Commentary: The Bear Market Rally is Over

By Steed Koh Wei Teck
Head of Proprietary Trading & Principal Investments
Phillip Securities Pte Ltd (a member of PhillipCapital)


The tsunami that started from thousands of miles way and finally hit our shores has left behind catastrophic damages in Asian markets. Many traders were caught stranded and bewildered.

The rally, which commenced after the marriage of Bear Sterns to JP Morgan Chase in since mid-March, is all but over.

Shares of major US banks and brokerages have continued to dive downwards as the credit ratings of the two top bond insurers were downgraded. Fears over food and fuel crisis are now weighing on the markets. A prolonged stock market downturn is imminent and inevitable.

As MBIA and Ambac lose their crucial credit ratings, this will lead to further downgrades of bonds guaranteed, forcing banks to increase their capital or undertake huge write-offs against their bonds holdings.

The cuts came on the back of warnings from banks about the potential for further writedowns and growing concern among investors that the financial sector could feel further pain from the credit crunch. On Friday last week, both monolines declined 12.7% & 4.9% respectively. Banks with large exposure to debt backed by the monolines tumbled.

Global markets would continue to suffer in the months ahead despite the abating credit squeeze crisis. Growth in the US and UK have been sluggish at best. Dow Jones Industrial Index closed below 12,000 points on Friday.

The crisis that started last year has mutated into a hideous beast.

The global slowdown would occur amid extreme global inflationary pressures. The past years boom in US was founded on unsustainable rises in consumer debts and abetted by a housing bubble market as well as a weak US dollar, which had aided US exports.

With banks tightening their lending in the face of collapsing housing prices, markets would start weeping and continue their downward spiral.

Inflation is a more diabolic beast than recession.

China, India and Vietnam, including Singapore, are experiencing acute inflation. Soaring fuel and commodities prices, including food staples, pushed many economies into high inflation, prompting governments to take unprecedented measures to curb inflation pressures.

Record high energy and agriculture commodity costs are destabilizing key developing economies.

Like a typhoon and earthquake happening concurrently, the world is suffering for the first time since 1973 from the confluence of record oil and food prices.

Corn, soyabean and meat prices jumped to high-time highs last week. Many governments in the developing countries just could not bear the long-term burdens of these on their fiscal budgets and have taken steps to remove food and fuel subsidies even as social tensions in the affected countries remained high.

Whether the stocks markets would stabilize would be contingent on three factors: the price of crude oil and commodities, inflation and how the developments in the troubled global financial sector unfold.

The worst is not yet over; brace yourself for more volatility ahead.




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