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The SET closed at 1438.08 on Friday, down 2.79% for the week, as the USD/THB exchange rate hit another fresh multi-year and intraday high of 34.982 baht per dollar to close at 34.91 baht per dollar, up 2.02% for the week. As the baht was sinking, foreign investors sold 8.26 billion baht worth of stocks on Friday, or about 28.9% of the total selling volume on the SET. Top MSCI Thailand constituents, PTT, PTTEP and KBANK were down 4.79%, 6.23% and 5.03%, respectively, for the week. Since mid-April, the performances of the SET and Thai baht are directly correlated.
The 10-year Thailand Government bond yield printed at 2.815% at the close on Friday, down 1.57% for the week. The yield spread between the U.S. 10-Year Treasury Note, yielding at 2.262%, at the close Friday, and the Thailand 10-Year Government bond, narrowed to 0.553%. Narrowing the bond yield spread and depreciating the Thai baht could spur capital outflows.
Economic outlooks in both China and the U.S. are wobbly and tilting to the downside. On Friday, the preliminary China Caixin purchasing managers index (PMI) surprised markets as it dropped to a 15-month low in July to 48.2, below the 49.7 forecast from a Reuters poll. The number below 50 signals the activity across the business sector is contracting.
The U.S. Commerce Department said on Friday that the new U.S. single-family home sales fell in June to a seven-month low and May's sales were revised sharply downward. Weak U.S. economic data could send the U.S. 10-Year Treasury Note yield to below 2% and the Fed could be running the risk of losing control of bond yields.
One may want to pay attention that during the months of January to June of this year, the average net sells for foreign investors of the SET was about 2.611 billion baht a month, according to the SET market data. Foreign investor selling has been accelerating as the net sells have already registered 24.648 billion baht since the beginning of July, about 9 times the monthly average net sells in the past six months. Foreign investors make up about 23% of the trading volume on the SET exchange.
From our technical viewpoint, the falling wedge chart pattern has been breaking down and the projected price is 1,370, with supports at 1,427, 1,412, 1,394 and 1,375.99. The relative strength index (RSI) at 28.50 and the Moving Average Convergence/Divergence (MACD) at –14.572, points to an oversold rebound. The SET could hit a near-term bottom when the MACD approaches extremely bearish downside momentum at about –20.
A bullish trend reversal might not happen until the Thai baht stops falling further, and foreign investor net buys are established. Our near-term target for USD/THB is 35.2 baht per dollar with the long-term head resistance, February 2009, at 36.31 baht per dollar.
The fact that the equity market is forward-looking and has traditionally been viewed as an indicator of the economy, a large pullback in the SET could be reflective of a future recession, or vice-versa. Historically, most recessions are accompanied by stock market declines of 30% or more, meaning levels below 1,133.84. As the SET continues to slide downward while the Thai baht continues to weaken, the market may be signaling a further downturn of the economy is ahead for Thailand. |
