Bouncing between optimism and pessimism

Date: July 29, 2019

  • The Straits Times Index lost 14.2 points or 0.4% at 3,363.76 for the week;
  • Markets everywhere alternated between hopes of more central bank easing and possible breakthroughs in US-China trade;
  • Singapore’s June industrial output fell, but less than expected;
  • Private home prices rose 1.5% in Q2;
  • IMF downgraded global growth forecast – again.

Interest rate cuts and US-China trade talks

Stock markets have alternated between developments on the US-China trade and US interest rate fronts for almost all of this year. In the first quarter and most of the second, it was trade that was at the forefront and although nothing positive have come from the talks so far, markets have been supported by hopes that there will sooner or later be a breakthrough.

For most of the past 3 weeks it has been hopes of a US interest rate cut which has provided support, hopes which arose when Fed chairman Jerome Powell and various other Fed officials made dovish comments when referring to the economy. However, there have been reports of disappointment that if rates are to be cut this month, it would only be 25 basis points and not 50 as had been hoped.

No matter, hope as they say, springs eternal. On Tuesday last week, the focus shifted back to trade following reports that a delegation led by U.S. Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin will fly to Shanghai for high-level talks this week.

 White House economic adviser Lawrence Kudlow said China may be prepared to buy more U.S. agricultural products as a “good-will gesture.” Top U.S. and Chinese negotiators have not met in person since talks stalled in early May. Investors will be watching and hoping that China promises structural reform and that the US removes some of its current tariffs on China goods and softens its hardline stance on Chinese tech giant Huawei.

US economic growth

As for the health of the US economy, financial newspaper Barron’s last week reported that at least one indicator is flashing a warning.

“The indicator is the Chicago Fed National Activity Index, which combines 85 indicators to measure the strength of the economy and inflation in the U.S. The index, which is released monthly, came in at a negative 0.02 on Monday, below economist expectations for a positive 0.1. It was negative for a seventh month in a row’’ reported Barron’s.

However, the newspaper did question the reliability of the index these days, adding that a bigger problem for investors today is that many old, reliable recession indicators have become less reliable because of the Fed’s extraordinary monetary policy, which includes keeping interest rates low and buying up bonds.

At this point, even the yield curve, which has been a decent predictor of recessions, now appears to have less predictive value.

Whatever the case, the latest figures released on Friday showed the US economy slowed less than expected in Q2, thanks to a surge in consumer spending. US GDP increased at an annualised rate of 2.1% compared to expectations of 1.8% growth.

IMF downgraded its forecasts again

The health of the global economy was said to be lurking at the back of the minds of investors throughout the week, notwithstanding hopes that the US and China might be able to settle their trade differences. The International Monetary Fund mid-week downgraded its global growth outlook to 3.2% this year and 3.5% for 2020, both down 0.1% from its April projections.

 “The principal risk factor to the global economy is that adverse developments – including further US-China tariffs, US auto tariffs, or a no-deal Brexit – sap confidence, weaken investment, dislocate global supply chains, and severely slow global growth below the baseline,” said the IMF.

The IMF predicts that the US economy will see a significant slowdown as the stimulus from tax cuts fades. After 2.9% growth last year, it predicts 1.9% in 2020.

Factory output down less than expected

Singapore’s industrial output fell 6.9% in May versus expectations that it would drop 8.5%. It was the fourth straight month of year-on-year decline. The fall adds support to expectations that the Monetary Authority of Singapore will likely adopt an easing stance in the near future.

Private home price up 1.5% in Q2

For the first time since last July’s July’s cooling measures, private home prices rose. This occurred during the second quarter when the gain was 1.5%, which was led by non-landed properties in the prime and city fringe districts.

Stocks in the news

On Tuesday, shares of electronic services provider Venture Corp gained 25 cents or 1.62% to $15.67. The company later announced that fund managers BlackRock Inc is now deemed to be a substantial shareholder of Venture after a 19 July share purchase. In a 19 July report, Maybank Kim Eng maintained its “buy’’ on the stock, noting that the company is a beneficiary of the US-China trade conflict because about 85% of its production is outside China.

Ailing offshore services provider Emas Offshore last week applied to be placed under judicial management, five months after a rescue plan was called off. Emas’s primary listing is on the Oslo Stock Exchange and it has a secondary listing on SGX. Trading here was suspended in Singapore in 2017.

Datapulse last week said it will comply with SGXRegCo’s notice of compliance relating to Datapulse’s minority investments in two hotels and the awarding of hotel management agreements to firms linked to its chairman and controlling shareholder.