STI up 1.1%

Investors may opt to take profit on the recent gains should the index be unable to sustain itself above 2900, says OCBC Investment Research.

OCBC Investment Research said:

U.S. stocks on Friday jumped up following an agreement between European Union leaders to take steps to boost the economies of its more troubled economies.

WTI Crude for Aug gained US$7.27, or 9.4%, to end at US$84.96/barrel, rebounding from its lowest closing price since 4 Oct 2011. Brent for Aug delivery also gained US$6.44, or 7.0%, to finish at US$97.80/barrel.

Gold for Aug delivery rose US$53.80, or 3.5%, to end at U$1,604.20/ounce. Silver for Jul delivery gained US$1.32, or 5.0%, to end at US$27.61/ounce.

While the strong showing on Wall Street Friday is likely to keep local sentiment buoyant this morning, the lackluster Nikkei showing (now only up 0.3% after opening 1.1% higher) could cap the STI’s gains.

As a recap, the index was already up 1.1% last Friday; and with the STI already nearing the key 2900 psychological resistance, investors may opt to take profit on the recent gains should the index be unable to sustain itself above 2900.

Beyond 2900, the next hurdle is likely at 2950. On the downside, the initial support is likely found at 2850, ahead of 2800.

IG Markets Singapore meanwhile noted:

Only time will tell how long this EU summit-inspired rally will last. Friday’s shot in the arm for global markets was combined with end-of-quarter window dressing to put a smile back on the faces of traders.

The STI gained a healthy 1.1% on Friday and Asia is likely to see more positive repercussions after Wall Street and Europe gained convincingly on the outcome of the 19th summit.

However there is the fear that risk assets may continue rising in the short-term on this current euphoric wave only for profit-taking and reality to kick in sooner rather than later.

But it is so easy to be cynical at these times and say we’ve seen it all before. We haven’t.

For the first time there is a clear intention to use the eurozone's bailout funds to buy sovereign bonds in the secondary market. While this was already built into the EFSF and ESM it still needed the political button to be pressed. It finally has.

Another very positive step is news that funds for Spain's banking sector bail-out will come directly from the EFSF and not the ESM, while the funds won’t be senior to government bonds issued. This will ease concerns among private sector bondholders as to where they stand in the queue when it comes to payouts.

There is also the long-term plan of setting up a supervisory mechanism for banks. Once this is established it will allow the ESM to recapitalize banks directly.

This was perhaps the most positive on the steps announced although it may take at least a year to set up.