Covid-19 hits the ST Index
FOR the past few weeks, global markets have been roiled by fears of the economic impact brought about by Covid-19. Taking a first glimpse of its impact, we have seen China's retail sales plunging 20.5 per cent year on year during January and February. Industrial output and fixed asset investments also fared badly, declining 13.5 per cent and 24.5 per cent respectively when compared to the previous year. With cases in the United States and Europe on the rise and several cities undergoing lockdown, we may potentially see a similar scale of economic impact on other major economies. The current situation has put a drag on the Straits Times Index (STI) which thrives on a trade-dependent economy. Disruptions to global supply chains will continue to weigh down business sentiments and travel restrictions will take a toll on tourism, which contributes to around 4 per cent of Singapore's GDP.
To mitigate the impact from Covid-19, the US Federal Reserve has imposed a dramatic cut in the Fed Funds Rate to 0-0.25 per cent and the resumption of quantitative easing through the purchase of US$700 billion in bonds. Rather than calming markets, the drastic approach appears to highlight to investors the severity of the situation and led to greater panic in the market. Despite several fiscal stimulus measures aimed at keeping financial markets stable, global markets remain spooked by the escalating fallout from the Covid-19 outbreak. The rate cut undertaken by the Federal Reserve will put pressure on banks' net interest margins. With the local banks taking up more than 30 per cent weightage in the STI, these main constituents may lead the STI lower.
Aside, the oil price war between Russia and Saudi Arabia has led to depressed oil prices. This may disrupt the oil industry worldwide, causing oil firms to face a double whammy from both a demand side shock and excess supply flooding the market.
The STI is not spared from the global rout. All these uncertainties led to a 24 per cent plunge in the STI since the start of March. However, the weakness of the STI can be traced back to last year's end January when the death cross was formed after the 50-period SMA crosses below the 100-period SMA on the weekly chart. With the recent drop, the STI has broken a key horizontal support level at around 2,528, the lowest point in 2016. Investors can look out for the next support level at around 2,200.
Based on the Relative Strength Index (RSI), the index is trading at a deep oversold level of 15.35. Comparatively, the previous time it reached this oversold level was during the 2008 financial crisis with a lowest level of 12.06. With that, we may potentially see a short-term rebound in the STI. However, investors should take note that if the Covid-19 situation does not show signs of improvement, the general trend still remains bearish. Any rebound may provide a short-term trading opportunity and may not be deemed a recovery.
With current market sentiments, positive catalysts leading to a potential short-term rebound may include stronger fiscal measures by government bodies. For the Covid-19 situation, signs of slowing down in new cases worldwide and strong measures of containment by governments may also boost global markets. For the rebound to sustain, the price level must first break above the support turned resistance level at 2,528.44 level and subsequently break above the psychological level of 2,600 for two consecutive periods.
Negative catalysts will include further escalation of the Covid-19 situation with measures such as nationwide lockdown in place, which disrupts economic activities. Potential support level to look out for could be 2,200.
Disclaimer: Chartpoint is provided by Phillip Securities Research for information only, and should not be construed as investment advice.
