DBS results to kick off a difficult week for stocks

ALTHOUGH Wall Street's Friday rebound will help shore up sagging sentiment, it will be DBS's second quarter earnings announcement on Monday - one of the most closely watched events in local market history - that will set the early tone.

Traders need no reminding why - apart from wanting to see how much the bank will be providing for its exposure to the now-failed offshore and marine (O&M) company Swiber Holdings, there will be questions over its lending to the entire O&M industry and its due diligence processes.

Many will also extrapolate from DBS's answers the extent of the hit to other banks and O&M heavyweights. Undoubtedly, short sellers will be among the most interested, having tasted blood in the week since Swiber shocked the market by applying first to be liquidated, then to be placed under judicial management.

The Swiber episode has not run its course yet; our guess is that it will be many more months before the full extent of the damage from oil's plunge and the Swiber bankruptcy on the local corporate sector will be known.

It's a sorry episode by any measure, and some hard questions will have to be asked of Swiber's management, directors and external auditors. Moreover, it only adds to what has already been a difficult year for the stock market, which has struggled in the face of a Chinese yuan devaluation, worries about a slowing China, crashing oil and the Brexit vote.

The bounces which have taken the index only twice into the black for the year have proven short-lived, perhaps tellingly since they have come mainly from efforts by central banks with their monetary injections, efforts which are now seen as having diminishing potency.

Last week the Bank of England announced a 25-basis-point cut in the bank rate to an all-time low of 0.25 per cent and various other monetary stimulus measures. It sparked off a rally in UK and European stocks but few observers believe that this will prove any more lasting than other bounces that preceded it, given growing scepticism over the effectiveness of monetary policy to fix current economic problems.

Rabobank, for example, in its "Statement on Monetary Policy'' last week noted that the BOE said it can't fix structural problems and asked "if monetary policy can't change a structural economic problem, why force in yet more liquidity to the already-stuffed market?''

Rabobank added that ultra-low rates and "quantitative easing'' have only succeeded in pushing up asset prices and said that Japan is "far deeper down this rabbit hole''. It noted there is now "speculation that when the Bank of Japan reassesses its monetary policy in early September it may decide there is no more it can do''.

Interestingly, according to the minutes of the BOJ's June 15-16 meeting, one member pointed out that if the central bank was to continue its bond purchases at its present rate, it will hold over half of all outstanding issuance by end-Q1 2019, and by 2025, ceteris paribus, it would hypothetically own the entire market.

Absurd though this may be, it is not wholly inconceivable - after all, who would have thought ten years ago that the US Federal Reserve would expand its balance sheet to almost US$4 trillion to save its crooked banks from going under?

Speaking of absurdities, a difficult year for equities will be made even harder in November when the US has its presidential election. In the running is a reality TV personality with orange hair and the attention span of maybe one minute at best who advocates dismantling economic treaties, increasing protectionism and isolationism, and who also promotes racial divisiveness. Clearly, a rocky road lies ahead for financial markets.

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