Regional reversals weigh STI down by 13 points

SINGAPORE - Monday's late push on the Straits Times Index failed to find a follow-through on Tuesday as regional weakness took its toll, cutting 13.78 points off the index at 2,538.24. Not surprisingly, banks and property stocks which had propped the index up in the final minutes of Monday's session contributed the most to Tuesday's loss.

The second line was weak in tandem with the fall in the index, but not overly so - excluding warrants and bonds, there were still 144 rises versus 197 falls, while 401 stocks were either unchanged or not traded. Turnover excluding foreign currency issues was a moderate 910 million units worth $965 million.

The steep dropoff in commodity prices was said to be making traders nervous despite the fact that this was originally deemed to ease inflation pressures and was therefore positive for stocks.
Another reason for caution was Wednesday's US interest rate meeting, not because of expectations that rates would be raised but because Wall Street and markets everywhere have already been rallying for the past week on expectations that the US central bank will keep rates steady.

Still, there were pockets of interest to keep buyers happy. The real estate investment trust (Reit) sector rose sharply on Monday and continued at a more moderate pace on Tuesday - Suntec, CMT and Ascendas all gaining three cents each to $1.40, $2.51 and $2.16 respectively.
The catalyst was probably a JP Morgan report on the sector dated Monday entitled 'The Singapore-Reit sweet spot'. The foreign broker said it expects average returns for the sector to be 8-10 per cent next year, although outperformers should achieve total returns in the mid-teens. It added that excluding CapitaCommercial Trust, local Reits are trading at a 5 per cent discount to revalued net asset value estimates.

On the subject of the US economy and interest rates, Morgan Stanley in a Monday report entitled 'The Great Housing Debate' said 'US housing activity is in recession and home prices are decelerating sharply. Those trends are likely to intensify, paring as much as 1.5 per centage points from US growth in the second hald of 2006. The damage could be greater but there are also chances we are overestimating the housing spillover'.

The US broker added US bonds are vulnerable because they have been pricing in a sharper slowdown than likely. 'Both real rates and term premiums are likely to rise with positive growth surprises and renewed uncertainty about the path of US monetary policy'.

Meanwhile, chart technicians have issued different views about what the future might hold. CLSA on Tuesday said its indicators suggest the MSCI Asia Free ex-Japan Index is likely to test its 2006 peak. 'The indicator turns bullish when 60 per cent of the index's constituents are above their 40-day weighted moving averages,' said CLSA.

Elliot Wave guru Robert Prechter, however, warned in a Sept 13 report that at least for Wall St, the rally is ending and the bear market will soon resume. 'The market typically falls sharply after completing an upward diagonal, so a seemingly out-of-the-blue reversal should occur...this is the last opportunity to get out or sell short before the market begins to accelerate lower,' said Mr Prechter.