A RELIEF rally cut a swathe across Asia markets on Thursday, soothing frayed nerves after days of staggering falls in global equities, but the biggest bogeyman - China's downturn - continues to lurk in the corner.
"This is the technical bounce that we said was likely over the coming days. But don't get too happy about it - fundamentals haven't changed," said Lim Say Boon, DBS Bank's chief investment officer.
Asian markets surged after Wall Street scored its biggest daily gain in four years following six days of bloodletting. Wednesday's gains in the US were fuelled by "Fedspeak" that the case for a September rate hike was now "less compelling" given the market turmoil and foreign developments.
China's Shanghai Composite was the indisputable outperformer with a higher closing by a hefty 5.3 per cent, followed by Indonesia's Jakarta Composite which climbed 4.6 per cent. Singapore's Straits Times Index closed 2.5 per cent up, Malaysia's KLCI rose 1.3 per cent and Japan's Nikkei 225 gained 1 per cent.
Analysts said the recovery had much to do with the fact that the sharp falls earlier in regional markets have rendered them technically oversold.
Singapore's STI has fallen over 14 per cent in the past three months, with its 14-day relative strength index (RSI) reading at 14, lower than 2008's low, implying that it may be oversold.
According to Nomura Research, in terms of valuations, all Asean equity indices except for the Philippines, are trading below long-term averages in terms of book value.
The fuel for the regional market's rebound came from the remarks by New York Federal Reserve President William Dudley, a dovish policymaker and influential voice on the Federal Open Market Committee (FOMC), that the current heightened market volatility makes a rate hike next month less appropriate, a clear sign, according to news reports, that fears over China's growth are influencing US monetary policy.
Some market watchers however opine that traders may be overzealous in cheering a non-rate hike in September because that merely means the next signpost for a possible rate hike is December.
The question - lingering for a while - is not if but when the Fed will raise rates. While a rate hike later than sooner is cause for market cheer, experts warn that if the Fed were to stave off the move that much longer, it would signal that the US economy's rosy growth story has turned less compelling.
For that reason, Mr Lim puts it succinctly: "If markets are unhappy about a September rate hike, would they be happy with a December hike? Or would they be happier if economic growth slows further and inflation falls even lower that the Fed goes on hold for the next 12 months?"
There are other reasons to be more circumspect about the markets' recent rebound.
While regional markets may be oversold, Nomura pointed out that they are still "not yet cheap enough" compared to stress-level troughs or even to compensate for the currency weakness. For this reason, not many rule out further declines ahead.
Besides, very little else has changed in terms of the fear factors that triggered the extreme volatility in regional markets, which according to Principal Global Investors, was not about the US or Europe but China.
Stocks in Asia, US and Europe have witnessed sharp selloffs earlier following a harrowing session in Chinese equities which plunged 20 per cent (in US dollar terms) over five days. The spook factors were weak economic data in the world's second largest economy, the surprise yuan devaluation and doubts over Beijing's ability to control the market.
Toss in sluggish global growth, a commodities slump and not-so-cheap market valuations and there are ample reasons for investors to stick to their risk-off mode.
That doesn't mean there are no interesting opportunities or "great entry points" arising from the market rout but one needs to be selective, said Robert McConnaughey, Columbia Threadneedle Investments global research director.
The global macro backdrop is shifting; from the "Goldilocks" era of persistent growth (but modest enough to ease monetary policies in the event of weakness) to stresses emerging in emerging markets and limits to central bank actions.
"However, such a shift does not mean that we need to run for the hills," said Mr McConnaughey.
The current growth concerns do not signal that this is the beginning of a financial crisis or a growth collapse in Asia, said Nomura.
The research house cited four reasons for this comforting view: China still has ample room to ease macro policies; falling commodity prices and depreciating NEERs (nominal effective exchange rate) are positive for Asia over time; the region's much improved external fundamentals since the Asian crisis; and most countries have room to expand fiscal policy and are well prepared with financial backstops.