The TAIEX yesterday plunged to below a 10-year average after suffering a double blow from uncertainty about the presidential elections on Saturday and mounting fears of potential losses from yuan-based target redemption forwards (TRF) amid the weak Chinese currency.
Stock prices tumbled 1.34 percent, or 105.55 points, to 7,788.42 yesterday, after regaining some strength from a deeper loss of 167.28 in the morning session, Taiwan Stock Exchange data showed.
Turnover shrank to NT$85.32 billion (US$2.53 billion) yesterday from NT$92.85 billion on Friday last week, the bourse showed.
“Investors took to the sidelines due to concerns that the opposition party might not only win the presidential election, but also take more than half of the seats in the Legislative Yuan,” Mega Securities (兆豐證券) analyst Alex Huang (黃國偉) said on the telephone.
“Some investors fear the results could prevent Taiwan’s trade ties with China from making progress,” Huang said.
To avert political or non-economic factors from undermining the local stock market, the government has activated the National Stabilization Fund to shore up investor confidence, Huang said.
“We have seen black swan events take place one-by-one this quarter,” Vice Minister of Finance Wu Tang-chieh (吳當傑) told reporters.
Wu also oversees the state-backed stabilization fund.
“We are very active in rescuing the ailing stock market. It is our top priority,” Wu said.
The fund’s support was muted by heavy sell-offs from foreign investors, who extended their net sale of local shares worth NT$9.84 billion yesterday.
Financial shares bore the brunt of yesterday’s sell-off. The nation’s two largest financial service providers — Cathay Financial Holding Co (國泰金控) and Fubon Financial Holding Co (富邦金控) — saw their stock sink 2.38 percent and 1.64 percent to NT$38 and NT$39, respectively.
“Investors fret that a weak yuan will incur larger-than-expected losses for local banks from their yuan-based TRF positions,” Huang said. “We are still unclear about the exposure of yuan-based TRF by local banks.”
The Financial Supervisory Commission did not disclose the total amount of local banks’ TRF holdings. The commission said local lenders have allocated NT$210 billion in reserves for potential losses from TRF trading in September last year.
Total target redemption forwards receded to a manageable level of NT$82 billion at the end of last year, compared with NT$160 billion in May 2014 during the height of the troubled instrument’s popularity, the commission said last week.
However, the figure could run up to a much higher number than NT$82 billion, as some banks exploited the loophole in the regulation by trading TRF through their overseas units, the Chinese-language Commercial Times reported yesterday, citing unspecified sources.
Local banks are only required to register TRF trading at home.
“As long as uncertainty lingers, we do not expect the TAIEX to rebound to more than a 10-year average of 7,880 within one or two weeks,” Huang said, adding that the TAIEX could seesaw between 7,500 and 7,800 points this week.
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