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Markets fear more volatility ahead

Uncertainty as traders watch developments

THE dramatic intervention by the world’s central banks helped to calm jittery bourses on Friday, but as Asian markets reopen for trading today, investors will be watching to see if the relief is only temporary.

Many traders believe that any move by the more optimistic investors or ‘bulls’ to stage a rally today will be met by an equally determined attempt by pessimistic ‘bears’ to sell into any rebound in share prices.

So, share prices are likely to remain volatile today as traders react to any fresh developments coming out of the credit markets, where investors’ appetite for risk has been soured by the crisis-hit mortgage market in the United States.

Bank of America senior economist Gilles Moec told AFP: ‘One of the big issues is that no one has any real clue of the amount of sub-prime loans which have been purchased by foreigners.

‘The big question is what is the overall amount, and this is bad for the markets because if there is one thing that the markets hate, it is uncertainty.’

Sub-prime loans are offered at high interest rates to Americans who have a poor credit rating and might otherwise be denied credit.

But Commerzbank analyst Andreas Huerkamp was more optimistic and predicted that the crisis would blow over.

‘There are strong parallels with the crisis in the mid-1990s, so you have to be a brave investor to buy shares at the moment,’ he said. ‘But history shows that everything will be forgotten in six months, and the market will recover.’

But given the state of uncertainty that now exists in global financial markets, most analysts believe it may be better for investors to simply sit on the sidelines while waiting for the mortgage crisis in the US to blow over.

Share prices in Singapore and other major regional bourses had see-sawed last week as fears of tightening credit gripped financial markets globally.

Even the commodities markets were whiplashed as traders unwound risky positions, leading to hefty falls in the prices of crude oil and base metals.

The current panic started last Thursday after French bank BNP Paribas froze three hedge funds with US mortgage exposure, sparking widespread fears the contagion had spread to European financial institutions.

This caused international banks to be so risk-averse that they refused to take any form of debt securities as loan collateral, causing interbank lending to come to a virtual standstill.

The European Central Bank was forced to pump 95billion euros (S$197billion) on Thursday and another 61billion euros on Friday to restore calm to the banking system.

The US Federal Reserve followed with a US$24billion (S$36billion) infusion on Thursday, and another US $38billion in three separate operations on Friday to ease a growing liquidity crunch as stock markets crashed across the globe.

What made the Fed’s intervention as ‘lender of last resort’ all the more significant was its decision to accept mortgage bonds as collateral from banks – shoring up investors’ confidence in the badly shaken credit markets.

In Asia, Singapore managed to escape relatively unscathed, with the benchmark Straits Times Index closing down just 53.99 points, or 1.6 per cent, at 3,359.18 on Friday after dropping 115 points at one stage.

But European markets suffered their worst one-day drop in more than four years as London’s FTSE-100 Index slumped 3.7per cent down, while in Paris, the CAC-40 Index was down 3.2 per cent.

Wall Street, however, managed to steady itself, with the Dow Jones Industrial Average recovering to close a mere 31.14points lower at 13,239.54 following the Fed’s intervention after initially crashing by 200 points.

Phillip Securities’ managing director Loh Hoon Sun said yesterday the local stock market is likely to remain vulnerable to any bad news coming out of Europe and the US in the coming weeks.

And this may leave traders to bet on two scenarios with few alternatives in between – a swift recovery or a meltdown.

‘Stocks will look cheap if international banks can swiftly work out the extent of the credit woes arising from the sub-prime loans and chop off their losses,’ a stockbroking director said.

But share prices may fall a lot more if a few big financial institutions could not take the heat and collapse, he warned.

The only good news is that retail investors here have been partly spared from the financial carnage because of the trading curbs imposed recently by local brokerages on highly speculative penny stocks after their daily traded volumes exceeded a few hundred million shares each.

The big concern now is whether the booming residential property market will be affected if the international credit crunch continues.

‘Some investors are obviously growing uneasy about the ability of private equities funds to complete some of the collective property sales which had been announced recently,’ said a dealer.

The abortion of any blockbuster en bloc property sales may hurt the share prices of listed real estate developers and construction counters quite badly, he said. 


Source: The Straits Times 13 Aug 07


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