The Straits Times Index is likely to head towards the March 14 closing low of 3,129 but may hold above the intra-day low of 3,094 during that session. The 3,100 could turn out to be a psychological support. By then, short term RSI which is already at the 30% line is likely to be sufficiently oversold to stop falling. Any recovery at that point may be tentative as volume has expanded noticeably during the almost incessant decline that took place between Aug 1 and Aug 18.
During the week of Aug 14-18, the STI lost 121 points to end the week at 3,173, falling below its 50-, 100- and 200-day moving averages at 3,242, 3,247 and 3,252. These are likely to be resistance levels. While quarterly momentum, directional movement indicators and annual momentum all look weakish, the STI should be able to find support within the next two weeks.
The more serious breakdown materialised with the Hang Seng Index, which fell below support at 18,300 during the week of Aug 14-18, and lost 823 points this week to end at 17,950. The HSI could easily lose a further 900 points as short term indicators are not sufficiently oversold to trigger a rebound, and directional movement indicators are suggesting a downwards trend. ADX has just turned up from a low level while DIs are negatively placed.
Part of the reason for a global market decline centres around concerns over the Chinese economy. On Aug 17, Evergrande filed for bankruptcy protection. In the meantime, yields on the 10-year US treasuries is at 4.21%, a 16-year high, and the highest level since the global financial crisis.
According to Fitch Ratings, risks on its rated portfolio include negative scenarios for funding, asset valuations and financial stability; inflation and interest rates; and geopolitics, governance and policy. The negativity around funding and asset valuations are affecting commercial real estate in the US despite signs of green shoots.
Chinese 2Q2023 property data showed “a marked contraction in sales and continued pressures facing developers highlight the risks to a steady re-acceleration in Chinese growth” Fitch says. Its base case is for a shallow recession in the US.
See also: STI’s upside from breakout remains valid as risk-free rates fade, but stay watchful for FOMC
Elsewhere, Julius Baer notes that “increasing concerns about a balance sheet recession in China and a relentless rise in US Treasury yields were among the main drivers for the sell-off” in the US. On the other hand, Julius Baer believes that the likelihood of a US recession has weakened. “The domestic economic backdrop in the US continues to be on a solid footing. Leading indicators have recently picked up again, while the disinflation process remains intact, allowing the US Federal Reserve to conclude its hiking cycle. This reinforces our view of a soft-landing scenario in the US, and we recently lowered the recession odds to 30% from 50%,” the Swiss bank says.
