Asian stocks take a beating, with Singapore's STI sliding a hefty 2.5%
Stock markets around the region were again mauled yesterday in a widely expected retreat after share indices in the United States ended sharply lower on Friday.
The sell-offs on Wall Street last week and those around Asia yesterday were triggered by fears that banks and other financial institutions are likely to suffer much larger losses than earlier expected from the turmoil that began in the US sub-prime mortgage market.
Shares in companies outside the financial sector were also hit, particularly those that depend heavily on export sales, as investors feared that the rising number of home repossessions and mortgage loans gone bad in the US housing market is spreading pain to consumers there who may spend less.
Worries that the US could be headed for an economic recession - never far from investors' thoughts since late July when the financial market upheaval began - seem to have resurfaced with new intensity.
Some market observers have suggested that the US Federal Reserve's ability to stave off a recession through further interest rate cuts may be hampered by rising inflationary pressures - a fear that has been stoked in the past week by higher oil prices and a fast-weakening US dollar.
But the broad consensus - for now - seems to be that the US economy is likely to see slower but still positive growth rather than fall into recession, said economist David Cohen at Action Economics. 'It doesn't appear that the US is going off a cliff.'
Around the region, major share indices fell sharply yesterday. In Singapore, the Straits Times Index finished 2.5 per cent lower, while in Hong Kong, the Hang Seng Index fell 3.9 per cent. In Japan, the Nikkei 225 index was down 2.5 per cent, while the two main indices in mainland China ended 2.4-2.5 per cent lower.
The gyrations in the market are likely to last at least until early next year when companies report their earnings results for the current quarter, said Philip Lee, JPMorgan's chief executive of investment banking in South-east Asia. 'A lot of it is sentiment-driven. People want to see how the fourth-quarter results come out.'
The results, which would indicate the extent of the impact from the recent spike in oil prices and other factors, would be 'a good harbinger of things to come', he said.
Meanwhile, investment banking deals are still being done in China and India, he said. 'People who can do deals are still doing them. Fundamentally, a lot of companies are still doing very well in this part of the world.'
But last week's slide in the US dollar, which has weakened considerably against the euro and major Asian currencies since August, has also prompted fresh worries over demand for Asian exports destined for the US.
CIMB economist Song Seng Wun said there was 'quite a lot of fear on the street' of a US economic recession, but Singapore's economy was robust enough to withstand a hiccup, though not a protracted downturn. 'We do have some slack in domestic consumption which is still resilient enough to cushion us in the near term.'
Citigroup's US research team is still forecasting a 'soft landing' for the American economy, said economist Chua Hak Bin in a report yesterday.
But he warned that the evidence so far suggests that Singapore and other Asian economies are still vulnerable to a sharp downturn in US economic growth, although less so than in the past. 'Arguments about decoupling is premature and probably 10 years too early. Asia or emerging markets will not be able to escape the effects of a full-blown US recession.'
Singapore's prospects in 2008 'will hinge critically on the extent of the slowdown in US economic activity next year', he said.
Still, 'the current US slowdown is largely housing and construction-led, which has less of an impact on Asian and Singapore exports,' he added.
Minister Mentor Lee Kuan Yew said on Sunday that Singapore's economy was 'doing fine', but warned that 'there are dangerous market signals' - higher oil prices among them.
