Market Update

KEY POINTS

The rally ahead of FED meeting – Buy on rumor, sell on news
STI near-term upside capped at 3575 (50% retracement), a re-test of 3400 likely during DecemberWeekly CommentsEquity indices have rebounded off their November lows. Expect range bound trade as investors await the FED decision. The STI should be capped at 3575 in the week ahead.

Uncertainty about the impact of the credit crisis on the US economy and Asia’s growth remains. With equity indices yet to show a clear sign of a technical trend reversal to the upside, we are treating last week’s rise as a counter-trend rebound within a larger trend that is still in consolidation.

Small caps, which lagged behind the blue-chip led index rally last week could enjoy brief spurt of life ahead of the FED meeting on December 11 but until investors’ confidence makes a return, the rise may not sustain.

Our earlier technical view for traders to adopt a contrarian positive view in anticipation of a technical rebound in the STI to 3510 has panned out.

Oversold equity indices rose on increased expectations for a more aggressive 50 basis points rate cut during the December 11 FOMC meeting, a technical rebound in the USD and a retreat in oil price.
However, the basis behind last week’s rally coupled with technical factors currently suggests a mere technical rebound rather than a trend reversal to the upside -

Point 1:
The main drive behind last week’s rally was raised expectations that the FED may cut interest rates by up to 50 basis points.

However, a declining interest rate environment does not necessarily equate to rising equity prices. During the period from May 2000 to June 2003, FED funds rate were lowered from 6.5% to 1%. The Dow consolidated from 10,935 to 9,011 during the same period when the US economy faltered.While a 50 basis point cut in interest to 4% would be welcomed, it would also reveal that the FED is increasingly worried that the collapse of the housing market and credit crunch could have a larger negative impact on the economy. Investors are turning to this Friday’s November non-farm payrolls (consensus estimates 75,000) and unemployment rate (consensus estimates 4.7%) for signs of whether the FED will cut rates by 25 or 50 basis points.

A worse-than-expected non-farm payrolls and unemployment rate increases the chance for a 50 basis points cut and thus equity prices should continue to rally? This argument sounds fragile. A ‘buy on rumor, sell on news’ is the more likely scenario for US equities so long as the economic outlook remains uncertain.

Point 2:
Oil price fell to USD88.7pbl last week on speculation that OPEC may increase oil production.
The pullback in oil price may be halted and reversed if the anticipated production increase does not materialize during the Gulf Cooperation Council (GCC) meeting this week.Technically, we continue to see the likelihood of oil price heading above the psychological USD100pbl mark before peaking out at/before USD107pbl.

Conclusion:
Mere hopes of an aggressive cut in interest rates during the next FOMC meeting is not going to continue to power Asian bourses and the STI higher once the event is over.
The key to a sustainable rally may lay in the ability among Asian economies to withstand a slowdown in the US. In this matter, the signs are encouraging. GDP growth (% y-o-y) among the Asia 10 countries rose from 5.7% in 1Q05 to 6.7% in 2Q07 even as the US economy slowed down from 3.2% to 1.7% during the same period.

From a technical perspective, the 50% upward retracement level and the mid-Nov high offers a likely short-term resistance to the current rebound for equity indices. This puts short-term resistance at 3575 (50% retracement) for the STI.