The Straits Times Index faced resistance as it reached the 50- and 100-day moving averages at 3,240 and 3,236 respectively. The STI’s intra-day high on September 6 was 3,345. As at the end of the week of September 4-8, the STI had shed 25 points to close at 3,208. Smoothed RSI met with resistance at its equilibrium line and has turned down.
Directional movment indicators are neutral with ADX falling to a low 15, with the DIs neutrally placed. The low level of ADX suggests that the STI is likely to drift sideways. Support stays at around 3,150 for the time being.
US risk-free rates as represented by yields on 10-year US treasuries rebounded from 4.09% a week ago to 4.24% as at September 8. The chart pattern could start to resemble a head-and-shoulder top formation if yields on the 10-year US treasuries move to 4.04%.
Bloomberg reports that Bank of America Corp (BofA) strategists say that the rising threat of interest rates staying higher-for-longer is likely to “drive a selloff in stocks over the next two months”. The strategists point out that rising bond yields make stocks unattractive. The S&P 500 earnings yield of 4.6% offer lower returns than the three-month Treasury bill yield of 5.5%, the BofA strategists argue. The negative gap of -0.9 percentage points is not positive for equities while positive spreads have coincided with extremely bullish periods for stocks, the BofA strategists indicate.
The other area of concern remains the Chinese residential sector. “While we do not expect a financial meltdown, the property slump will likely cost the Chinese economy in terms of long-term growth potential, primarily because of a sharp slowdown in investment,” note Dong Chen, Head of Macroeconomic Research, Pictet Wealth Management and Julien Holtz, Emerging Market Strategist, Pictet Wealth Management.
“Sentiment towards Chinese equities is undoubtedly depressed. Despite low valuations (10x and 11.7x forward P/Es respectively for offshore and onshore stocks), which look even more stretched on a sector-adjusted basis, investors are clearly not queuing to pile into Chinese stocks,” the duo say.
See also: STI’s upside from breakout remains valid as risk-free rates fade, but stay watchful for FOMC
“While the overall picture is grim, bearishness around Chinese equities may have reached a local peak and we therefore are refraining from cutting our exposure,” they add.
