Published May 20, 2009

Regional bourses rally to hit new highs this year

Momentum, liquidity and 'green shoots' theory driving markets: brokers

By R SIVANITHY

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(SINGAPORE) The liquidity-driven rally of the past two months resumed in full force yesterday as Wall Street's Monday bounce and hopes for a quick economic rebound lifted stocks around the region to their highest level this year.

Led by banking and property counters, the Straits Times Index jumped 83.38 points or 3.8 per cent to 2,260.36 - the highest level since early October 2008, taking its 2009 gain to 28 per cent or 26 per cent in US dollar terms.

In Hong Kong yesterday the Hang Seng Index surged 521.12 points or 3 per cent to 17,544.03, taking its 2009 gain to 22 per cent. In Japan, the Nikkei 225 ended 251.6 points or 2.8 per cent stronger at 9,290.29.

Brokers said markets are driven mainly by momentum, liquidity and hopes that the 'green shoots' - glimmers of hopes of a US economic turnaround - will soon take root.

In a May 15 Global Investment Strategy report titled 'Be Scared, But Be Invested', BCA Research said the world economy is still sick, the financial system is still a shambles and markets have been reduced to ruins. But talk of 'green shoots' has made the reflation theme too tempting to resist, especially when there is so much liquidity and so many short positions to cover, it said.

'Stock markets around the world have recognised the fact that the pace of global economic contraction is slowing, but additional gains would require confirmation that 'second order' (rate-of-change) improvements will indeed turn into 'first order' recovery.'

Still, BCA is troubled that a growing crowd is buying into the reflation story.

Bank of America-Merrill Lynch (BAML) said in a May 12 Global Economic Weekly report that latest US Federal Reserve and European Central Bank data show only a small number of banks are now tightening their credit standards. However, although banks are more willing to lend, there is still insufficient demand.

As a result, the mood among US and European banking leaders remains sombre, said BAML.

'Default rates will keep rising through to year-end, putting more pressure on bank balance sheets and inducing continuing caution,' it said. 'If the recent recovery in economic sentiment continues, as we expect, demand for credit should gradually rise.'