AFTER an early short-covering bounce yesterday that took the Straits Times Index (STI) up about 15 points, the selling then resumed, dragging the index to a net loss of 8.54 points at 2,822.61. The same pattern manifested itself in Hong Kong, where the Hang Seng Index first recorded a triple-digit rise only to fall back into the red by the close, its loss being 0.3 per cent for the day.

Drop

Turnover remained depressed at 1.5 billion units worth $1.06 billion excluding foreign currency issues and activity in penny stocks and microcaps continued to dwindle. All in all, it was a session very much within expectations, given the worries shrouding Europe and the frantic, speculative bubble that had been inflating among the smaller counters. Not surprisingly, retail dealers reported a largely listless day, bereft of any meaningful business.

Commodity stocks have been weak in recent days following the release of disappointing results by sector leaders Olam, Wilmar and Noble. The most recent is Olam, which lost almost 11 per cent on Wednesday and yesterday dropped 4.5 cents to $1.74 with 50.4 million shares traded, making it the day's second most active counter.

Greece, Spain and Italy remained the focus of investors' worry. Over in Athens, news of increased political bickering between parties as well as with Germany over the latter's insistence on austerity before handouts are given unsettled markets on Wednesday, this despite the European Central Bank intervening in the debt market to buy and stabilise Spanish and Italian bonds.

While the announcement of a second Greek general election caused a knee-jerk sell-off on Tuesday, the biggest political issue is that any new Greek government after the election will want to renegotiate the second EU/IMF loan. The Troika is very firm in rejecting such an approach. The risk is for no breakthrough and delayed payment for the crucial mid-June instalment. Additionally, PM Lucas Papademos' last act was to warn (through the President) about the "the risk of collapse of the banking system if withdrawals of deposits from banks continue due to the political insecurity".

In its latest Asia/GEMS Strategy, Morgan Stanley said a new bull market for China stocks is about to unfold. It argued that valuations are cheap, monetary and fiscal policy are easing, inflation is under control, property prices are stable and the bear phase has probably ended. The bank set a year-end target of 23,600 for the Hang Seng Index which yesterday closed at 19,200.

In its May Global Weekly Research and Strategy, ABN Amro's private bank said its investment committee met for its weekly strategic market review on Wednesday and decided, despite the economic situation in Europe being far from encouraging, to leave the asset allocation unchanged: "neutral" on equities, hedge funds and real estate and "underweight" on bonds and commodities. It added that fear of a Greek exit from the eurozone has raised the short-term risks so its positive bias to add risk to the portfolio is put on hold until further notice.

In a separate technical look at the STI, ABN Amro noted that in the past few months a solid resistance at 3,035 has emerged.

"Currently prices are bouncing off this level to start a move south towards the support zone at 2,648/2,521," said the bank. "The only way to avoid a further decline is a break of the 3,035 level (less likely scenario)."