Markets 'lifted' due to G7 conference call; STI set for firmer open

PMI factory output figures showing a rise to 50.4 points in May are also likely to boost trading in Singapore.

IG Markets Singapore said:

An unnerving sense that things had calmed down in the eurozone due to a simple G7 conference call lifted markets yesterday. Having enjoyed a respite from market turmoil Asian bourses look set to continue their winning ways again today.

But in the time of crisis talk is cheap and markets will want to see some action from EU policymakers as the eurozone crisis threatens to burrow itself deeper.

This fear is already beginning to play out as no immediate solution can be found to the Spanish banking sector which is slowly sinking into the quagmire.

The Spanish government is caught between a rock and a hard place. They don't want to ask for a bailout package and then be governed by tough EU/IMF terms but fear they are shut out of capital markets.

This lack of support for Spanish banks and the chaos a banking collapse can wreak on other European economies has kept risk-off trading firmly on the table despite the G7 conference call boost.

On Wall Street, the benchmark S&P 500 rose 0.6% while the Dow Jones Industrial Average edged up 0.2%. The NASDAQ finished 0.7% higher.

The world’s biggest economy was buoyed by service industry growth coming in better than expected at 53.7 for last month, above expectations.

Asia enjoyed a strong session yesterday ahead of the G7 chatter and by proactive moves by Australia’s RBA to cut interest rates by another 25 basis points to stimulate the local economy.

Australia’s economy is expected to have grown by 3.3% in the first three months of the year which is very healthy in the current climate of global economic doom.

In Singapore there was also welcome news with PMI factory output figures showing a rise to 50.4 points, up from April’s 49.7. While it is still early days to talk about the economy bottoming out, this is another positive sign that the local economy is resilient to the drop in demand from the stuttering major economies.

The electronics sector declined from 51.5 in April to 50.8 last month but importantly remained in positive territory.

Traders will be listening closely to this week’s testimony by Fed Chairman Ben Bernanke to Congress and more clues as to the health of the US economy. It’s probably too soon to start talking about QE3 at this stage although Fed officials have said they will support new measures if the economy isn’t making progress.

OCBC Investment Research meanwhile noted:

The modest recovery on Wall Street overnight and the positive Nikkei start (+0.6% now) are likely to provide further short term inspiration to the local bourse this morning.

As a recap, the STI had initiated a mild technical rebound yesterday; despite recovering as much as 1.2% at one point, the index gave up most of its earlier gains to close just 0.5% higher.

But with today's tone likely to remain upbeat, we could see the index inching further north to fill the minor 2730-2738 gap, with the subsequent resistance marked at the 2760 support-turned-resistance.

On the downside, 2690 (minor trough) is still the immediate support, with the subsequent base lying at the 2650 support (next minor trough).