Are global markets due for major corrections

The latest stock market gains in the United States, and other markets looked increasingly similar to January when the initial market euphoria was later overwhelmed by huge losses come February where there was back-to-back market drops that almost seems to paralyse the investors’ rational decision-making abilities. We shall attempt to determine whether such trends exist by analysing the one-year daily chart of the Straits Times Index (STI).

Source: Phillip Securities POEMS 2.0 Trading Platform (One-year daily chart of the Straits Times Index (STI), May 07, 2018)

Using the channel lines, and Fibonacci Retracement analysis, we noted that the Straits Times Index (STI) reached a high of 3,576.34 on January 26, 2018 on the eve of a major sell down to come later in February.

This time, we noted that the Straits Times Index (STI) broke through the 3,600 psychological resistance mark to push to a high of 3,641.65 on May 02 before the market started to turn south. The index closed Monday’s trading session at 3,532.86, down 12.52 points, or 0.35 per cent.

We also noted a potential heads-and-shoulder formation of the STI at current levels as denoted by the two yellow arrows. In both occasions, the STI hit above the 3,600 level, only to be sold down afterwards. The large huge drop this year in February saw the index falling by close to a 20 over percent before recovering later in the month. However, at the low end of about 3,250, we saw the index climbed back up higher, albeit several occasions of back-and-forth before breaking above 3,600 level for the second time this year.

We think that the latest falls in the STI could closely resemble to what happened in January and February when volatility has since been the catchword phrase most market watchers were describing about the overall current market conditions.

What are we seeing for global markets, are they similar in the chart patterns

Source: Stockcharts.com (One-year daily chart of the MSCI World Index ETF, May 04,2018)

After a huge swoosh downwards to below 2.000 level in mid-February, the MSCI World Index ETF has not seen any major shifts, and has mostly consolidated itself at around the 2,019 and 2,020 levels recently.

One of the major observations was during early April when the ETF broke the 50-day moving average (MA) upwards to rise to a high of close to 2,050. However, the rise was short lived as the index retraced back downwards.

But, European major stock indices move up

The German DAX index

Source: Stockcharts.com (One-year daily chart of the German DAX, May 09, 2018)

Taking a look at the German DAX index, we noted that the index took the opposite direction by moving upwards to end Wednesday’s trading session at 12,943.06. At these levels, there appears to be technical breakout  since the index hit the lows at 11,700.

Moreover, the 14-day relative strength index (RSI) above showed that there is an uptrend to the index as it heads to the upper boundary to close to the reading of 66. At the reading of 70 and above, investors usually interpret the index as having been ‘Overbought’.

In a related news, a China Xinhua News Agency reported on April 25, 2018 that international investors have increased their allocation of investments on the German DAX stock exchange. The article cited the findings from a study done by international accounting and consulting firm Ernst & Young (EY).

Based on the EY studies, the percentage of shares of companies listed on the DAX that are owned by international investors rose from 52.4 per cent in 2016 to 53.7 per cent in 2017. During the same period, the relative holdings of German nationals fell from 37.7 per cent to 35.8 per cent, while 10.5 per cent of stocks could not be geographically allocated. The German DAX is home to the so-called blue chip counters like Siemens, and Infineon, among others.

The French CAC Index

Source: Stockcharts.com (One-year daily chart of the French CAC index, May 09, 2018)

Similarly, the French CAC index have seen a technical rebound from the lows of 5,050 in April to edge higher at 5,534.63. The trough-to-peak increase is about 9.6 per cent. Moreover, we noted that the 200-day MA is starting to rise sharply and might ‘cut’ above the 50-day MA signalling a potential run-up of the index.

Are European financial markets due for correction

Based on the two chart illustrations depicting the major European stock indices, we think that the index might have gone ahead of their fundamentals.  However, we do not think that the European financial markets are overvalued due to the large interest rate differential, and economic potential of the region that has not reached the maximum limits.

We do not think that the bouts of volatility seen globally early this year will leave European financial markets to analyse if manufacturing growth is intact.

Source: Tradingeconomics.com (IHS Markit Euro Zone Manufacturing Purchasing Managers Index (PMI))

According to data obtained through Tradingeconomics, the IHS Markit Euro Zone Manufacturing Purchasing Manufacturing PMI was revised higher to 56.2 in April 2018 from an initial estimate of 56. This is markedly slower than the 56.6 recorded in March. The researchers at IHS noted that new export orders were the lowest in 17 months with some firms linking to a stronger Euro currency, especially against the US Dollars.

We think that the April’s fall in the manufacturing PMI could be a seasonal phenomenon. If one were to take a look in April 2017, there was also a drop in the PMI reading, albeit a smaller one as compared to April 2018. However, the following month in May 2017, the index rose. Therefore, we do not think that the monthly shifts in the index do not represent any significant missteps or market failures. We will be more concerned if there is a secular decline in the manufacturing PMIs, meaning a prolonged downturn in the index readings going forward. Currently, we are not seeing that extreme scenario

Asian major stock indices defy sceptics by moving upwards

Hong Kong Hang Seng Index

Source: Stockcharts.com (One-year daily chart of Hong Kong’s Hang Seng Index (HSI), May 11, 2018)

The Hong Kong’s Hang Seng Index (HSI) is seen consolidating around the 50-day moving average (MA) line of 30,638.92. The index closed Friday (May 11) trading session at 31,122.06. At the current level, the index’s 14-day MA is still at the average level of about 57. We think that the HSI is currently in ‘trendless’ mode in terms of direction. We shall wait for more data and confirmation of where the index is heading going forward.

A turnaround could be seen for Shanghai Composite Index

Source: Stockcharts.com (One-year daily chart of the Shanghai Stock Exchange Composite Index, May 12, 2018)

Although the 50-day MA of the Shanghai Stock Exchange Composite Index (SSEC) cuts below the 200-day MA which signifies a ‘Dead Cross’, we do not immediately discount the index’s ability to make a comeback as shown up the recent upturn seen on the one-year daily chart shown above.

We noted that the Moving Average Convergence and Divergence (MACD) momentum indicator is showing a gradual upturn in the index.

We think that part of the reason for the sell down in the SSEC in April might be due to concerns over the potential escalation of trade wars between the United States and China. However, we do not think that such a scenario will arise as a trade war does not benefit either party, and might drag the global economy which the United States does not want to take the blame for it.

We also think that a compromise solution is possible, and though both would like to extract favourable terms from any negotiations, we think that both parties, especially China will not blindly give up their bargaining power in their negotiations. We think that the China negotiators under Chinese Vice-Premier Liu He will be willing to take down some n restrictions on foreign party acquisitions if such moves do not necessarily lead to huge damages to the China’s economic interests.

Malaysia ‘boleh’ win in recent general elections

The Malaysian voters have made their choice in the selection of their new government led by Tun Dr. Mahatir of Pakatan Harapan (Alliance of Hope) or PH is Wednesday (May 09) General Elections. The highly anticipated event viewed by thousands of observers overseas and local almost surpass the major news by President Trump who announced on Tuesday that the United States will reimpose sanctions of Iran, thus sending oil prices up.

The coalition party led by Dr. Mahatir, 92, caused commotions among stock market participants, and the exchange traded fund tracking the country’s stock index fell almost 10.4 per cent from the peak as shown in the chart below:

Source: Stockcharts.com (One-year daily chart of the iShares MSCI Malaysia ETF (EWM), May 11, 2018)

Based on the one-year daily chart of the Ishares MSCI Malaysia ETF (EWM) which indicates that the bout of selling might have been overdone. This is seen by the 14-day RSI which showed that the index is close to the ‘Oversold’ region. We think that part of the fear were uncertainties about the new government policies under PH. However, the new Prime Minister has assured businesses that the government will work with them to come up with policies that will not lead to any undermining of their business interests. This means business friendly measures that will not unnecessarily add to the overall debt burden of the country.

However, with the removal of the Goods and Services Tax (GST), and in place of it a sales tax might crim the state coffers. The country’s credit rating might be put on review if policies failed to restore government finances to order. This might erode foreign investors’ confidence. According to some news reports, some foreign funds have already started pulling out funds from Malaysia citing the uncertainties.

Are Malaysian stocks good buys

For the risk adverse investors, which we think the majority are, there are many considerations to note while investing in Malaysia including foreign exchange, repatriation of funds, political stability, and valuations, among others.

As of February 2018 when stock market volatility was at its highest, it was noted by The Edge Financial Daily that the benchmark Kuala Lumpur Composite Index (KLCI) was not the cheapest among the regional stock indices as shown in the chart below:

Source: The Edge Financial Daily, February 12, 2018

For investors keen in Malaysian stock counters following the elections, we think sectors like the healthcare, electronics and consumer driven stocks that might be beneficiaries of the removal of the GST might be areas to look out.

As for infrastructure, and construction counters like George Kent, Sunway, and Mah Sing among others, the new government has said many times during the election campaigns that they will review the number and amount of public projects to determine whether such projects will benefit the Malaysian people.

Singapore stocks on their tops

Source: Phillip Securities POEMS 2.0 Trading Platform (One-year daily chart of The Straits Times Index, May 11, 2018)

The Straits Times Index (STI) closed Friday (May 11) trading session at a high of 3,570.17, up 32.58 points. This takes the index to a year-to-date (YTD) performance of 4.91 per cent, and the weekly return of 0.7 per cent. With earnings reports of STI heavy weights like OCBC, City Development, UOL, ST Engineering, and ComfortDelgro reporting during the trading week, there appears to be optimism among banks, property developers, diversified industries, and transportation counters. The actual performances are largely in line with many analysts’ forecasts about stocks in these industries likely to be driven by the overall global economic growth.

As for the laggard counters like Thai Beverage, Sembcorp Industries, SPH, Starhub, among others, there have also been interest by investors who seek to capitalise on growth and recovery. Though the road ahead might take a while for positive and consistent returns to show up, investors might want to place these STI counters in their watchlists for continued monitoring.

Iranian sanctions, Oil prices up, and US stock markets are in early summer joy

With the Iranian sanctions in place as announced by President Donald Trump this week, oil prices got an early shot in the arm with many analysts adjusting their year-end 2018 target prices to the upper-end of US$75 to US$80 per barrel. This has prompted the Organisation for Petroleum Exporting Countries (OPEC) to make adjustments as well to the global oil prices.

According to the online article on Oilprice.com, two industry sources were quoted by Reuters that Saudi officials in Riyadh were considering US$80 per barrel, or US$100 per barrel. Already, Brent crude oil prices have skyrocketed to close at US$77.12 per barrel.

Source: Stockcharts.com (One-year daily chart of Brent Crude Oil prices, May 12, 2018)

Similarly, US stocks ended the week on a high note, with the three major indices closing between 2.3 per cent for the Dow Jones Industrial Average, S&P 500 climbing higher at 2.4 per cent, and the Nasdaq ending the week at 2.7 per cent higher.

A summary of the closing US stock indices shown below:

Source: CNBC.com (May 11, 2018)

S&P 500 index scores a technical rebound

Source: Stockcharts.com (One-year daily chart of the S&P 500 stock index, May 11, 2018)

As noted in the one-year daily chart of the S&P 500 index chart, we noted that the index is starting to show a technical breakout above the 50-day MA, with the 14-day RSI showing a major climb from the average of 50 to 61.

Similarly, with energy counters in focus, the SPDR Oil and Gas Exploration and Production ETF (XOP) is also showing a steep uptrend after being in the trough of close to US$32.00, and the 14-day RSI is close to the ‘Overbought’ region of 70 as shown in the chart below:

Source: Stockcharts.com (One-year daily chart of the SPDR S&P Oil and Gas Production ETF index (XOP), May 11, 2018)

Are gains in the Energy sector sustainable

This question is difficult to explain, and is probably news driven. The basic fundamentals of demand and supply continue to apply. As long as OPEC maintains the average price at US$80 per barrel, it is bound to attract criticisms such as US President Trump. He insisted that the oil cartel has driven the prices too high due to production cuts. This might prompt the President to encourage more supplies of shale oil to counter the rise. A so-called tit for tat disagreement is not likely to solve any issues.

We think in order to keep the short-term price rises sustainable, there has to be a close co-operation between US and OPEC. However, given the lack of eye-to-eye contact between both parties, it could be a challenge just to bring everyone to the negotiation table. We expect that with the summer driving season in US about to start soon by end of May, the President will continue to push for lower oil prices.

How did our investment portfolio perform

Note: Model equity portfolio performance as of May 11, 2018. For illustration purposes only, and information is not verified by third party. Past performance is not necessarily indicative of future performance. Please seek the advice of your qualified licensed financial adviser before any investments are undertaken.

Since the inception of the model equity portfolio at the end of November 2016, the latest portfolio returns this week have shown a major outperformance of 85.87per cent, inclusive of capital returns, dividends earned, and realised returns earned during the last rebalancing round on December 31, 2017. This compares to the total return of 22.89 per cent for the Straits Times Index (STI) during the same time period.

The top three holdings in total return terms (dividends plus capital gains) include Nordic (up 44.7 per cent since end June 2017); followed by Ascendas Reit (up 13.6 per cent since November 2016), and SATS Ltd (up 15.8 per cent since December 2016).

The model equity portfolio did experience a shortfall coming from Singtel (down 6.1 per cent since December 2016); followed by Straits Trading (down 11.0 per cent since end June 2017).

For now, we are not planning to make any changes or do any rebalancing for the portfolio. We shall actively monitor the model portfolio till end of June 2018.

Upcoming Earnings News next week

Source: Phillip Securities Pte Ltd, SGX

Some of the STI component stocks that are scheduled to report next week include SIA, and Singtel. We noted that there has been a runup in the stock price of Singtel, and Friday’s expected release of its results will provide more clues of its future direction.

Economic Calendar (Week starting from Monday, May 14, 2018)

Singapore

Source: Tradingeconomics.com

China

Source: Tradingeconomics.com

United States

Some of the key economic numbers due next week include the monthly retail sales for April. The monthly retail sales data might give some peek on the continued spending and consumption made by US consumers.

In summary, it is not a matter of when, but will the impact of a global market correction will have any bearing to any country. We think that if a country’s finances are in order, along with sustainable policies, such shocks are likely to be minimised, though it cannot be eliminated altogether.

Have a good trading week ahead.

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About Peak Hour 86 Articles
Hock Meng has 12 years of financial industry experience, including three years working as a research associate for a hedge fund company in Wall Street, US, with assets under management (AUM) close to US$400 million during its peak in 2008. Hock Meng is a Chartered Alternative Investment Analyst (CAIA) holder and passed his Level I Chartered Financial Analyst examinations. Hock Meng is licensed to provide investment advisory services in the area of unit trusts, dividend portfolio construction, securities wrap services, and life insurance planning