By Goh Eng Yeow
Markets Correspondent
engyeow1@sph.com.sg

 

JUST weeks ago, analysts were confidently predicting that the benchmark Straits Times Index will crush the 3,000 level and it will be party time like 2007 once more.

But after hitting a 17-month high of 2,933 a fortnight ago, STI had crashed through the 2,800 support and now the 2,700 support in a matter of days.

Somehow, when analysts of all hue started touting the 3,300 target for the STI, I could not help getting a feeling of foreboding that it may never come about.

The big picture had changed so rapidly in the past week that all talks about corporate earnings upgrades had evaporated.

Instead, politics is now driving financial markets, as traders ponder the consequences of the proposed Volcker rule whose objective is to force US lenders — among the biggest financial institutions in the world — to give up activities like proprietary trading and hedge funds.

Now, why should this rule have such a big impact on assets of all classes?

Take crude oil. It has fallen 5 per cent since the proposal to impose new limits on US banks' activities was touted, as traders took fright at a possible drying up of liquidity if banks are not allowed to trade on their own accounts in crude futures contracts anymore.

No doubt, the demand for crude oil has steadily grown, as energy-thirsty economies such as China and India expand.

But a large quantity of crude oil is also being hoarded by traders in super-tankers on the open sea and this has the dubious effect of driving its price up. As such, the Volcker rule will have a beneficial impact of dampening speculation in crude oil. It will also release much-needed oil into an oil-hungry world at a far more reasonable cost.

Then there is the gold market. Price of gold has fallen about 3.6 per cent, presumably on fears that the level of speculation in the precious metal will be reduced like crude oil.

Markets have been generally negative about the Volcker rule, with stock prices falling about 5 per cent since the announcement was made last Thursday.

But in the long run, it should have a beneficial effect, if the resources now channelled to trading is devoted to more fruitful economic purposes instead.

Take the drop in oil prices. It will trigger a fall in energy and transportation costs — and this will benefit consumers who will have more money to put into their pockets. And it will delay any interest rates hikes from central banks sparked by inflation fears.

So I am hopeful while STI may have difficulties crossing the 3,000 level, it will find support around current levels, after the benefits from any ban in proprietary trading by banks have been worked out.