The Euro 2008 could not have come at a worse time, as it has been blamed for the lackluster trading conditions in the local market.

The greatest football event in Europe, which is held once every four years, kicked off on 7 June amidst concerns that investors would be too preoccupied with football to care about the stock market. Just a day before the first ball was kicked, the Dow Jones Industrial Average (DJIA) plunged almost 400 points on fears of rising oil prices and inflationary pressures.

Of course, Euro 2008 was conveniently blamed for the predicament of the stock market just like every four years ago when the market would be flushed with talk that the European Championship and the World Cup would coincide with a falling market.

The Americans, whom everyone looks to for market direction, are not interested in football – not the least bit even though David Beckham now plies his trade in the US. If the DJIA were to rise 400 points – as opposed to falling 400 points – we can all be sure that market participants would be buying despite sleepless nights watching football matches.

There is simply no correlation between football and the stock market. Period.

We are not interested in what happens on the football pitch, as we are more focused on what happens on the other “battlefield” across the Pacific Ocean – battle against inflation and rising oil prices.

What Is In Vogue?

Subprime is out of fashion and so is the credit crunch that everyone was talking about months ago.

Has the problem disappeared? No, but solutions have been offered, solutions have more or less worked and we are now facing fresh worries.

The ever-changing landscape in the stock market is what makes things so interesting. What used to be fashionable and market-moving just a couple of months ago are now no longer a primary concern simply because the US banks have been raising funds in preparation for possible writedowns. The US Federal Reserve has also done its part by injecting funds into the financial system so as to avoid a credit crunch.

The latest worries, which have been causing global investors and policy makers much headache is the problem of rising commodity prices – especially skyrocketing oil prices. When have we ever heard of oil prices climbing by a few, even 10, dollars within a single working day?

According to official energy statistics from the US government, global demand for oil climbed from 57m barrels per day to slightly more than 85m barrels in 2007. In short, oil demand barely doubled but prices have shot up from US$4.15 per barrel in 1973 to more than US$130 per barrel today. The price increase is most pronounced this year.

There have been arguments that oil and other commodities are a hedge against inflation but surely the increase in these last two years have been too astronomical to accept. The weak US Dollar has been blamed for the rise in oil prices while demand from emerging economies, too, have been made the scapegoat.

Federal Reserve Chairman Ben Bernanke has recently highlighted his concern on rising inflation, which is a direct result of rising oil prices. Painting a slightly rosy picture of the US economy which, in his words, is facing diminishing risks of a downturn, he gave the strongest hints that the rate cut cycle has come to an end unless something serious occurs that required further easing.

The Fed is now more preoccupied with fighting inflation and curbing rising oil prices and, thus, his recent remarks about ending the rate cut cycle, is aimed at stemming the fall of the Greenback. By strengthening the Greenback, it is hoped that investors and speculators will stop pushing up oil prices. Once oil prices start to ease gradually, inflationary pressures will ease and so will the commodity bubble.

A sudden and drastic drop in oil prices will probably lead to the collapse of some corporations responsible for pushing up oil futures, as it is almost certain that major big name players are engaged in the speculation of oil futures. The US government is now investigating manipulation of oil futures.

In the latest move, President Bush is now asking the Congress to lift the ban of offshore oil drilling so as to source for more supplies. In addition, Saudi Arabia has agreed to increase oil output although the oil producing countries have reiterated their stand that supply is adequate.

Against the backdrop of rising oil prices and inflation, global markets have been in a state of slumber. Even rebounds have been shortlived and shallow.
Let us take a look at the charts, which have largely been showing sideway trading patterns with some downside bias.

Dow Jones Industrial Average

The US bellwether index has been in a gradual decline since 19 May when it failed to clear the 13,150, which completed a double-top formation. There were several short spikes but these gains were shortlived and did not provide any reprieve for investors.

The DJIA has yet to show signs of being oversold but a meaningful rebound could be on the cards as it is now near 12,000 points. Moreover, drawing a parallel line from the two recent lows shows that support is at 11,950, which is pretty near.

On a weekly chart, however, indicators look slightly more oversold than on a daily chart and some slight downside in the near term should result in a good rebound for the medium-term.

Once again, a break below 11,700 will trigger a wave of selling that could threaten a fall to 10,500 while a break above 12,500 will be a bullish signal.

Straits Times Index
The STI has shown a lot of resilience despite the DJIA drifting lower. Trading between 3,000 to 3,200, the 200-point range achieved amid some slight decline, is the reason why the market has been very quiet for the past fortnight.

The index threatened to break below 2,980 but soon held up and closed above 3,000 on 18 June despite the DJIA falling even further the night before. This was a show of strength and should the STI continue to climb for the next two trading days for the week ending 20 June, we can expect the STI to test the 3,150 resistance where there is a gap waiting to be filled.

Once this gap is filled, investors should start to turn cautious as the STI is in a “lower low” formation since May with each of the past three peaks lower than the preceding ones.

Should market sentiments turn for the better and head towards 3,250, a break above this level will be bullish.