Potential Brexit rains on local sentiment

OVERCAST and dam-pened, the local stock market seemed to be taking its cues from typical English weather over the past week as worries over Britain potentially voting to leave the European Union (EU) rained on sentiments for most of the five days of trading.

Singapore equities took a pounding at the start of the week and continued to head downwards on a bumpy slope despite brief patches of respite. Turnover was poor for most of the week except Friday, which was the only session where total value traded managed to end above the S$1 billion line.

Though the benchmark Straits Times Index (STI) managed to claw its way up by 0.4 per cent or 11.86 points up, its subdued finish at 2,763.42 points only lent to the tense atmosphere ahead of the British referendum to be held on June 23. It ended the week 2.1 per cent below the end of the previous week of trading. That spelled a dismal end to what had been a winning streak for the STI, which had prior to this chalked up four consecutive weekly gains.

In Singapore, stocks in the spotlight over the course of the week included the three local banks, Singtel, Keppel Corp and CapitaLand, which all ended the week down. In the second-liner space, less commonly seen names that made it to the top actives list included digital satellite firm AddValue Technologies, which had announced the previous week that that a large asset sale may come to fruition after a delay of more than two years.

Risk aversion has increased within developed markets this past week as Brexit fears rise, Citi said in a global macro strategy report on Friday.

"Indeed, many key levels have been breached in safe haven assets: USD/JPY now trading below 105, the 10-year US Treasury yield breaking the pre-2013 taper tantrum lows and gold briefly soaring above US$1,300."

Central banks contributed to the pessimism mid-week after flagging the dangers of Brexit. After United States Federal Reserve chair Janet Yellen warned that a vote by Britons to exit the EU "could have consequences in turn for the US economic outlook", Bank of Japan governor Haruhiko Kuroda said the referendum was "making international financial markets somewhat unstable".

That was followed by the Bank of England (BoE) adding: "A vote to leave the EU could materially alter the outlook for output and inflation, and therefore the appropriate setting of monetary policy . . . through financial market and confidence channels, there are also risks of adverse spill-overs to the global economy."

ABN AMRO analyst Nick Kounis said in a Friday note that these warnings from central banks "are disconcerting, with investors concerned about what central banks and other policymakers would do to contain the impact".

IG market strategist Bernard Aw said that although markets eked out gains at the end of the week, "what worries me is if it is the calm before the Brexit storm".

"For the rest of the world, it is not just the fate of the UK economy that concerns them, but the broader impact on the EU. Would we see more referendums on EU memberships from disillusioned members? Would a Brexit situation has greater implications for the EU than the UK? This uncertainty is what keeps investors awake at night, at least until the vote takes place."