Date: September 2, 2019
- The Straits Times Index lost 194 points or 5.88% at 3,106.52;
- The index started the month holding on to the 3,300 level, it ended the month just regaining 3,100;
- China devalued its currency, labelled a “currency manipulator’’ by Trump;
- Main cause was trade flip-flops by Trump;
- Yield curve inversion raised possibility of recession;
- US interest rates were also relevant, but less so.
At the risk of understatement, August was a tumultuous month for stock markets everywhere as sentiment swung violently between bullish and bearish, depending on developments on the currency, US interest rate and US-China trade fronts.
China allowed its currency to weaken
On 5 Aug, Beijing allowed its currency to weaken till it fell to the lowest in 11 years, Chinese enterprises stopped making new purchases of American farm goods and President Trump’s Treasury Department formally labelled China a currency manipulator.
These developments shook world markets as nervous investors looked for safe places to park their money. Wall Street suffered its worst session of the year that day with the S&P 500 closing down nearly 3 percent. Selling was especially heavy in the trade-sensitive technology, consumer discretionary and industrial sectors.
Chinese officials said the move came in response to market forces, which have reacted to Mr. Trump’s tariff threats by pushing the value of the currency down. In an unusually blunt statement, the central bank put the blame for the currency fall on Mr. Trump’s “unilateralism and trade protectionism measures and the imposition of increased tariffs on China.”
In a statement on 5 Aug, the Treasury said that Steven Mnuchin, the Treasury secretary, “will engage with the International Monetary Fund to eliminate the unfair competitive advantage created by China’s latest actions.”
Yield curve inversion rattled markets
For interest rates, the key development was inversion of the US Treasury yield curve mid-month, followed by several more times thereafter. Last Tuesday the 10-year Treasury yield was down 6 basis points to 1.47%, its lowest since 2007, whilst the 2-year yield eased 3.5 basis points to around 1.52%.
The spread between the 3-month Treasury yield and that of the 10-year note — the Fed’s preferred inversion metric — slumped to -52 basis points, its lowest since March 2007.
The inverted yield curve is what happens when investors are bidding for longer-term bonds — thus driving down their yields — because they are pessimistic about the short-term prospects for the economy. Many observers believe that an inverted yield curve is a warning indicator for a coming recession.
CNBC quoted bond analyst Kevin Giddis as saying the worsening inversion is “certainly validating that a recession has a great chance of being here a year, year and a half from now’’.
The US Fed and interest rates
Although US interest rate considerations played less of a role than before, they nonetheless did have some influence on market sentiment given that the US Federal Reserve had cut rates in July in anticipation of an impending slowdown.
The minutes of the July Federal Open Markets Committee meeting showed that the Fed had been divided over that rate cut, with around half its members preferring to keep rates unchanged and a small handful who opposed a cut.
US-China trade – the flip-flopping continued
As for US-China trade, almost everything hinged on statements (or outbursts) from US President Trump, who upped the ante in the third week of the month by slapping taxes on more China goods while also raising the level of existing tariffs.
Faced with the prospect of a trade war that might continue escalating with no clear end in sight, the Straits Times Index was largely weak throughout the month, dropping 194 points or 2.88 per cent over the four weeks to 3,106.52.
Investors sought the safety of bonds, driving prices up and yields down. In several countries, bond yields sank into negative territory, which means that investors are prepared to pay a premium in order to park their funds in these instruments.
As the month drew to a close however, investors drew some comfort from news that China said it would delay imposing its tariffs on the US, and that it was open to fresh talks with the US. This occurred at the end of last week, and enabled stock prices to stabilise from the battering they had taken.
However, Business Times on Saturday quoted Robert Carnell, chief economist and head of research for the Asia Pacific at ING as expressing scepticism at a deal. “Yes, markets today are happy as a goldfish is with a new rock in the tank to swim around, and around and around. I’d be gearing up for the next down-leg, personally’’.
Risks are skewed to the downside: Morgan Stanley
The downtrend in some global economies is becoming contagious as weakness in the manufacturing sector begins to spread, according to Morgan Stanley, which last week warned clients that “the wheels for a slowdown are in motion.”
“Even as we have been revising our growth projections lower, we continue to highlight that the risks remain decidedly skewed to the downside,” Chetan Ahya, the bank’s chief economist, warned in a note published Tuesday. “We expect that if trade tensions escalate further … we will enter into a global recession (i.e., global growth below 2.5%Y) in three quarters.”
MS’s economist also said that despite claims that the US remains an exception to the global deceleration, the effects of the international slowdown are already filtering into American data, highlighting the “significant loss of momentum” in payrolls data in the past seven months, falling to 141,000 on a six-month moving average in July from 234,000 in January.
“Rising tariffs will likely exacerbate the existing downward pressures on corporate margins and profitability. Hence, corporates could soon move to the next stage, cutting back on hiring,” Ahya added. “As it is, consumer sentiment has taken a hit in August and the drop was very clearly driven by the announcement of further tariffs and to some extent the resulting stock market volatility’’.
