balance towards China, Shanghai and Hongkong.
We do enjoy some buffer if either of the three are performing strongly but at the end of the day, depressing US economic indicators can still cause massive upheavals.
My main concern these days are not bad news… contractions, recession, write-offs, losses, etc. are already foregone conclusions. What matters is that the BAD turns out to be not so bad and we can all heave a sigh of relief.
Amid the gloom, there are actually some positive news today. Oil prices fell nearly $3 after China announced that it would lift subsidies on gasoline and diesel in a move to curb demand from its rapidly growing economy.
Also, the index of leading economic indicators, issued by The Conference Board, a business research group, increased 0.1% to 102.1 in May. This index is designed to forecast turning points in the business cycle.
Positive contributors include the interest-rate spread, new orders for consumer goods, materials, and non-defense capital goods. Negative contributors were real money supply, consumer expectations, building permits, index of supplier deliveries and weekly initial claims for unemployment insurance.
Next week, the Federal Reserve will conduct a meeting and it is widely expected that the federal funds rate will remain at 2%. Seriously, enough is enough. Seven rate cuts since September is like feeding a patient huge dosages of medicine at once. I am not surprised that the economy is not responding well to rate cuts and cheap credit at the moment.
Look at General Motors, they are busy closing down plants because of low consumer demand from fears of inflation and high fuel prices. Entice them with a 0% interest rate loan now to expand production lines or set up factories, and they wouldn’t be interested.
I expect an interest rate hike in early 2009, but a sluggish dollar and raging commodity prices may force Ben Bernanke’s hand.
To conclude, I believe volatility in the stock market will still be the major theme but for now, the bulls should return from the wilderness, at least for a day. 