TRADERS must be surprised that despite Wall Street’s weaker close, the Singapore market has stayed resilient.
Indeed, after an initial 9 point drop, the Straits Times Index has moved back into positive territory, as I write.
I had initially shrugged off the impact which a change of policy by Beijing on the yuan would have on the equities market.
But come to think of it, the tiny step it is taking may prove to be a major stride where the rest of the world is concerned.
When Beijing effectively pegged the yuan to the US dollar two years ago, the world was suffering from its worst economic slowdown in decades.
By discontinuing this crisis regime, it is sending a loud and clear message that it believes that the global financial crisis may well truly be over, even though some analysts are labelling the problems now hobbling Europe as Act II of the crisis.
Not surprisingly, analysts have made much of the move, drawing parallels between what Beijing is doing now, and the Plaza Accord in 1985 which triggered an explosion in Japanese consumer demand, as the yen doubled in value against the greenback in the next 25 years.
But few analysts have drawn attention to the fact that Beijing’s move had come amidst concerns over the draconian working conditions of its workers hired by factories operated by the foreign firms in southern China – the suicides at Hon Hai factories and the industrial action taken by workers working for Honda.
I believe that in moving to a more flexible exchange rate, Beijing is sending a strong signal that its days as the world’s workshop by supplying manufacturers with an inexhaustible supply of cheap labour may be numbered.
If your goods are priced in US dollar but your costs are in yuan, your profit margin will naturally face a squeeze, if the Chinese currency appreciates.
Beijing’s move is directed as much towards its domestic audience, as to the shrill war-cries by an increasingly protectionistic US Congress looking for scape-goats to blame for the 15 million Americans out of work in the United States.
I suppose traders will ask what this amounts to, for their investment portfolios.
We will have to look to the foreign exchange market as our guide.
It will not have been lost on investors – even those bewitched by the on-going World Cup matches – that as the yuan made its biggest one-day gain against the greenback in five years yesterday, regional currencies were all stronger against the US dollar as well.
As I point out several times, the direction which regional stock markets take is dictated by the giant US dollar carry trade.
When the US dollar slips, investors clap in glee, and pile happily into regional shares. But when the greenback strengthened sharply, as it did last month when the European debt crisis triggered anxiety attacks worldwide, there was a big wobble in regional equities.
Sad to say, all these movements have nothing to do with the fundamentals underpinning a stock.
I glanced at the USD vs SGD rate and noticed that the Singdollar had continued to move up slightly against the greenback this morning. It explains the resilience of the local equities market.
Trading markets, rather than stocks, may be the best strategy for now.