Asia Morning Analytic: 170210 The Calm Before A Storm?

Morning readers,

Hope you all enjoyed a nice CNY break, and would like to take this opportunity to wish you all a prosperous year of the tiger!

Tuning into the markets, it is interesting to take note of the development over the holidays -

1. Greece problem has reigned in more confidence over the ability that Greece may contain its deficit problem as a result of a concerted effort by EU to "credibly" guarantee its ballooning debt. However, it should remain to be noted that cautious approach should be taken on process such problem because no concrete measures have been actually in placed if Greece do turn in for help, despite Greece PM continued to reiterate that Greece do not need any external help. Moreover, it is notable that euro has been extending its falls despite the bucking of trend last night, which allows one to further turn into the deeper implications of the issue, especially given the recent detail over the swap agreements that has been done to delay interest payments on the Greek authorities behalf. There are several issues with this specific problem that will be further pinpointed, which would be detailed by the post on our GFA thematics: GFA: The PIIGS outlook.

2. A lesser but equally notable problem about sovereign risk and corporate risk problem is again highlighted by the development in Dubai World. Despite the recent bailout by Abu Dhabi, Dubai World is cranking up problems with their debt again as it fails to draw up concrete measures over how the debt will be faciliated in the current moments. This may, again, draw up global turmoil as it dents risk sentiment after the fallout in Europe over the past week.

3. Another suprising RRR hike of another 50 bps by the Chinese authorities leading into the CNY holiday was certainly not friendly to the global environment. Chinese authorities looking into reigning in exploding liquidity in 2009 may continue to pressure the markets. However, this movement have more or less seem to be priced in by the market as the news did not significantly dampen sentiment on Friday night. However, GFA remains to be cautious over this move, especially given Jan CPI data came out nicely below forecast at +1.5%, as this may signal Chinese authorities to stay on the tightening schedule ahead of the market's prediction.

4. On a brighter note, economic data coming out from the US, whilst corporate reports for Q409 has been spectacular to lift up markets. Notable ones are Barclay's report last night, with profit nearing doubling on a yoy basis. Whilst on the other hand, economic data such as retail sales and manufacturing index in Jan came out nicely in the US to support a continual and gradual US recovery, whilst the Japan GDP growth in Q4 also exploded to boost market sentiment on Monday.

5. Moreover, we are seeing on the FICC field that yields across the globe has stablised in comparison to early last week when Greece was in the focus. Risk sentiment has also returned as we see risky currencies taking a strong rebound from its earlier dips, with AUD and NZD being the outperformer these few days. Oil prices and other commodities have also bounced back hard, with oil prices up 10% from low of 69.95, whilst gold up 7.6% from lows of 1040's, thanks to a dollar retreat that demonstrates tension easing in the markets.

From these developments, it may be possible to see leads in HSI this morning to take positive cues over the recent developments, as risk sentiment has picked up over the last few days as the market has been given a lot more breathing space than that of mid- Jan to early Feb. Likely to see the commodities platform to outperform, lifting the market above the critical 20500 MA50 level, which may show near term upside to the market, whilst a general recovery across all other sectors as risk appetite returns. However, any gain may be capped by the RRR hikes that continues to weigh down local markets, which leads us to believe that continuing macro uncertainties and turmoils, and a 'fundamental catching up' story may produce what we see now as "the calm before a storm?"

GFA anticipates the HSI to be range trading between 20,000-20,800 in the near term, with a break under 20,000 further indicate weakness, whilst a break above 20,800 may provide indication that the correction phase is over. GFA looks for HSI to finish nearing the top end today as risk sentiment has dramatically improved from last week, aiming to see +0.5 - +0.7% on the market today.

GFA remains a buyer of banks on further dips, as for the reasons pointed out in GFA thematics: Chinese New Year Outlook, whilst seeing consumer sector continues as a outperformer. GFA is also a buyer of export-related sectors, which would be later discussed in details in our upcoming weekly thematics.

Thats about it for the morning wrap!

Happy trading!

ongy out.