Traders bet on Wall Street rising

Hang Seng's surge, 60-point bounce in Dow Jones Industrial Average June futures push STI up 41 points

IF INDICES in this part of the world should rise sharply, it's a fair bet that it was because traders are betting heavily on Wall Street rising just as sharply later the same day. Such was the case yesterday when fears of Mexican swine flu, which had dragged the Straits Times Index down some 45 points on Monday and Tuesday, were suddenly banished, thanks to a 2.7 per cent rise in Hong Kong's Hang Seng Index and a 60-point bounce in the June futures on the Dow Jones Industrial Average.

The outcome was a 41.16-point rise in the STI to 1,849.57, with some amount of short-covering no doubt playing a part.

The bulk of brokers' reports dealt with the possible consequences on markets if the swine flu threat was to rise beyond present, relatively benign levels.

In a Hong Kong Economics report on Tuesday, Morgan Stanley said that it thinks the negative impact on the economy will be smaller than that experienced during the 2003 Sars outbreak. 'The biggest blow during Sars was the collapse of in-bound tourism, which will unlikely be the case this time round as Hong Kong/China is not the source of the outbreak,' said MS. It also said that Hong Kong today is different from 2003 because the relevant authorities are better prepared for epidemic disease outbreaks.

Airline stocks have understandably come under pressure this week, although Singapore Airlines yesterday rebounded 16 cents to $10.30 with 2.7 million traded.

In assessing the impact of the swine flu on SIA, DBS Vickers said in a Tuesday note that it does not expect a major impact on the airline's business yet, because SIA does not fly to Mexico and flies to only a few US cities.

'Of greater importance is a recovery in demand and thus load factors, which can help the stock re-rate . . . Maintain 'hold' with $11.30 target price. The earnings outlook for the next two quarters remains weak and we would advise buying only if 1) load factors start to improve or 2) the shares drop below $9 per share,' said DBSV.

Elsewhere, Chartered Semiconductor was the day's most active stock, rising 1.5 cents to 16.5 cents on volume of 84.4 million. Goldman Sachs yesterday released a 'sell' on the counter, saying that because the stock has doubled in the past month and is now trading at 0.6 times 2009 estimated book, it is overvalued. Among other reasons, GS also based its call on Chartered not having had positive annual cash flow since inception and the likelihood that it will need further financing in 2009-10 to supplement a recently-completed rights issue.

Meanwhile, Credit Suisse (CS) joined the ranks of investment houses such as Nomura, UBS Investment Research and Citi Investment Research in recommending an 'overweight' on the local market.

In a April 28 Strategy report, CS said it believes that the local market may have bottomed and could gain 20-48 per cent from current levels. It said it is 'overweighting' banks and financials while 'underweighting' telecoms and property.

In a April 24 Global Economics Weekly report, Bank of America/Merrill Lynch said that the current bounce on Wall St is at best, 'the famed reflexive rebound that occurs between down-legs of a secular bear market'.

It added that economic support for the rally has been dubious so far and pointed out that although bull markets may start out being driven by technicals like sentiment and market positioning, they have to be driven by economic fundamentals to be sustained.