SET Index : 3 scenarios to consider for the week ahead.

The week ahead promises to offer increased uncertainty, which by default can create strong volatility. For investors, unlike speculators the trend looks as if it has now changed direction in many markets, the Thai SET being one of the more resilient, with new high for the year potential.

There are 3 scenarios we are considering for the week ahead.

Firstly, the US markets rebound early in the week, with the SET managing to close the gap to 1122 by mid week. But it unlikely to go as far as 1140 unless a massive bounce is seen in global markets.

The second scenario is for a dead cat bounce on the SET to around 1100-1113, then another leg down to retest last week’s lows. In this scenario theUSmarkets fail to rebound and indeed head south.

The third scenario is the S&P USA downgrade spooks markets and there is little or no rebound, or not above 1100 on the SET anyway, then a pullback to 1060-1070 on the SET, and possibly closer to 1040

Cynics and short sellers amongst us might feel a drop in US stocks and a move in to US treasuries is in fact the outcome the FED are looking for – at a time when QE 2 is over, all the extra help they get buying up the huge amount of US bonds can’t be a bad thing. We have argued before that this is one of the reasons the FED were so happy with the Dow’s performance immediately after QE2 ended, because it gave plenty of height to fall from before they announce their next market friendly QE program later in the year or early next.

With returns onUS treasury paper so low and the US Dollar harshly debased, we fail to understand even the safe haven appeal. If we were running a central bank it would be gold, silver and bonds of the likes of Australia, Singapore, Thailand, Turkey, possibly Poland and Indonesia that we would buy, and leave the US mountain of debt firmly alone for others to finance.

In analyzing the week ahead for Thai stocks, we also considered the following points

 

  1. The ECB looks like it has agreed to start buying Italian bonds from Monday. Short term Euro positive, and indeed for stocks in general. So a rebound to 1.4350-1.4000 on EUR/USD wouldn’t surprise. A breakout above 1/400 is bullish for the ‘risk trade’ but we doubt it will go far.
  2. The G20 MM’s – the top 20 or so global market makers (Goldman Sachs and friends) might prefer a dead cat bounce scenario as well, because they like to inflict maximum confusion on markets (well by that we mean retail investors who tend to lose to the big boys) because they are all in a better position to profit from chaos than is the average investor. We will be watching S&P500 futures closely for leading signs of this, which in point terms means they will be back around 1250 quickly. If this plays out it means scenario 1 is the likely outcome – with the SET managing to close the gap to 1122 by mid week. But unlikely to go as far as 1140 unless a massive bounce is seen in global markets – like to 1280 on the S&P, which we very much doubt will occur.
  3. New government, new cabinet. Will be interesting to see if there is anything left in terms of market reaction to the election result. If not, we suspect the honeymoon period may be a tad shorter than many may wish.

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