S’pore market soars after Fed rates cut, but outlook still unclear
INVESTOR confidence has returned — but is it here to stay?Analysts, like investors, were mostly bowled over by the United States Federal Reserve’s aggressive move yesterday, cutting two key rates by a hefty 50 basis points each to stave off recession risks.
As with markets around the globe, the Singapore share market soared, cheered by what is regarded as the Fed’s determination to keep economic growth on an even keel. A healthy US economy is generally positive for the rest of the world, particularly export- reliant economies such as Singapore’s.
“Confidence has returned and this bodes well for the market, at least for the next couple of weeks,” said Mr Jimmy Koh, UOB’s head of economics and treasury research.
The markets, he said, would want to see how the effects of the Fed rate cuts filter out into the broader economy.
“Are people more willing to lend? The problem now is not a lack of liquidity, but a lack of willingness to lend.”
Mr Vasu Menon, chief editor at online bank FinatiQ.com, agrees, saying: “Once the euphoria dies, people will examine what the Fed has done and whether it is enough, and whether the signal they are sending to the market is one of concern that (the economy could slip) into recession.”
The Fed’s comments accompanying the rate decision also raised expectations that yesterday’s move might be the start of a loosening trend.
CIMB-GK — which now expect the Fed funds rate target to fall to 4 per cent by the end of this year from their previous 5.25-per-cent forecast — said: “Our reading of the Fed statement is that risks to the inflation outlook have become more balanced, given the greater downside risks to real growth. The scope of the policy statement seems to indicate that the door is still open for rates cuts.”
But Mr Menon wonders if inflation will stand in the way of further rate cuts, adding that: “There are underlying inflationary pressures in the US, not just rising oil prices, but from the tight labour market, weak US dollar and other factors.”
Thus, even as the Fed has delivered more than what many had been expecting, the outlook is still far from clear.
Singapore shares will continue to take the lead from Wall Street: If the Dow Jones Industrial Index manages to stay above 13,500, the Straits Times Index (STI) could test its July high of 3665 points. But if the DJI retreats, the STI could return to 3400-3600, said UOB’s Mr Koh.
For that reason, analysts continue to caution, especially for the banking sector even though Singapore banks hold up well because of their limited exposure to the US sub-prime mortgages.
The oil and gas sector could benefit, should the policy loosening revive the economy and stoke fuel demand as some expect. Moreover, as the Northern hemisphere enters the winter season, “there have been concerns of supply,” said Mr Menon.
High oil prices encourage oil exploration and demand for oilrigs and the like, helping shares of companies such as Keppel Corp and SembCorp Marine.
With the improved sentiment, Mr Yeo Kee Yan, a DBS Vickers retail market strategist, said housing property developers, particularly for the mid-to-lower end market, might have potential for gains after developer Far East Organization paid a record $202.9 million for an Ang Mo Kio site.
He also favours the hospitality sector ahead of the year-end holiday season.
“The hotel wave is coming because of the year-end holiday season, the opening of Changi Terminal 3 next year and the F1 Grand Prix coming to town. All these bode well for the hospitality sector. Even if more hotel rooms come out now, it won’t be enough. There would still be a shortage,” he said.
The STI gained 3.4 per cent, or 116.61 points, to close at 3594.36 yesterday.
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RISK OF US RECESSION UP?
The risk of a US recession is increasing, although the chance is less than 50 per cent, according to an official at Fitch Ratings.
The US central bank yesterday reduced its key rate by 50 basis points, more than what economists expected. Asian economies can weather a US slowdown, although a recession is likely to hurt growth in the region, said Mr James McCormack, head of Asian sovereign ratings at Fitch, said.
“The risk of recession has gone up, but is less than 50 per cent,” he said. “We still forecast a slowdown. A 50-basispoint cut should be supportive of growth.” — BLOOMBERG
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