BT: ST Index back to Jan 1 level (05 Mar 2007)

ST Index back to Jan 1 level

By R SIVANITHY

SINGAPORE - Punters who might have asked the question 'is it time to buy?' at the start of trading on Monday received a resounding reply of 'not yet' when the bottom fell out of all regional markets in the wake of yet more weakness on Wall Street last week and a sudden spike in the Japanese yen that observers say has led to large-scale unwinding of the 'yen carry trade'.

At its worst, the Straits Times Index - which had already plunged 7 per cent last week - collapsed by 145 points, weighed down by a jaw-dropping 777 points, or 4 per cent, loss for the Hang Seng Index at 18,664 and a 575 points, or 3.3 per cent, loss for the Nikkei 225 Average at 16,642.25.

All sectors were hit, led by the banks and property. The broad market's advance-decline score was 34-575 excluding warrants and bonds, though thanks to a late bit of short-covering, the index closed a net 96.45 points lower at 2,982.29. In less than a week, the index has now lost all the 10 per cent rise it posted for the year.

Although most brokers think the market might stabilise later this week, few were advocating any concerted buying at this stage because of the market's vulnerability to forces largely beyond its control - namely, a sliding China stock market, a plunging Wall Street partly because of the threat of a recession later this year and the rising yen.

In the case of China stocks, BCA Research said in a Mar 2 report that the contagion effect on global equities should be very limited because capital controls essentially isolate the Chinese market from the rest of the world.

'Furthermore, we view the recent sell-off as a technical correction by nature, rather than a leading signal of significant weakness in the Chinese economy,' said BCA. 'Unlike developed economies, the correlation between the Chinese economy and stock prices has been minimal... so the wealth effect from the falling stock market is obviously negligible as prices are simply back to where they were two weeks ago.'

On the US economy, BNP Paribas said in a flash report dated Feb 28 that it believes the soft landing scenario to be intact and that domestic demand remains solid. It said the rising number of mortgage defaults is unlikely to be a major problem because these loans account for only a small part of total borrowing. 'Our confidence regarding equities in the medium term remains intact,' said BNP.

The unknown quantity, however, is the extent of the Japanese yen carry trade, which refers to the strategy of borrowing cheap yen to invest in higher yielding assets. The strategy can work so long as the yen-dollar exchange rate remains stable; however, the yen has now shot up 6 per cent in a week, leading to huge pressure to sell out of those assets.

Henderson Global Investors said 'nobody knows how big the carry trade is. If it is large and investors start to close positions because they fear a rising yen will lead to currency losses, it could lead to more widespread selling of higher yielding assets... the dollar/yen exchange rate may be crucial to the outlook for equity markets and whether last week's drops are an isolated event or the start of a more serious decline'.

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