Markets bid to recover from brutal sell-off but fears linger; Singapore shares close down 1.4%

SINGAPORE - Margin calls pushed the Singapore market further south on Aug 6 even as most other Asian markets staged a recovery from the previous day’s bloodletting.

The Straits Times Index closed down 1.4 per cent at 3,198.44, extending a 4.1 per cent plunge on Aug 5.

Like the previous day, banks led losses with DBS Bank down 1.6 per cent at $32.75 and UOB shedding 1.7 per cent to $29.58 while OCBC Bank dropped 1.3 per cent to $13.84, hit by markets now expecting bigger rate cuts from the US Federal Reserve.

Japan’s Nikkei led the regional recovery, rebounding 10.2 per cent after a record 12 per cent dive a day earlier.

Australia’s S&P/ASX200 rose 0.4 per cent, South Korea’s Kospi gained 3.3 per cent, but Hong Kong’s Hang Seng slipped 0.3 per cent while the Shanghai Composite Index edged up 0.2 per cent.

So is this a good time to start bottom fishing?

Brokers here said that following the Aug 5 market rout – which globally wiped out trillions of dollars of wealth in a single day – many investors were now being called up to top up their margin accounts, where stocks are bought with borrowed money.

“It will be a few more bear days before things stabilise,” said the head of a dealing team at a Singapore stockbroking house.

Markets across the world dived on Aug 5 on

fears of a US-led recession

following disappointing economic data last week. Precipitating this was a global tech rout on concerns that the biggest-spending tech giants had little to show yet for their artificial intelligence (AI) investments.

Pressure mounted further when the

Bank of Japan (BOJ) unexpectedly boosted interest rates for a second time,

raising the spectre of a potential fall in Japanese imports that will impact the Japanese economy. This drove Japan’s Nikkei index to its worst day since the 1987 “Black Monday” crash on Wall Street.

As investors fled risk assets, Bitcoin plummeted 11 per cent, leading a sell-off in cryptocurrency and related stocks.

But the sell-off has raised the possibility – or hope – that the US Federal Reserve could step in sooner than expected to cut US interest rates, which are at 23-year highs. Bond traders are now pricing in the possibility of a 50 basis point rate cut in September and multiple cuts through 2025.

While warning against jumping head first into the market at this juncture, there are many market experts who reckon the Aug 5 sell-down was an overdone knee-jerk reaction.

Analysts said the markets were looking for an excuse to sell, and they got it from the BOJ rate hike resulting in the unwinding of the world’s biggest “carry trade”, in which investors borrowed hundred of billions in yen because of Japan’s low interest rates to fund investments in higher-yielding assets elsewhere.

Other triggers to the market meltdown were weak US manufacturing and jobs figures last week, rising tensions in the Middle East and a spate of disappointing Big Tech results.

Analysts like Mr Thilan Wickramasinghe, head of research at Maybank Securities, said there has been a lot of froth in the market and a heavy dose of irrational exuberance, especially around themes like AI.

“So a healthy correction is not a surprise,” he pointed out. “The scale of it is sizeable, so there will be a lot of nervousness out there.”

That said, “the fundamental economic data out to the US is pointing to a slowdown, not a recession. So I think it is too early to call it the end of the bull market”.

In the same vein, BlackRock Investment Institute noted in a report this week: “The Fed opened the door to a September (rate) cut last week, as we expected. Then the payrolls data stoked recession fears and market hopes for a large 50 basis point cut next month. We see this as another flip-flop in the market narrative with little evidence backing it. Unlike in recessions, a growing workforce is driving the rise in the higher unemployment rate, not falling employment.”

Indeed, unlike previous market dumps, Aug 5 was not the result of any obvious market damaging event. Unlike 2008, the balance sheets of banks, corporates and households remain healthy. Unlike 2020, there is no pandemic in sight. No signs of any impending corporate or bank collapse either.

The only thing that has changed is a bunch of economic indicators suggesting that the US economy is slowing down. The question is whether this is a soft landing or a hard landing.

That said, some analysts have been sounding the alarm about a potential overinvestment in AI. In a June report, Goldman Sachs warned that the biggest-spending companies had little to show for their AI expenditures.

Mr Vasu Menon, managing director for investment strategy at OCBC, reckons it is too early to call the market’s bottom given multiple moving parts and the momentum of selling.

“However, the key question to ask would be whether the economic and earnings outlook has changed materially and, for now, it’s too early to jump the gun. We will have to monitor economic data in the coming weeks to see if recession fears are indeed warranted. Our base case at this juncture remains for a soft landing of the US economy. So, there is no reason to panic and no evidence to show that the US economy is in any kind of deep trouble.”

Analysts also agree that the impending rate cuts and the resulting liquidity that they could unleash in time – one estimate puts it at US$6 trillion (S$8 trillion) – should help global markets regain their footing. But for now, given the weak sentiment and the risk of further yen appreciation, more market downside cannot be discounted.

SAC Capital chief executive Ong Hwee Li said the Aug 5 sell-off was months in the making.

“For a while now, the US market has been ‘priced for perfection’, charged by the AI fever. This has run up Nasdaq to a multi-year-high price-to-earnings and price-to-book excess of 33 times and six times, respectively. Under such a situation, any fiscal or monetary moves (read: BOJ raising interest rates) or suggestion to the negative (read: Goldman giving odds of a US recession) was likely to precipitate a sell-off.”

He added that investors should stick to the script: “Now is the best time to pick up the favourite stock you’ve been eyeing for a while, at a valuation more mirroring its fundamentals.”

The message strategists are sending out is to stay cautious even though stock prices have come down to more palatable levels. They say the aftershocks of the massive carry trades that rocked the markets may not be over yet, and there may be more unwinding in the days ahead.