No Cause For Panic Over Market Turmoil

Source : The Business Times, August 14, 2007

STOCK markets all over have been rocked in the past fortnight by mounting concerns over the US' sub-prime mortgage crisis, with the Singapore market losing some $50 billion of its market capitalisation in 10 days.

Volatility has shot up and central banks have had to intervene, injecting large doses of cash into markets last Friday to prop up confidence and stave off a market crash.

Hopes are now high that the US Federal Reserve - whose loose monetary policies earlier this decade were arguably the source of the problem - will now cut its short-term interest rates and ease the pressure in credit markets, possibly within the next fortnight. But is it really time to panic yet?

After reaching an all-time high of 14,000 last month, the Dow Jones Industrial Average has lost less than 7 per cent in the recent selloff and is still 6.2 per cent up for the year.

After a stellar run stretching back four years to the end of the Iraq invasion in 2003, such a loss by any standards counts as nothing more than a correction, albeit a painful one.

Similarly, Hong Kong's Hang Seng Index has only dropped 6 per cent from its all-time high and is still 10 per cent up for the year, while the Straits Times Index, which set dozens of all-time highs this year, may have lost 9 per cent from its own high but is still 12 per cent higher for the year to date - and this, after a 36 per cent rise for 2006. Moreover, it is being argued that the present selloff is not the start of a bear market and that even if the US economy does slow because of the sub-prime collapse, Asian economies will be spared because their engine of growth is not so much the US but the emerging markets of China and India.

Still, the fact that central banks have had to intervene does suggest some degree of concern that should not be taken lightly. Volatility, for example, has spiked up sharply - the VIX Index, which measures implied volatility in S&P 500 stocks, has tripled since the start of the year - so a swift rebound in sentiment is unlikely.

Furthermore, at its most recent Open Markets Committee meeting last Tuesday, the Fed delivered a clear reminder that combating inflation remains its priority when it said 'a sustained moderation in inflation pressures has yet to be convincingly demonstrated.

Moreover, the high level of resource utilisation has the potential to sustain those pressures'. It went further to speak of increased downside risks to economic growth and that its predominant concern is that inflation fails to moderate.

With oil having just backed off from an all-time high of US$78.77 per barrel on Aug 1 and with the US dollar still displaying weakness rather than strength, those in the market hoping for a Fed bailout via a rate cut could well be hoping in vain.

Indeed, markets may have to endure more pain in the days ahead but over the longer term, there appears no compelling reason for panic yet.