STI set for firmer open amidst news of EU bailout

Markets are likely to rebound following news that Chinese inflation eased and Spanish banks were bailed out by the EU, says IG Markets Singapore.

IG Markets Singapore noted:

Markets are likely to see a healthy bounce today after weekend news that Spanish banks were bailed out by the EU and Chinese inflation eased.

While no-one is denying the strong headwinds still blowing into Asia from many directions, regional investors may be lifted by immediate concerns having eased as they start the week.

At the end of last week fears of a Spanish banking meltdown continued to spook the markets while China’s surprise interest rate cut led some to believe it was softening up the markets for some very bad economic data.

In the end the EU came to Spain’s rescue with a €100 billion rescue package while China’s data was weak, but not as weak as many had feared.

While markets may get a short-term lift, the Spanish bank bailout points to a worrying trend. This is the biggest economy to receive an EU/IMF hand-out so far. The casualties of the eurozone crisis seem to be getting bigger after Greece, Ireland and Portugal previously received rescue funds.

This latest bailout may stoke more fears than it calms, once the champagne runs out.

Another side effect is the bad taste in Greek mouths that they got a poor deal on their own bailout agreement by having to sign up to more arduous terms that the Spanish. This may increase the anti-bailout sentiment ahead of crucial elections at the weekend.

With these elections now only days away, we may be witnessing the calm before the storm.

When it comes to China, there may be no storm, just a heavy downpour with its latest economic data. There is definitely a slowdown looking at industrial production, retail sales and investment, but not a big enough one to cause panic within the world’s second biggest economy.

Domestic demand is still strong while another month of falling inflation gives the PBOC more room for manoeuvre to cut interest rates and relax the reserve requirements for its banks.

China is still well placed to steer its jumbo jet of an economy down onto the runway via a soft landing, if that is what GDP growth of about 8% can be described as. Eurozone economies would call this level of growth a miracle.

After last week’s surprise cut in interest rates the Chinese government was sending out a message that it is dedicated to stimulating economic growth and will take action when it feels appropriate. The cut itself is expected to do very little.

Behind the scenes it has been ramping up infrastructure spending around the country and has the tools at its disposal to boost consumption from within to shield itself from the euro pain.

This week is also a big one for the US economy. Last week Wall Street enjoyed its best week of the year despite Ben Bernanke failing to progress hopes of quantitative easing.

So this week he will have the chance to justify his confidence in the US economic recovery with retail sales, Empire State manufacturing and inflation figures out in the coming days.

On the currency markets, the euro has risen on the Spanish banking bailout moving above the $1.26 mark to trade this morning at $1.263.

Commodity markets also saw a huge boost from Chinese and Spanish developments. Oil rose its most in five months having been battered recently by eurozone woes, increased supply, rising stockpiles and threats of weaker global demand.

Brent crude rallied 2.7% to move above the $100 threshold, to trade at $102.09 a barrel. US Crude shot up 2.5% to trade at $86.25.

Gold has held steady sitting at $1603 an ounce.

The futures market points to a much firmer open for the STI this morning. Japanese stocks opened 1.8% higher while Australia enjoys a public holiday.