Date: April 2, 2018
Over the course of the month of March the Straits Times Index registered a loss of 90 points or 2.6% at 3,427.97. Thanks mainly to Thursday’s 45-points rise, the index’s first quarter performance was a gain of 25 points or 0.7%.
As always, Wall Street’s movements played a central role in dictating movements here and so it is that in the weeks ahead, investors in the local market will focus on the most recent factors that have influenced US trading – the likelihood of the US Federal Reserve raising interest rates more times than expected, the rising trade tensions between the US and China, the possibility of tighter regulations for tech companies amidst privacy concerns and last but not least, earnings.
There is also the possibility of more high-profile White House-originated sackings and resignations to consider, following the departures in March of chief economic advisor Gary Cohn, Secretary of State Rex Tillerson, national security advisor HR McMaster and President Trump’s lawyer for the Russian probe, John Dowd.
All told, if there’s a phrase that sums up the outlook from here on, it’s one that clearly applied throughout February and March – the “new normal’’ for markets will be heightened volatility.
This marks a significant shift from where markets stood at the end of 2017 heading into 2018 when the VIX Index – often labelled the “fear” or “complacency” index – hovered at a rock-bottom level of about 10, and virtually all investment houses were painting a benign, bullish picture for risk assets.
Though most analysts are still painting an optimistic picture, investors should note that the VIX has now almost doubled to just under 20, suggesting that complacency has been replaced by fear. Perhaps more significantly, they should also note the mixed signals from the US bond market, where the 10-year Treasury yield came close to challenging the 3% mark but ended 1Q at 2.741%.
On 14 February, the 10-yr Treasury yielded 2.913%, the highest since January 2014 after news that December’s consumer price index rose more than expected. The following day it rose to 2.944% after stronger-than-expected producer price data. Also keeping yields elevated was strong jobs data that sparked worries that the Fed would raise interest rates four times this year instead of the market’s forecast of three. At that time, many observers warned that if the yield did cross 3%, equities could suffer significantly.
However, on Thursday last week, the 10-yr Treasury yield closed at 2.741%, reportedly thanks to a flight to quality amidst rising uncertainty (and possibly, fear) in equities. Other explanations for the drop are that the bond market could be anticipating a slowdown in the US economy (if a full-fledged trade war was to erupt?) and it is reacting to persistently low inflation.
The truth is that no one truly knows why bond prices are rising as they have in the past fortnight, though our belief is that when confronted with many possible explanations, the simplest, namely that it because of a flight to safety, is probably the best. Whatever the case investors should not lose sight of the fact that signals from US Treasuries are likely to play a major role in setting the tone for equity market trading in the weeks ahead.
Last month also saw new Fed chairman Jerome Powell head his first Federal Open Markets Committee meeting. Most observers felt that he delivered a dovish post-meeting statement, which could be why the federal funds futures market is currently pricing in only a 2.1% chance of a rate hike at the next FOMC on 2 May.
As for the local market, liquidity looks like it could be a problem. Thursday’s turnover at 1.47 billion units worth S$1.8 billion was decent enough, but it was very likely padded by significant amounts of month- and quarter-ending “portfolio rebalancing” which is often an euphemism for “window-dressing”.
Going by volume done in the prior two weeks, a more accurate daily average would be in the region of S$1.2b, just above the broking industry’s ballpark breakeven of S$1b. As always, the advice to those in the market would be not to stray too far from the 30 STI components as these are the stocks that enjoy the highest liquidity, research coverage and therefore, investor attention.
Among the other items of interest will be to see how troubled commodities trader Noble Group’s restructuring plan works out in the face of strong shareholder resistance and whether an attempt to replace a relatively new board of directors at Datapulse succeeds.
Also relevant will be the industry’s reaction to the Singapore Exchange’s latest consultation paper on the safeguards needed for dual class share structures. Although the entry of such companies will likely disappoint governance advocates, from the standpoint of the local economy, they cannot continue to be excluded.
