Selling pressure to continue amid few positive catalysts

LOCAL shares could continue to bleed in the week ahead following last week's bruising tumble in global stock markets, as near-term positive catalysts remain few and far between and many investors shy away from what they perceive as falling knives.

The Straits Times Index (STI) has now slid a depressing 11.7 per cent from the end of 2014 after it closed below 3,000 points on Friday, and looks set to remain there or slip further.

One hint of more weakness to come is the accelerated selling on Wall Street on Friday, which was viewed as the first significant correction in US stocks after a six-year rally. That saw the Dow Jones Industrial Average and the S&P 500 each lose a little above 3 per cent on the day. This brought the Dow down to around 10 per cent below its May high, while the broader S&P was over 7 per cent lower than its peak in May.

Wall Street's fear gauge, the Vix, spiked up by a sharp 46.5 per cent last Friday after Thursday's 25.5 per cent jump. The index recorded a stunning 118 per cent gain on the week.

US second-quarter GDP estimates are also widely expected to be revised upwards when the second reading comes out on Thursday night Singapore time. Though fears of a September lift-off have faded somewhat, a strong GDP growth figure could prompt another bout of agonising over whether the Fed will or will not pick September to start raising interest rates if the world's biggest economy appears to be on a firmer footing.

"Share markets are likely to see a further correction in the next few months ... Worries regarding a Fed rate hike in the run up to its September meeting are certainly not helping," said Shane Oliver, global strategist at AMP Capital Investors, in a Saturday note.

On top of that, the worries over China's economy and capital flight that spurred last week's bloodbath are poised to linger on as well, with analysts saying that these fears could even intensify.

All these are hardly good omens for local shares, which have suffered substantial selling pressure especially among large-caps. Out of the 30 STI component blue-chips, nearly half fell to new 52-week lows last week.

Given Brent's decline to around US$45 per barrel on Friday and no immediate sign that Opec will change course on production, energy-related counters may also need to brace for a rocky few weeks ahead.

Sentiment may continue to be subdued for penny stocks as well after some dents to certain counters' images last week. Silverlake Axis was hit by an anonymous short-seller report on Friday while companies in the Pacific Andes stable reeled after news that the Monetary Authority of Singapore and the Commercial Affairs Department were investigating an offence under the Securities and Futures Act.

Finally, although everyone is watching China, Greece also happens to be in renewed turmoil after its prime minister resigned on early Friday Singapore time and called snap elections. These are expected to be held in late September. "We believe that this development will slow the Greek administration and could even prevent the passing of the bailout-related legislation ... until after the elections," Societe Generale said in a note.

As Mike McCudden, head of derivatives at stockbroker Interactive Investor, put it in an AFP report on Saturday: "Only the very brave are venturing into equities as buying stocks is currently like catching falling knives."

However, it could soon be time for bargain hunting. "Investor sentiment is deteriorating rapidly into the sort of pessimism that provides great buying opportunities", Mr Oliver said. "As such, despite the current significant set-back share markets are likely to remain in a broad rising trend."

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