WHEN oil plunged below US$30 a barrel in February, the worry that descended on markets was the threat of deflation, which Investopedia defines as "a general decline in prices, often caused by a reduction in the supply of money or credit. . . Declining prices, if they persist, generally create a vicious spiral of negatives such as falling profits, closing factories, shrinking employment and incomes, and increasing defaults on loans by companies and individuals".
Whether or not deflation will really take root in the economy remains to be seen now that oil has rebounded to above US$40 per barrel, but the definition above certainly applies to the local stock market, where the Straits Times Index (STI) on Friday dropped 10.48 points to 2,734.91, though it did manage a four-point gain for the week.
Like in the definition above, money supply to stocks has dried up - volume on Friday was a meagre 982 million units worth S$1.04 billion, of which S$768 million or 74 per cent came from trading in the 30 STI members. Excluding warrants, there were 140 rises versus 249 falls throughout.
Banks in particular have borne the brunt of "deflationary worries", mainly because of their exposure to the oil sector. Concerns over their asset quality and impact on earnings have given funds an incentive to lighten their banks' exposure or to short-sell; whatever the case, their weighting within the STI ensures that when they plunge, so does the index.