AS EXPECTED, short- covering lifted the Straits Times Index (STI) by 12.02 points to 2,974.37 yesterday, this after it had dropped 32 points on Monday in thin volume. There were similar short-covering rises in other markets - Hong Kong's Hang Seng Index edged marginally higher while Europe, which took a battering on Monday, opened in the black.

The main focus, however, remained on penny stocks where churning escalated to fever pitch. Excluding foreign-currency issues, some 5.4 billion units worth just $990 million were traded, prompting a slew of different responses from dealers, ranging from "ridiculous" to "bubble" references.

"We have seen this countless times before," said a senior dealer. "Penny stock fever takes grip when cheap stocks start to move, the action gets overheated and then it all collapses."

Another said: "Everyone knows that there's nothing behind most of the moves, no news, no fundamentals. But as long as everyone knows the score, then the playing field is level."

The average unit volume was 18 cents, the lowest this year. Furious rotational playing of the second and third lines was the order of the day. New names that entered the top 20 actives list included Adventus, Federal International and Vallianz.

Within the STI there were 18 rises versus 7 falls. SingTel's 4-cent rise to $3.14 provided the biggest contribution with 3.5 points, while gains for OCBC and UOB added a further 3.3 points.

Jardine Strategic was the largest index loser with a 22-US-cent fall to US$32.24.

In the China or S-chip segment, shipbuilding firm Cosco Corp's shares ended one cent higher at $1.065. OCBC Investment Research yesterday initiated coverage on the company with a "hold" recommendation and fair value of 98 cents based on an industry average price/book of 1.6.

Fitch Ratings yesterday said it is reaffirming the ratings of the three local banks as "AA" because of high capital standards, close regulatory supervision and strong funding franchises. "At end-2011, Singapore banks' core Tier 1 capital adequacy ratio (without hybrids) ranged from 11-12 per cent while non-performing loan reserve coverage exceeded 100 per cent, which were amongst the highest of similarly-rated peers," said Fitch.

In its April 23 Asset Allocation and Strategy, Morgan Stanley Smith Barney reiterated a recommendation first made in October 2011 that investors overweight safe-haven assets and underweight risk assets, reflecting global concerns about policy efficacy, ongoing household and sovereign balance-sheet deleveraging, recession in Europe, and slowing growth in China and the US.

The investment bank pointed out that US equities have risen 1,300 per cent from 1982 to 2000 and that there are significant continuing imbalances for several major economies relating to central governments' budget deficits, indebtedness, savings, consumption, trade, currency relationships, global competitiveness, sovereign-debt quality and foreign exchange reserves.

It also said US stocks are not undervalued using long-term earnings metrics; the Shiller price/earnings which is price divided by 10-year average earnings for the S&P 500 is 22.7, 38 per cent above its long-term average.