Christmas rout leaves markets contemplating tough year ahead

Singapore

THE year is ending badly for stocks, and the coming 12 months seem fraught with uncertainty.

Most equity markets in South-east Asia dived on Wednesday, roiled by nervousness over the US economy and an impasse over the US government shutdown.

Eli Lee, head of investment strategy at Bank of Singapore (BOS), noted that it has been an unnerving few weeks as the US market continues to lead global equities downwards.

"The US market is now almost 20 per cent below its October high. This is an unusually deep correction in an expansionary backdrop (without a recession), and a 20 per cent decline marks a bear market in street parlance," Mr Lee said.

"This helps explains why the market reacted so negatively last week to a less-dovish-than-expected Fed which is seemingly unmoved by falling share prices," he added.

As market observers expected, Wall Street's Christmas Eve sell-off trickled down to the Singapore market, with the Straits Times Index (STI) losing 39.91 points, or 1.3 per cent to 3,011.15 by the closing bell.

This comes after Mr Trump on Tuesday furthered his criticism of the Fed, saying the central bank was hiking interest rates too quickly. Just a day before, investors were still grappling with news of the US's partial government shutdown, and US Treasury Secretary Steven Mnuchin calling top US bankers and making plans to convene a "Plunge Protection Team".

Stephen Innes, head of Asia-Pacific trading at Oanda, said that fear-mongering continues to permeate global capital markets, making it unclear if investors' cheerless mood will improve before the end of the year.

About US$5.6 trillion of equity value has been obliterated within Asia this year as the global carnage shows no let-up, and investors are bracing for volatile days ahead, Bloomberg noted.

While financial markets in Hong Kong, Australia and New Zealand were closed for holidays on Wednesday, China's Shanghai Composite Index lost 0.3 per cent to 2,498.29 points. South Korea's Kospi also slumped 1.3 per cent to 2,028.01, hitting a near two-month low. The Korean won was flat while bond yields fell.

Displaying some resilience against the US market sell-off, however, were Japanese equities. Tokyo stocks ended higher, rebounding from a 5 per cent drop the previous day. The Nikkei 225 index, which closed at a 20-month low on Tuesday, gained 0.9 per cent to log its first positive finish in six sessions. Similarly, the Topix rose 1.1 per cent for the day.

Meanwhile, CMC market analyst Margaret Yang noted that Singapore's STI is adversely affected by falling crude oil prices.

"Falling oil prices will curb oil exploration activities and lead banks' asset quality to deteriorate. Before the oil prices stabilise, the Singapore market is probably going to underperform Asian peers," Ms Yang explained.

As at 7.20pm on Wednesday, Brent crude was up 70 cents to US$51.17. However, it earlier fell to US$49.93, the lowest since July 2017, and posted a 6.2 per cent slide in the previous session, according to data from Reuters.

Benjamin Lu, commodities analyst with Phillip Futures, highlighted in a research note on Wednesday that crude oil futures continue to suffer from steep losses as mounting economic challenges dim fuel demand prospects.

"A prolonged rout in the global equity markets has instilled contagion effects on oil prices as investor confidence recedes significantly in the current term," Mr Lu said.

Indeed, with the risk-off sentiment in markets, investors may be looking for shelter in gold instead. The commodity rose to its highest in six months on Wednesday, with spot gold climbing 0.3 per cent to US$1,272 per ounce as at 8.12pm.

"The latest move on gold should be a stark reminder to investors that gold in any form should be an essential part of any long-term investment strategy as again the yellow metal has proven its weight when markets turn turbulent," noted Oanda's Mr Innes.

Similarly, Phillip Futures' Mr Lu added that gold prices shone this week as US political instability and a dim global economic outlook drove support for safe-haven assets. "With the US dollar softening on rising market uncertainties, gold prices look poised to benefit from heightened geopolitical and economic risks into the near future," Mr Lu said.

In contrast, the US dollar has lost some lustre as investors offload the currency amid US political uncertainty. It weakened against most Asian currencies, except the yen - the USD-JPY briefly touched a four-month low, with the Japanese yen dipping 0.2 per cent to 110.54 per US dollar, its first retreat in almost two weeks.

Against the Singapore dollar, the greenback has declined some 0.09 per cent, with the USD-SGD trading around 1.3714. Meanwhile, the euro declined 0.1 per cent to US$1.1386.

With the decline in equities and the widening of credit spreads, Mr Lee of BOS noted that the bank is "cautious that financial conditions have tightened and if not reversed, could further crimp the economy in Q1 2019".

He added: "Over the longer term, however, markets will be driven by fundamentals. While falling markets often, but not always, signal the future path of the economy and can directly impact growth by hurting confidence and investment spending, history tells us markets are susceptible to overly large swings as well."