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The SET surged 4.83% for the week to close at 1,411.33 on Friday, while the
USD/THB exchange rate tumbled 2.42% to 35.537 baht per dollar as investors are convinced that the U.S. Federal Reserve will delay their first rate hike until December, or early next year. Some cash moved into the Thai bond market as the Thailand 10-year Government bond yield took a 5.05% nosedive for the week to close at 2.63% on Friday. Obviously, someone made a wrong bet on the forex trade and drove the
USD/THB exchange rate to a nine-year high of 36.67 baht per dollar last week.
Minutes from the U.S. Federal Reserve’s September 16-17 policy meeting, released on Thursday, showed that Fed officials were actually concerned about low inflation and economic problems in China. There was also some disagreement between the Federal Reserve board staff, who prepare the economic projections, and Federal Reserve officials who actually vote on interest rates.
According to MarketWatch, the Fed staff’s view of the U.S. economy was much gloomier than that of the Fed officials, as the staff forecasts potential growth averaging just 1.74% over 2015-2020, while Fed officials believe that the economy can grow at 2.0%. The bad news is that the average growth rate of the U.S. economy was 3.1% over the past 50 years.
Federal Reserve Bank of Richmond President Jeffrey Lacker told Bloomberg on Thursday that the U.S. is already at full employment and the central bank may risk overheating the economy as it attempts to drive additional job gains. Some on Wall Street believe that a rate hike, when the inflation is well below the Fed’s own target, will cause the financial bull market to stumble, bond yields to climb and the economy to slip into a recession.
The federal funds futures, traded on the Chicago Mercantile Exchange and commonly used to estimate the market’s views on the likelihood of changes in U.S. monetary policy, indicate only 8% odds for a quarter-point rate hike at the October 28 policy meeting, while the odds are 37% at the December 16 meeting, according to data from CME Group as of October 9.
Since the beginning of October, individual investors of the SET have been selling into the rally. According to SET market data, net sells of individuals were 4.35 billion baht on Friday and are topping 14.8 billion baht in October. Foreign investors and proprietary traders have been buying heavily with combined net buys of 13.43 billion baht this month. During the same period, the SET has been up 4.62%. Investors who were trapped in the downtrend market just want to sell at the first opportunity to break even due to the overhead supply.
Thailand received two more downgrades this week. The World Bank cut Thailand’s economic growth forecast for 2015 on Monday to 2.5%, from the April 15 forecast of 3.5% growth. Things could get worse in the next two years as the bank also cut Thailand's GDP for 2016 and 2017 by 2 and 1.6 percentage points to 2.0% and 2.4%, respectively. There is more bad news that Thailand has the lowest GDP growth forecast among Asean countries.
The IMF came out Wednesday and sharply cut their Thailand GDP forecast for 2015, to 2.5% from their April forecast of 3.5%. The IMF also slashed their 2016 growth projection for Thailand from 4% to 3.2%. Separately, the fund’s head of financial stability, José Viñals, warned that the world risks sliding into a fresh financial crisis leading to global recession if governments and policymakers mishandle market stability risks. The markets seemed not to care and shrugged off the IMF warning.
Luckily, not many people trade stocks on either World Bank or IMF data. From a long-term technical viewpoint, the index has been moving in a bullish descending wedge triangle chart pattern since late 2014. The index hit the bottom at 1,292.14 on August 25 and bounced off the lower trendline support of the descending wedge. The period between the two bottoms is about 19.6 months for the last two cycles. The SET is now trading above the 50-day SMA, which is bullish.
There could be several resistances at levels between 1,442 and 1,459.54, or 23.6% Fibonacci retracement, due to the overhead supply. Nonetheless, the SET should be able to break out if the USD/THB exchange rate stays below the 36.50 baht per dollar level, and the U.S. Federal Reserve stays on the sidelines. As the old saying goes, “Don’t fight the tape and the Fed!”.
One should be aware that the U.S. markets and the Shanghai Composite index are ready to break out. Thus, the risk/reward to stay long in the market increases. |
