Will Wall Street decouple from the rest of world?

WALL Street's Friday plunge shouldn't come as much of a surprise, given that the Straits Times Index on the same day went down in anticipation of a US selloff. As a result, it's probable that the index will be relatively firm on Monday as the algorithms that sold or shorted on Friday will look to go long soon.

That's for the short term, the longer-term issue that traders should ponder over is whether the US economy and, by extension, Wall Street is decoupling from the rest of the world.

The reason for this is that 2015 is shaping up to be the year in which central bank action will be key in determining how markets and economies perform - in the course of a month, we've seen market-moving announcements from the US Federal Reserve, the Swiss central bank, the European Central Bank (ECB) and the Monetary Authority of Singapore (MAS).

Unlike most central bank efforts in the 4-5 years after the US subprime crisis of 2008 which were broadly in line with each other in that they sought to engineer economic recovery, the latest moves are mostly divergent and dependent on localised circumstances. The wild card, of course, is falling oil prices.

The US Fed last October ceased its money printing or QE efforts and is now focusing on when it should raise interest rates - hence the turmoil on Wall Street, which is also grappling with the negative impact a strengthening US dollar is having on US corporate earnings.

In its Open Market Committee meeting statement last week, the Fed made no mention of Europe or any other non-US factors, suggesting to some observers that the central bank thinks the US has decoupled itself from the rest of the world.

The ECB, in the meantime, has found its QE so far to be ineffective but, undaunted, it has pressed on with the recent 1.1 trillion euro QE package. Since the ECB move prompts increased demand for safe havens like the Swiss franc, then this explains Switzerland's central bank's shock move to remove the cap on its currency against the euro - to try and defend the cap would simply have been too much.

Some of that ECB money is probably finding its way here - daily volume over the past week has regularly crossed the S$1 billion mark, compared with most of final-quarter 2014 when daily turnover was usually well below S$1 billion.

This, in turn, has ensured the Straits Times Index has held up, but only just - for January or the year to date, the gain has been 26 points or 0.7 per cent.

For what it's worth, if the US has decoupled, then by the same token it looks like markets are returning to investing according to liquidity instead of fundamentals, an anomalous way of doing things no doubt, but one that's been an integral part of the "new normal" since the subprime crisis.

As for oil, Rabobank in a commentary last week said falling prices has meant economists have begun the process of revising upwards their developed world growth projections, while revising down their developing world growth projections, particularly of those major oil exporters.

"Where the developed world is concerned, because the oil price shock is a 'good' one from the point of view that it is being generated mostly by supply-side factors (probably 65-80 per cent of the drop in oil prices is due to supply surprises in oil production, the refusal of Saudi Arabia to counter the rise and the decision by Opec to maintain its oil production cap of 30 million bpd, all against the backdrop of still-rising oil inventories), the implication is that markets are likely to continue reassessing their interest rate normalisation expectations, certainly in the UK and the US and perhaps one or two non-eurozone European countries."

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