(SINGAPORE) The Taiwan Effect - and some positive news from the United States - saw a smart rally on the local bourse yesterday. But analysts were reluctant to conclude that it had scrambled out of the woods.

The Straits Times Index (STI) surged 102.88, or 3.6 per cent, to close at 2,927.79 - its biggest gain since Jan 23.

The rise came on the heels of a presidential victory in Taiwan for Nationalist Party (KMT) candidate Ma Ying-jeou. Mr Ma favours closer trade ties and political dialogue with China, and investors eager for a cosier relationship with China sent Taiwanese stocks surging 4 per cent.

The stock market's main TAIEX share index ended with a gain of 340.36 points, to 8,865.35, after jumping 6.15 per cent at the open - its biggest intra- day percentage gain in more than seven years. Taiwan's currency also hit a decade high. Overseas investors were said to have bought heavily into Taiwan stocks yesterday.

While the Hong Kong market was closed yesterday, Singapore's bourse climbed - led by the buying of selected index stocks.

Banking stocks featured heavily in the top movers of the index. Stocks of the three banks led the way. DBS Group Holdings jumped 90 cents, or 5.3 per cent; United Overseas Bank Ltd gained 58 cents, or 3.2 per cent; while Oversea-Chinese Banking Corp rose 11 cents, or 1.4 per cent. All 30 stocks in the index went up, save for two stocks which remained unchanged.

'There was specific buying of large index stocks, such as banks,' noted NRA Capital managing director Kevin Scully. Buying of banking stocks probably signalled the confidence investors had in recent moves by the US Federal Reserve to shore up the ailing US banking sector. US indices moved up after the Fed said last Thursday that it would auction US$75 billion in credits under a programme announced last week to deliver more liquidity to stressed banks and securities firms.

There was also speculation that the Fed and the Bank of England (BOE) were in talks to buy up mortgage-backed securities as a possible solution to the credit crisis, although a Reuters report quoted a senior Fed official as refuting that report, saying that the US central bank is not engaged in talks.

Elsewhere in the region, the indices were mixed. In Japan, the Nikkei ended somewhat flat at 12,480.09. The Shanghai Composite index fell 4.5 per cent or 170.39 points to 3,626.19. The Kuala Lumpur Composite Index ended slightly higher at 1.01 per cent or 11.96 points to 1,201.02. Markets in Hong Kong, Australia and New Zealand were closed.

So, with Singapore stock markets still looking heavily to the US market for guidance, Mr Scully thinks the STI will still see wide fluctuations. 'We are not out of the woods. There will be more bad news,' he said, adding that US economic data which shows rising unemployment and a US recession will mean the US economy has no purchasing power.

Probably only in the first quarter of next year might we be able to see a bottoming out of the US economy, he said.

A Citigroup report released yesterday noted that tightening financial conditions are likely to lead to a more protracted US recession. This would spill over and lead to a significant slowdown in other major economies.

'We have consequently shaved our GDP growth forecasts for Singapore to 4.7 per cent and 5.2 per cent for 2008 and 2009 respectively, from 5.6 per cent and 6.8 per cent,' said Citigroup economist Kit Wei Zheng. 'Despite slower growth, inflation remains a serious challenge. We have raised our inflation forecast further to 5.4 per cent from 5 per cent previously.'

He said strong growth in Q1 2008 is unlikely to be sustained, if their forecasts for a global growth slowdown are correct. 'Apart from exports and manufacturing, further moderation in financial services and the property market is also likely.' He noted, though, that a recession in Singapore is not expected.