Sub-Prime Overhang Still Evident

Source : The Business Times, September 5, 2007

AN unexpectedly soft opening for Europe that was probably triggered by a steep fall in the US futures market yesterday brought some sellers out throughout the region and reminded local players that at least until the US Federal Reserve meets on Sept 18, markets will remain nervous and volatile.

The Straits Times Index had until mid-afternoon risen as much as 10 points but eventually finished a nett 10.16 points lower at 3,376.06.

The broad market followed suit, with the positive advance-decline score deteriorating as the day progressed to a final reading of 222-231, excluding warrants.

Turnover, excluding foreign currency issues, continued to hover below the $2 billion mark at 1.8 billion units worth $1.5 billion, relatively low by this year's standards. At 5pm, the September futures contract on the Dow Jones Industrial Average had lost about 25 points while Hong Kong's Hang Seng Index surrendered a triple-digit rise to close marginally weaker. Europe, in the meantime, opened an average of 0.5 per cent weaker but managed to recover some ground within the first hour.

Within the ST index, it was losses in Keppel Corp, SembCorp Industries and UOB that contributed the most towards the index's fall, while SingTel's two-cent rise to $3.60 provided support to the tune of two index points.

No discernible pattern was evident in trading of blue chips or penny stocks - apart from a feeble play on small-cap construction stocks - though given the external uncertainties, this was hardly surprising.

Brokers expect the present drift to continue at least until the US central bank holds its next interest rate meeting on Sept 18 at which it is hoped a federal funds interest rate cut will materialise. This hope first sprang from an Aug 17 discount rate cut by the US Fed and was reinforced by subsequent comments by Fed chairman Ben Bernanke that the Fed will play its part in helping stave off a recession.

In its latest market commentary OCBC Investment Research's recommended investors adopt a defensive stance because although the local broker believes fundamentals in most sectors remain intact, short-term volatility looks set to persist. Its preferred sector is oil and gas because of 'sustained contracts, strong order books and record earnings'. In a Sept 4 Asia-Pacific economics report, US investment bank Morgan Stanley (MS) examined the question of whether AXJ (Asia ex-Japan) can effectively decouple from the US in the event that the latter undergoes a sharp deceleration in consumption growth.

'We believe that a 'hard' decoupling - implying continued stable to strong growth in the Asia ex-Japan region - is a low probability outcome,' said Morgan Stanley.

'We believe there is a high probability of AXJ economies witnessing 'soft' decoupling if the US economy soft lands. Our bottom-up country forecasts indicate that if US growth slows by one per cent, AXJ GDP growth will decelerate by 1-7.2 per cent in 2008.' MS also added that the main risk to its analysis is renewed turbulence in the US and Asian financial markets.

This is because unlike previous decoupling analyses which relied mainly on economic impact via trade linkages, the increased globalisation of financial markets today means that economic growth shocks can be much more readily transmitted via financial markets than before.