■ STI – Maintain 2825-3030 range over next 1 month
■ Impact of previous rate hike cycle initiation – Shortterm negative for S&P500 and STI, negative for USD, positive for oil
We maintain our view for the STI to range from 2825 (11.46x FY16F PE, -1.5SD) to 3030 (c.12.22x FY16F PE, - 1SD) over the next 1 month. Short-term traders can look to bargain hunt at or slightly above STI 2825.
Attention this week is drawn to the ECB policy meeting on Thursday and the release of US November job numbers on Friday.
With the possibility of the FED starting the next rate hike cycle in December, we look at the impact of previous rate hike cycle initiation on the S&P500, STI, USD and oil.
We note that both the S&P500 Index and STI have a tendency to correct in the initial 2-3 months before recovering.
The implication for a December rate hike is that the upcoming Capricorn effect could be weak or even nonexistent. The spectre of further earnings cut with the possibility of 4QFY15 turning out to be another ‘kitchen sinking’ quarter for Singapore companies should also shorten the lifespan of any Capricorn rally in the making.
Next, contrary to general belief; the USD Index has a strong tendency to weaken in the months following the initial rate hike. Furthermore, oil price has a strong tendency to rally in the months following the initial rate hike.
Based on Elliot-wave observation, oil price is at the tail end of a major multi-year correction. Further downside in the short-term should be limited at USD38-40pbl at worst. There is the likelihood for a counter-trend rally that lifts Brent crude to USD58pbl (23.6% retracement), followed by USD69pbl (38.2% retracement) in 1H16.
If true, O&G stocks should outperform. Our picks in this space are SembCorp Industries for large cap and Ezion for small caps. (Read Report)