Monthly wrap for October 2018: October was very much a “risk off’’ month

Date: November 1, 2018

  • Straits Times Index lost 7.3% for the month, down 11.3% for the year;
  • US-China troubles, rising geopolitical risk, earnings disappointments among main concerns;
  • A weakening China economy and stock market also played a part;
  • Adding to worry were nervousness ahead of US mid-term elections, interest rates;
  • Daily trading volume remained consistently low;
  • URA’s minimum condo size seen as further cooling property market.

 

STI struggled to keep a grip on 3,000 mark

At the start of the month there was little sign the turmoil that lay ahead – the Straits Times Index looked like it might regain the 3,300 level as it closed at 3,267 on 3 Oct, the Dow Jones Industrial Average on 2 Oct closed at a new all-time high of 26,773 and even battered technology stocks like Venture Corp showed signs of revival, the counter jumping 5% or $0.89 on 1 Oct to $18.52.

By the end of the month however, the STI was struggling to hold on to the 3,000 level having closed at 2,966 on 30 Oct, Venture had collapsed to below $15 and volatility in the Dow had surged exponentially. If there is any single phrase to describe October’s trading, it would have to be “risk off’’.

US earnings, trade war with China and 3% 10-year Treasury yield

According to most observers, disappointing US earnings was a major factor behind the weakness on Wall Street which has spread throughout most other equity markets. This may have been factor but it is unlikely to have been instrumental in sending markets reeling. More likely explanations are concerns over the upcoming mid-term US elections, rising geopolitical tensions as US and China ratchet up the trade rhetoric, the alarming weakness in China’s stock market and a 10-year US Treasury yield that remained stubbornly above 3% for the entire month.

Turnover was again low as STI came under pressure

For the month, the Straits Times Index dropped 239 points or 7 per cent. It enjoyed a last-day window-dressing push on Friday that added 52 points and helped reduce its year-to-date loss to 384 points or 11.3%.

Just as it has been for several months now, turnover was consistently low throughout October, daily volume exceeding the industry’s breakeven volume of $1 billion only a handful of times.  On Friday, the last day of the month, window-dressing in the wake of a large overnight rebound on Wall Street helped elevate volume to 2.3 billion units worth $1.5 billion but this is unlikely to last in the days ahead.

Heightened volatility brought on the the ongoing US-China trade spat and the continued absence of a significant retail presence are among the reasons for the low level of business done in local stocks.

Wall Street’s volatility

The first sign of what was to come arrived on 10 Oct, when the Dow plummeted 832 points or 3.2% to 25,598. What was significant of trading that day was that bonds also fell – according to news analyses, there were only 14 trading days in the prior 3 years where stocks fell more than 1% and bonds also weakened. Since there was no flight to safety apparent, the conclusion was that “risk on’’ had returned in a big way.

The fallout here was painful and immediate – on 11 Oct, the STI collapsed by 84 points or 2.7% to 3,047, led by the Jardine group and the banks. Heightened selling of blue chips meant that 11 Oct saw the month’s highest daily volume done – $1.7 billion.

In local news…

Sovereign wealth company Temasek Holdings on 16 Oct announced it would soon be offering its first ever retail bond. It has a 5-year tenure, will pay a fixed interest of 2.7% and is fully guaranteed by Temasek. The bond listed on SGX on 29 Oct and ended the month at $1.02.

Hyflux, which is dire financial distress, on 18 October announced that it is considering a $530m rescue plan offered by Indonesia’s Salim group. The news was accompanied by some degree of relief among stakeholders, though much remains to be done.

The Urban Redevelopment Authority (URA) on 17 Oct shocked the property market by announcing that the average size of new private flats outside the central area will have to be at least 85 sq m. URA also said that nine areas – up from four now – will be subject to an even more stringent minimum average requirement of 100 sq m. These areas are Marine Parade, Joo Chiat-Mountbatten, Balestier, Telok Kurau-Jalan Eunos, Stevens-Chancery, Pasir Panjang, Kovan-How Sun, Shelford and Loyang.

Analysts responded by saying that this could put an end to en bloc deals and should moderate condo and land prices in the affected areas.

Fed minutes and the threat of rising interest rates

The minutes of the September US Federal Open Markets Committee (FOMC) meeting released on 18 Oct showed a discussion on more interest rate hikes and whether to exceed the “neutral’’ stance in favor of tighter monetary policy. In response, the Dow fell 327 points or 1.3%. On that day too, the 2-year Treasury yield rose to 2.907%, the highest since 25 June 2008.

China’s problems

On 19 Oct, the Shanghai Composite Index jumped 2.7% after the Chinese authorities over the weekend said they would help support the economy and stock market, possibly even through tax cuts. Bloomberg reported that the stock market rally was probably aided by state buying; the rebound however, proved short-lived as prices fell back soon after.

The South China Morning Post (SCMP) last week reported that according to the state-run news agency Xinhua, the Communist Party’s Politburo, the 25-member supreme policymaking body headed by President Xi Jinping, agreed on Wednesday that there was “growing downward pressure” on the economy with “profound changes” in the external environment.

The statement was a shift from three months ago when the Politburo said there had been “noticeable” changes in the external environment.

“It followed weaker-than-expected business sentiment in the manufacturing and services sector in October, results led by sharp declines in export demand, according to the official purchasing managers’ index. The figures point to further deceleration down the road after the country’s headline growth rate slowed to its lowest level in a decade in the last quarter’’ reported SCMP.