The Stock Exchange of Thailand fell more than expected this week and has slipped beyond our support range. The surprisingly weak performance reflected rapid rises in US bond yields following the US Federal Reserve's aggressive 75-basis-point interest rate increase.
The US benchmark is now between 1.5% and 1.75%, and the latest so-called "dot plot" of forward guidance by policymakers puts the year-end rate at 3.4%.
Despite a brief rebound after the announcement of the Fed decision, the SET and other bourses quickly resumed their downtrend on mounting worries about a steep rise in financial costs amid fragile global economic conditions.
Losses locally were led by energy and commodity plays -- the most vulnerable and sensitive to interest rates and economic conditions.
We anticipate a further stock correction in the coming week. Given the downside for commodity and telecom stocks due to high market cap and the fact that they had recently outperformed the market, the SET could dive as deep as the low 1,500s. However, we remain hopeful that banks and many small and mid-caps will defy the overall market consolidation mode.
NEGATIVE FACTORS
Since the Thai stock market relies heavily on commodity stocks (particularly oil), the energy price downtrend clearly has an adverse effect on the benchmark index. The SET also outperforms many bourses during an oil price upswing.
Amid fragile global economic conditions, equities will be hit periodically by negative news such as weak economic indicators and earnings forecasts of listed firms after the second-quarter period ends.
Key macro factors to monitor include the US personal consumption price index -- an inflation gauge that Fed policymakers pay close attention to -- which will be released on June 31. That will be followed by a CPI update on July 13, two weeks before the next Federal Open Market Committee meeting on July 26-27.
Locally, we expect earnings forecast downgrades for listed firms in many sectors including contractors, power and retail. The downward revision will reflect cost inflation and a potential drop in purchasing power. Supply shortages could also linger as the impact of lockdowns in China could slow the real sector recovery.
Last but not least, monitor any significant drops in various risky assets, such as Bitcoin, for the spillover effect on other markets, as such steep falls substantially affect the wealth of numerous investors.
POSITIVE FACTORS
Despite the interest rate uptrend, we see positive signals from monetary regulators in major economies that they are serious about tackling inflation. For example, the European Central Bank surprised observers by calling an emergency meeting to discuss weakening confidence that was driving bond yields higher.
After the ECB said it would create a "new tool" to address risk issues, bond yields fell back and European stocks rebounded. Meanwhile, the Fed tried to calm market panic by providing more clarity in its latest policy statement.
After market consolidation, we may see positive surprises from global key indicators such as softer raw material costs (benefiting stocks whose costs are linked with inflation) and more serious negotiation attempts to end the Russia-Ukraine conflict -- including possible discussions between China and Russia.
On the local front, investors should monitor economic stimulus programmes or measures to help people cope with the cost of living.
And while baht depreciation is a concern with the currency at its weakest -- possibly too weak -- in six years, the Bank of Thailand has made clear that it is ready to intervene if necessary.
The Thai tourism sector also could offer a positive surprise. Tourist arrivals have bee recovering quite quickly and the momentum will likely continue, despite constraints on the key China market.