Singapore Markets Morning Briefing - what you need to know for Fri Feb 24, 2012

Overnight there was improvement in risk sentiment across Europe and the US.

IG Markets Singapore said:

The STI will be hoping to put the brakes on its two-day downward spiral today buoyed by an improvement in risk sentiment across Europe and the US last night. But this might be short-lived.

Singapore traders have not had much reason to be cheerful after the Greek bailout package earlier this week as global markets started to slide. Greece has been the focal point for so long that markets had forgotten to check on the state of the global economy.

This week we saw that recovery is still some way off with many sub-50 PMI manufacturing figures being posted across Europe and China. But last night we saw tiny steps are being made in the right direction with US unemployment claims data beating expectations and holding steady at four-year lows. Housing data also showed some improvement.

This saw the S&P 500 trade near 10-month highs and the Dow once again flirt with the 13,000 level. Among the major averages, the Dow Jones Industrial Average was up 0.4% to close at 12986. The S&P was also 0.4% higher at 1363, while the NASDAQ climbed 0.8% to finish at 2957.

With US markets once again approaching key levels, ‘Dow 13,000’, and the S&P edging up to its post- GFC high of 1370, one hopes some of this magic dust can be sprinkled onto the STI today to end the week on a more positive note. The loss in value of 2% is unlikely to be reversed today, but traders will be hoping at least this slippage doesn’t worsen.

But the omens don’t look good for a number of reasons. Firstly, industrial production figures for Singapore are due out this lunchtime. There’s a strong chance output shrank in January as the global economy was still very bleak before rays of sunshine started breaking through.

Secondly, oil has continued to rise with US crude edging up 1.5% to $107.49 a barrel while oil futures are climbing on the back or Iranian tension not dying down anytime soon. Rising oil prices are not good for energy-hungry economies.

Thirdly, China is now downgrading its economic expansion this year arguing its current growth model is unstable and more importantly, unsustainable. This is not good for China’s trading partners who rely on it for exports and the catalyst for Asian growth.

RBS, on the other hand, reported:

Treasuries staged a flattening rally today, bounding off the opening lows due to the LCH action and as stocks softened up early. In addition, Treasuries were supported by strong retail demand at the 7yr auction and talk of additional Fed easing in the market in April.

This talk also supported commodities, including oil, helping the Treasury bid due to the negative impact rising energy has on consumption. Our flows were better selling in the morning from leveraged and macro accounts in 5s and 10s, and better paying in swaps. Flows into the afternoon as the market turned around became more mixed, with some real money two way in 3s and buying in 5s.

As for TIPS, we saw real money buying the front end, 10s, and 12s and selling the long end. Total Treasury broker volume today was 94% of the 10-day average.

Meanwhile GFT noted:

The question then becomes how much of an impact a Greek default would have on the markets. Psychologically it would be significant because it is a first for the Eurozone.

Fears of contagion could freeze the markets quickly as investors turn their focus to the risk of contagion. If a default were to occur, the euro and European financial markets would take their cue from European yields and the CDS spreads of Italy, Spain and Portugal.

The next 2 weeks will be extremely important to Greece and the financial markets as a whole but from now until then, things could be quieter unless the second bailout fails in any Parliamentary vote.

Germany will be holding a vote on Monday and Merkel won’t gain support from local lawmakers easily. In early March, European Union leaders will meet to give their final seal of approval for the deal.

Although we believe that a default would have significant repercussions for the euro and the financial markets in general, it may not mean the end of the world. Investors survived the U.S.’ loss of their AAA rating and the downgrade of France – they even survived the demise of century old Wall Street institutions, albeit after some severe pain.

If Greece were to default and credit default swap payments were made, at least faith in these instruments would be restored and investors would not have to wonder if banks, policymakers and ISDA will bend the rules in a crisis.