Alvin Teo Jun Wen

The Straits Times Index (STI) continued its downtrend in July 2022, ever since peaking at the 3,450 level in April this year. On May 10, 2022, the STI broke below its 3,250 level of support, and has been trading around the 3,070 to 3,150 level. The 3,040 level has been tested multiple times and has shown to be an intermediate support level for the STI in the short term. It is observed that the 3,150 level has been tested multiple times in both June and July 2022, which may indicate that this is the intermediate resistance level for the STI.

The STI continues to face headwinds due to inflationary concerns both globally and locally. From the recent Consumer Price Index (CPI) data for June 2022, the United States saw its inflation rate rise to 9.1 per cent, the highest seen in 40 years. This was partly due to the increase in global commodity prices as well as supply chain disruptions in the wake of the Russia-Ukraine conflict and the lockdowns in China. It has pressured the US Federal Reserve to be more aggressive with its rate hikes as previous attempts to curb inflation appeared to have remained futile. It is expected that the Federal Reserve may raise interest rates by 75 to 100 basis points during the upcoming FOMC meeting on Jul 26-27, 2022.

Locally, Singapore has also been struggling with inflationary concerns. In the latest Monetary Authority of Singapore (MAS) monetary policy statement published on Jul 14, 2022, the MAS core inflation is projected to rise above 4 per cent in the near term. The MAS core inflation is now projected to be between 3 per cent and 4 per cent this year, an increase from the earlier estimates of 2.5 per cent to 3.5 per cent. To curb these inflationary pressures, the MAS has decided to re-centre the mid-point of the Singapore Dollar Nominal Effective Exchange Rate (S$NEER) policy band up to its prevailing levels. The resulting effect will lead to a further appreciation of the Singapore dollar against the country’s major trading partners. The rationale for this is to cushion the rising costs of imported goods as well as tighten the labour market due to the rising global inflationary pressures and supply chain disruptions.

Potential bearish outlook ahead

A double top formation formed when the STI peaked at the 3,450 level two consecutive times, once in February and the other in March 2022. This formation was confirmed when the index fell below the support level of 3,300 in May 2022.

Furthermore, there was a bearish crossover that occurred in June 2022 when the 50 Exponential Moving Average (EMA) crossed below the 200 EMA which further indicated that the index may have a bearish outlook.

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The first support level for the STI index will be at the 3,040 level, which was tested in May, September, and November 2021 before moving upwards. Therefore, this level proves to be very crucial as any break downwards may see the index falling to the next support level of 2,840 which is similar to the area of the Fibonacci 161.8 per cent level.

Global inflationary pressures arising from the rise in commodity prices and supply chain disruptions have left many investors worried about a potential recession. Coupled with the Fed’s signal to further increase its interest rates as inflation in the US continues to soar despite previous rate hikes, global markets may continue to face downward pressures in the short term.

Based on the Jul 20 closing, the STI was at the 3,170 level. It has managed to break above the Fibonacci 78.6 per cent level of 3,154 and was just touching below the EMA 50 line as well as the downward trendline. If it rises above the EMA 50 line, there could be a near-term bullish momentum towards the EMA 200 line at the 3,204 level. The STI could potentially recover and test the resistance level of 3,250 if there are positive catalysts during this near term. However, with the current global affairs hindering the stock markets, it is predicted that the STI may not break above the resistance level of 3,250 in the near term.

With bearish sentiment lingering around the global markets, it is more likely that the STI may not be able to break above the EMA 50 line and may even continue its downward trend to test the support level of 3,040 once again in the near term.

The writer is equity specialist at Phillip Securities