MORE volatility is on the cards for local equities this week, as traders anxiously await the outcome of a make-or-break emergency summit of European Union leaders in Brussels today over the deepening Greek debt crisis.
The meeting is seen as one of the last chances to resolve the deadlock before Greece's bailout programme expires on June 30.
It comes after negotiations between Greece and its creditors broke down last Thursday. Greece must repay about €1.54 billion (S$2.3 billion) to the International Monetary Fund on June 30, which it most likely will not be able to do without a bailout agreement that unlocks last-minute financing.
If today's talks fail, the exodus of cash from Greek banks will intensify, raising the chances of capital controls being imposed.
Already, billions of euros have been withdrawn from the nation's banks in the past week as the stand-off between Athens and its creditors drags on, prompting the European Central Bank (ECB) last Friday to raise emergency lending to Greece's banks for the second time in three days. The ECB said it will meet again today to decide if it will provide further help.
"If there is no solution by Monday, global equities, especially euro zone markets, will be hard hit. That's because it may suggest chances of a default are almost 99 per cent," a remisier said.
"Hopefully, the Straits Times Index (STI) will hold its ground and not breach 3,270, which is the next support. If it doesn't break that level, that's a good sign. Otherwise, the market can come down really fast. If, however, there is a positive resolution, we can run back up to 3,400."
The benchmark STI managed to cling to the key 3,300-point support last week, closing at 3,300.96, up just 0.54 point last Friday, but down 1.6 per cent for the week.
In China, analysts are expecting further cuts in reserve requirement ratios and interest rates if the HSBC Markit manufacturing purchasing managers' index for the world's second-largest economy, due to be released tomorrow, comes in weaker than expected.
Since last November, the People's Bank of China has cut interest rates three times and banks' reserve requirement ratios twice. Still, doubts persist over the extent to which easing measures can help China's economy and its capital markets.
Morgan Stanley strategist Jonathan Garner said that despite the current policy-easing cycle that began last November, China's economy is worse off compared with where it was in 2009, when massive stimulus efforts led the economy to rebound strongly.
But if China's macroeconomic data stabilises, corporate earnings growth could still rise to high single digits from low single digits currently, helping to support the market, he told Bloomberg.
Meanwhile, the ongoing correction in Chinese equities, in the short to medium term, may herald a consolidation phase for the next few weeks, as investors grapple with the new "normal" of tighter margin debt financing and increased initial public offering activity, analysts said.
Meanwhile, City Developments (CDL) is expected to rebound this week following a heavy sell-off last Friday ahead of the stock being dropped from the FTSE EPRA/NAREIT Global Developed Index today.
FTSE announced the planned deletion on June 4 following its quarterly review of constituent stocks in the Asia region.
CDL slipped 1.1 per cent or 11 cents to $9.58 last Friday, with 12.8 million shares traded. This came after funds using the index as their benchmark sold CDL stock as they no longer need it in their portfolios, a remisier said.