STI hit by Italian, trade war worries

  • STI dropped 86 points or 2.4% over the week to 3,427.51;
  • Geopolitical concerns rose to the fore in Italy, US trade war concerns returned;
  • Volume boosted on 31 May by “portfolio rebalancing’’;
  • US bond yields plunged as investors sought safety, then crept upwards;
  • SGX censured Jason Holdings’ founder;
  • Malaysian timber firm Jawala debuted on Catalist;
  • Singapore market favoured by Schroders.

Overview – political risk rises, portfolios get rebalanced

The Straits Times Index fell 2.4% over a holiday-shortened week, buffeted mainly by volatility on Wall Street whose origins lay in Italian political worries and sudden trade sanctions imposed by the US on the European Union, Mexico and Canada.

On the plus side, the meeting between the leaders of North Korea and the US appears to be going ahead as planned, though the operative word is “appears" – it’s anybody’s guess whether the summit will actually occur or if one of the parties pulls the plug at the last minute.

On Thursday 31 May, trading in the local market was duly boosted by month-ending “window dressing" or “portfolio rebalancing" if you prefer. Whatever the case, volume that day swelled to triple the daily average, the S$3.53 billion traded that day being the highest one-day haul this year. The next day, Friday 1 June, turnover dropped back to more familiar levels – 2.2 billion units worth S$1.4 billion.

That figure was elevated by heavy trading of the Jardine group, in particular Dairy Farm. The counter’s US$0.38 or 4.2% slide to US$8.57 that day came with 28.4 million traded, the total value of trades coming in at a whopping S$243.4 million.

Trading in Jardine Matheson and Jardine Strategic on 31 May added a further S$129 million whilst heavy selling of Starhub that saw it lose S$0.07 at S$1.93 on volume of 91.3 million added a further S$177 million to business done.

Starhub has been removed from the MSCI Singapore Index and included instead in the MSCI Singapore Small Cap Index. News has also emerged that the cable TV operator will no longer screen offerings from the Discovery brand due to an impasse in negotiations.

The last day of May also saw heavy selling of Singapore Press Holdings that cut S$0.06 off its share price at S$2.63 on turnover of 11 million, whilst falls in UOB and OCBC accounted for a total of S$287 million. Trading in Starhub, SPH, the two banks and the three Jardine stocks totaled S$863 million, or about one-quarter of total volume that day.

Italian debt worries

Early in the week it emerged that turmoil in Italian politics could result in elections being called soon. If so, political pundits believe that Eurosceptic parties could gain power and threaten the country’s continued membership in the Eurozone.

The resulting flight to safety benefited US Treasuries, with the yield on the 10-year bond dropping from just below 3% to around 2.8% on Tuesday. Wall Street’s major equity indices fell around 1.5% that day and although they rebounded on Wednesday thus giving the impression that Italy didn’t matter, they collapsed on Thursday after the US’s latest trade moves.

US trade sanctions

On Thursday, the Trump administration announced it will go ahead with tariffs on steel and aluminum imports from Mexico, Canada and the European Union. The announcement brought the sellers out again, with worries emerging that China may also enter the picture soon.

Meanwhile, the EU and Mexico announced they will be imposing counter measures, with the head of the European Commission Jean-Claude Juncker quoted as saying “this is a bad day for world trade…it is totally unacceptable that a country is imposing unilateral measures when it comes to world trade’’.

US bond market and Friday’s jobs report

After the Italian-prompted rally on Tuesday, US bond prices gradually weakened as the week progressed. The 10-year yield has crept up from 2.8% on Tuesday to just above 2.9% on Friday. According to news reports, Friday’s payrolls report which showed the economy added 223,000 jobs in May versus Bloomberg’s estimate of 190,000 has been taken by the market to mean there is certain to be a rate hike this month and possibly two more this year.

SGX rapped Jason Holdings’ Jason Sim

On Thursday, the Singapore Exchange said it has reprimanded floor specialists Jason Holdings’ founder and former chief executive Jason Sim for breaching Catalist rules. According to SGX, the company had materially overstated its revenue in its first half results for the six months ended 30 June 2015.

Jawala’s debut

The latest company to list on SGX was Malaysian timber firm Jawala, which made its debut on Friday. Its shares had been offered at S$0.25 each and the stock ended its first day at S$0.26 on volume of 4.5 million traded.

Jawala, which holds a 100-year licence agreement to manage a 11,043 hectare plantation in Sabah's Sapulut Forest Reserve, raised about S$3.2 million in net proceeds through the offering. It harvests and supplies timber from salvage logging to produce sawn timber, veneers and plywood.

Schroders’ view

Schroders in its multi-asset views for May said that although valuations continue to remain elevated on Wall Street, it expect earnings growth will continue to be strong in 2018, driven in part by the US tax cuts and rising share buybacks.

The fund managers added that for Asia ex Japan, Singapore continues to rank as its best country model, as earnings revisions momentum remains as strong as in the US in addition to reasonable valuation levels.