All eyes on FOMC and its accompanying statement

Date: March 19, 2018

The week just past lived up to expectations when trading here and on Wall Street underwent large bouts of volatility following uncertainty created by US President Trump’s tariffs on steel and aluminum. However, what was unexpected was one of the main sources of that volatility – US President Trump sacking his Secretary of State Rex Tillerson on Tuesday, the tenth high-profile firing by Mr Trump since he assumed office last January. The week before, top White House economic advisor Gary Cohn resigned, most likely in protest over Mr Trump’s tariffs.

In addition, comments by German Chancellor Angela Merkel about possible retaliatory moves by the European Union in response to the US’s tariffs added to market concerns; meanwhile, news that US retail sales fell for the third consecutive month helped ease inflation concerns and keep a lid on Treasury bond yields.

Heading into a week where the Federal Open Markets Committee (FOMC) meets for the second time this year, all eyes will be on the accompanying statement. The market has been certain that there will be a 25-basis points rate hike at this meeting – the futures market is pricing in a 94.4 per cent chance of this occurring, up from 88.8 per cent a week earlier – so what remains is to dissect the language the Fed will use on the outlook for the economy which in turn will offer clues on how many more hikes there could be in 2018. One has to wonder if the Fed will mention possible inflation pressure from the tax cuts which have recently been passed into law.

Thus far, the market believes only two more hikes are in the offing for the rest of the year, so if the Fed delivers a hawkish statement that leads to expectations of three or more hikes, stocks will come under pressure. Investors should keep a close eye on the 10-year US Treasury yield in order to get an idea of the market’s thinking and recall that analysts believe that if the yield crosses 3 per cent, stocks could be in real danger. On Friday, the yield closed at 2.844 per cent.

As for the local market, what might be of some concern is declining volume. Between Monday and Thursday turnover averaged S$1.25 billion, and though it spiked up to S$1.6 billion on Friday, this came mainly from selling of the three banks – not a good sign for the local market. As for the Straits Times Index, three straight days of weakness between Wednesday and Friday meant that its gain for the week was reduced to 27 points or 0.8 per cent at 3,512.14.

Among the companies in the news was commodities firm Noble Group, which on Monday announced it has sold a vessel for US$24 million and on Wednesday said its creditors have signed a restructuring support agreement (RSA) that the company says should help return it to a firmer financial footing. The new Noble will remain listed on SGX but will move its center of main interests from Hong Kong to the UK and will be 80 per cent owned by senior creditors, 10 per cent by management and 10 per cent by existing shareholders.

However, Noble’s management will share with existing shareholders an option to buy a further 10 per cent stake from senior creditors as well as a performance incentive share option to subscribe for another 5 per cent in additional equity.

Substantial shareholder Goldilocks Investment Company has criticized the plan, describing it as “window-dressing’’; Noble in the meantime on Friday announced it will not pay the principal and interest on its US$379m bonds due on 20 March, nor the coupon on its 2020 notes that it has already missed.

Rowsley’s shares have been active and creeping upwards this week. The company is holding an extraordinary general meeting on 23 March to obtain shareholder approval to buy the Thomson Medical healthcare businesses from controlling shareholder Peter Lim for S$1.6 billion via the issuance of shares.

On Thursday, shares of China health food firm NutryFarm International – a company that was formerly known as LottVision – jumped S$0.08 or almost 35 per cent to S$0.31 with 456,200 traded, drawing a query from SGX. Trading was halted a short while later, and on Friday the company announced it is buying Internet management firm First Linkage.

Last but by no means least, the surprise 5.9 per cent drop in non-oil domestic exports (NODX) compared to a year ago. Economists had forecast an expansion of 4.8 per cent, most probably projecting from a 12.9 per cent rise in January. It served as a reminder that volatility is on the rise all over, not just in stocks but also in economic indicators, and that the situation could worsen if the world turns more protectionist, like the US.