|
The SET inched up 0.5% for the week to close at 1418.38 on Friday, while the
USD/THB exchange rate continued to slide another 0.79% this week to settle at 35.256 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. The U.S. dollar has lost strength since the beginning of October after mixed bags of U.S. economic news. The weak dollar could be due in part to the People’s Bank of China
(PBoC)’s active intervention in the forex markets, as the PBoC has been buying yuan and selling dollars to prevent the yuan from weakening beyond around 6.40 yuan per dollar.
On Wednesday, the U.S. Federal Reserve released its Beige Book indicating that the U.S. economy continued modest expansion at the end of the third quarter, as the strong dollar continues to hurt certain sectors of the U.S. economy including manufacturing, energy and tourism. The Federal Reserve said on Friday that industrial production slipped 0.2% in September after falling 0.1% in August. Manufacturing output, the biggest component of the industrial production index, fell by 0.1% in September, following a 0.4% decline in the prior month. It should become obvious to the Fed by now that U.S. manufacturing is in trouble.
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 5% odds for a quarter-point rate hike at the October 28 policy meeting, while the odds are 30% at the December 16 meeting, according to data from CME Group as of October 16.
According to the Nikkei Asian Review, the Federation of Thai Industries announced on Wednesday that it cut their car production forecast again for this year to a range of 1.95 million to 2 million units, due to declining domestic demand. The number is much lower than the original target of 3 million cars annually. Another bombshell is that Volkswagen might revise their plan for its manufacturing plant near Bangkok, as the company is facing financial problems from its diesel emissions scandal. VW had already received the go-ahead from the Thai government to build a 1 billion euro plant to assemble about 300,000 vehicles per year at full capacity.
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 are topping 16.6 billion baht in October. Foreign investors and proprietary traders have been buying heavily with combined net buys of 19.5 billion baht this month. According to Bloomberg, the SET trades at 13.8 times its projected 12-month earnings, compared to a multiple of 11.4 for the MSCI Emerging Markets Index.
From our short-term technical viewpoint, the SET is moving in an ascending (ASC) wedge within a bullish higher low (H-L) chart pattern, meaning every low is higher than the previous low while every high is higher than the previous high. Another bullish sign is that the SET is trading above the 50-day SMA (green line) and testing the 100-day SMA (blue line), with all the major moving averages bending upward.
From our long-term technical viewpoint, a descending broadening (DES/B) wedge has emerged with a breakout target at 1,442. The 1,412 level represents the overhead supply level at which investors who were trapped in the downtrend market just want to sell at the first opportunity to break even. There could be several head resistances at levels between 1,430.14, or the 100-day SMA, and 1,455.96, or 50% Fibonacci retracement. There are technical supports at 1,417.29, or the 38.2% Fibonacci retracement level, 1,412 and 1,401, if the SET makes a pullback.
In our opinion, 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 also be aware that the U.S. markets are ready to break out, while the Shanghai Composite index has already broken out. Thus, the risk/reward to stay long in the market increases.
The headline risk for next week is China’s third-quarter gross domestic product to be released on Monday. The consensus forecast is 6.8%, down from 7% in the second quarter, according to a Reuters poll of 50 economists. One may want to pay attention to the Bank of Thailand (BOT), as the bank has a weak baht policy. A strong baht could force the BOT to cut the rate at their next meeting. Thailand's central bank announced at the end of April that the bank encourages more capital outflows to weaken the
baht. |
