A week of two halves

Date: April 23, 2018

When Donald Trump assumed office as US president last January, the world braced itself for a trade war that he had promised with China. When none materialized in the subsequent months, markets drew a sigh of relief and turned their attention to the supposedly market-friendly policies that did emerge from the Trump administration – a rollback of rules governing banking activities, large-scale infrastructure spending and tax cuts that was touted as putting more money into the hands of consumers but actually will benefit mainly the rich.


In the meantime, Mr Trump’s withdrawal of the US from the TPP (Trans Pacific Partnership) agreement was dismissed as having not much consequence for the country.


About 14 months after Mr Trump came into power and trade war fears have returned. The selling equity markets suffered on Thursday and Friday was widely attributed to those worries, though one has to wonder why the market only reacted last week when the US’s intention to impose tariffs on steel and aluminum – widely attributed as targeting China – was announced more than a fortnight ago, over the weekend of 3-4 March.


Whatever the case, China’s ambassador to the US, Cui Tiankai, last Thursday was quoted by Bloomberg news saying that his country does not want a trade war but is not afraid of one, adding that the US’s claims of intellectual property violations are “groundless’’ and that China will “fight back and retaliate’’.


Cui also said Trump’s trade sanctions against China make “no economic sense” because the escalating conflict “will affect the daily life of American middle-class people, the balance sheet of American companies and the indexes of the financial market’’.


The latter certainly was the case, as a market that looked like returning to its pre-January complacent self was jolted by those comments and a spike up in the VIX Index, sometimes known as the “fear’’ index, by a huge 5.48 points or 30.68% on Thursday to 23.34. On Friday it continued to rise, up 6.5% to 24.87.


The VIX measures the options market’s estimates of future volatility; a low reading is often equated with heightened complacency whilst a high reading suggests fear.


Also notable was that bond prices remained steady, with the 10-year Treasury slipping marginally on Friday from 2.82% to about 2.81%, the support suggesting a modest flight to safety took place amidst turmoil in stocks.


The second troubling development came early last week when it was revealed that a UK political consulting firm Cambridge Analytica had obtained personal information of Facebook users without the latter’s permission, possibly to aid the Trump presidential bid. Concerns that Facebook users could abandon the social media platform have led analysts to downgrade the stock, prompting a selloff that has seen its price fall about 10 per cent in three sessions.


Observers also noted that Facebook’s CEO Mark Zuckerberg’s Wednesday statements about the data leak did little to address criticism over how the company deals with privacy issues.


The third developments of concern also come from the US, where there were a series of sackings and resignations associated with Mr Trump. The first was the firing of deputy director of the FBI, Andrew McCabe, just two days before he was due to retire. According to most news reports, his departure was likely linked to the ongoing investigation into Russian meddling with the 2016 US presidential election, though the reason given was that Mr McCabe “lacked candour’’ when questioned under oath.


Also worrying was the resignation of lawyer John Dowd who was Mr Trump’s legal adviser for the Russian investigation, followed by national security adviser HR McMaster.


There was a fourth major market-moving occurrence during the week but with everything else that happened, it had less of an impact than it should. We’re referring to new US Federal Reserve chairman Jerome Powell’s first Open Markets Committee meeting in which the Fed did the expected when it raised interest rates by 25 basis points but then confused the market with its comments and projections. As things stand now, opinions are split over whether there will be two or three more hikes in 2018.


All of the above added up to weakness for Wall Street, where the Dow Jones Industrial Average lost 1,413 points or almost 6% over the week. Meanwhile, the Straits Times Index fell for four of the five days, with Friday’s 69.98 points or 2% drop to 3,421.39 taking its loss for the week to 91 points or 2.6 per cent.


Volume for most of the week was low – between Monday and Thursday, dollar business averaged S$950 million, below the S$1b the industry needs to break even. On Friday however, 1.9 billion units worth S$1.9billion was done, indicating heavy selling of blue chips.


Among the stocks in the news was financially-strapped Noble Group, which is being sued by substantial shareholder Goldilocks over allegations that Noble inflated its profits to raise money. The suit also alleges management paid themselves inflated salaries, and then tried a cover-up when the accounts came under increased scrutiny,


Noble later in the week it is likely to be able to continue as a going concern as there are reasonable grounds to expect its restructuring to be successful. It also warned that attempts to wind it up would be very difficult and fraught with complex legal challenges. The commodities trader has defaulted on bond payments in the past few weeks.

Wall Street therefore started off well-supported by earnings announcements, the US bond market traded sideways for the first half of the week and even the release of yet another tell-all book on President Trump, this time by former FBI chief James Comey, didn’t rattle investors as much as might have been expected.

Perhaps markets are becoming used to unflattering descriptions of the US president, at least for now – even though the possibility of impeachment has been mentioned.

Here, even though exports disappointed for the second consecutive month, hit by a triple whammy of a high base effect, cooling electronics demand and a stronger Sing dollar, the Straits Times Index rose just over 100 points on Wednesday and Thursday.

The reasons reported for this sudden rise were an easing of geopolitical tensions and the absence of bad news, though one suspects there was heavy short-covering that could account for much the bounce. Meanwhile, official data released on Tuesday showed that non-oil domestic exports fell 2.7% in March, coming in way below already-low economists’ expectations of 1.2% growth.

Wall Street’s Thursday drop however, reminded investors that interest rates, inflation and the US Treasury market may yet have roles to play in determining the fate of equities in 2018. A sudden spike in the 10-year Treasury yield by 4.6 basis points to 2.914%, brought the sellers out, particularly since it was the highest since 22 Feb. Traders will probably recall that was the month when Wall St underwent massive turbulence which spilled over onto global markets.

The reasons for the jump on Thursday were reported to be better-than-expected economic data – initial claims for unemployment benefits were low and the Philadelphia Fed index which measures manufacturing activity showed robust expansion.

“We have easing of geopolitical tensions in the world, we have higher commodity prices, we’re in the ninth year of an economic expansion, and the Fed looks like it will raise rates in June,” said Gary Pollack, head of fixed-income trading at Deutsche Bank Private Wealth Management was quoted by CNBC as saying.

The spike in the 10-year’s yield continued on Friday, when it finished at 2.96%, the highest in four years.

There is also come concern over the possibility of the yield curve inverting or flattening, which occurs if shorter rate rise above longer rates, or to the same level. On Wednesday, the 2-year yield rose 4.4 basis points to 2.429%, the highest since August 2008. According to some observers, an inverted yield curve could be a precursor to a recession.

On Friday, technology stocks came under pressure after Taiwan Semiconductor Manufacturing, an Apple supplier and the largest contract manufacturer in the world, forecast weak smartphone demand for the second quarter. However, a 25-points loss for the STI that day was not enough to drag the index into the red as it still managed to record a 72-points or 2 per cent rise for the week to 3,573.38.

Apart from the weak trade figures, other significant news on the local front included battered commodities trader Noble Group announcing on Thursday that it will drop a controversial requirement in a restructuring proposal that effectively forced shareholders to vote in favor of that proposal. This comes after the Singapore Exchange wrote to the company to review the requirement.

Shares of offshore and marine group Ezion Holdings resumed trading on Tuesday after the company completed a months-long debt-refinancing exercise that included equity swaps and issuance of warrants. The stock fell S$0.003 on Tuesday to S$0.194 on heavy trading of 251 million shares and finished the week at S$0.173.

Elsewhere, a special shareholder meeting involving Datapulse Technology on Friday ended with the incumbent board keeping its seats and winning approval to push ahead with its contentious diversification into the hair care business.

For the week ahead, investors should keep a close eye on the US bond market, where – as noted earlier – the 10-year yield is at levels that sparked off the intense volatility experienced in February. Some analysts think that if it breaks above 3 per cent, US equities could encounter increased pressure.

Support for stocks could come from earnings – nearly a third of the S&P 500 companies report their figures in the week ahead, and there is hope that earnings and forecasts will be solid enough to divert market focus. The US reports 1Q GDP on Friday, and growth is expected at 2.2 percent, though Barclays on Friday cut expectations to 1.5 percent.

Last but not least, there is the possibility of month-ending “window-dressing” of the STI to watch out for.