Deal or no deal?

Date: January 14, 2019

  • The Straits Times Index gained 139 points or 4.5% last week at 3,198.65;
  • The main driving force was that the US and China resumed trade talks;
  • As of Friday, other than encouraging noises from the talks, nothing concrete has yet emerged;
  • US Treasuries remained firm during the week;
  • The US government shutdown continued;
  • Local market turnover in equities was still thin, hovering around the $1b mark daily;
  • Even if the markets are now taking most news as good news, investors should watch for “buy in anticipation, sell on news’’.


Is most news now seen as good news? 

For the last three months of 2018, most news was treated as bad news by the markets, led mainly by Wall Street. This was in stark contrast to much of 2017 and at least the first half of 2018 when most news was seen as good – for example, a strong US jobs report in some months was taken as a sign of a robust economy and so stocks were a “buy’’; conversely, a weak jobs report in other months suggested the economy wasn’t overheating, which then meant interest rates wouldn’t have to be raised, which in turn meant stocks were still a “buy’’.

The same “glass is always half full’’ logic applied for many other US economic indicators – for eg. 2.5-3% GDP growth was seen as suggesting robustness and was received optimistically, yet 6% growth for China was seen as weak and received pressimistically.

However, this changed as 2018 progressed, so much so that news in December that the US Federal Reserve might raise interest rates only twice in 2019 – compared to previous expectations of 3 hikes – which should have been welcomed, was instead greeted poorly, leading to a large selloff.

The same could be said of US-China trade negotiations, which have been ongoing for almost 2 years now. During that time, there have been many twists and turns, White House personnel departures (more through sackings than resignations) and distractions to the point that investors had become skeptical of the talks yielding anything concrete or beneficial in terms of impact on global growth.

Much of this skepticism originated from numerous occasions in the past where encouraging comments by US officials eventually led to nothing, prompting the feeling that “we’ve seen and heard all of this before so why should now be any different?’’

Oddly enough, the market appeared to think that last week really was different – stocks rose every day, particularly strongly during the three days which the US had a team in China to conduct trade talks. Throughout this time there was the same positive rhetoric that had been heard before that led to disappointment later, yet stocks rose in anticipation of a mutually acceptable deal being struck.

Consider if you will, that negotiating officials can hardly be expected to say that talks are going badly whilst those talks are still ongoing. All concerned will surely make positive overtures so as to calm the market’s nerves and not rile the parties on the other side of the table.

Be wary of “buy in anticipation, sell on news’’

Perhaps the new-found optimism comes from investors being tired of dealing with most news negatively for the latter part of the old year, in which case it might be time to switch stance and try and see if it’s possible to interpret news in a positive light instead in the new year.

A word of warning though – observers have pointed out the difficulty of ensuring a lasting deal being agreed upon, whilst there is always the possibility that when details of any deal are finally released, investors will run into the “buy in anticipation, sell on news’’ syndrome that so often plays a part in daily market affairs.

Interestingly, US Treasury bond yields fell on Friday, suggesting money was parked in safer instruments like Treasuries. Bond prices and yields move in opposite directions.

Over the course of last week, the Straits Times Index rose for five consecutive days, gaining and impressive 139 points along the way. This brought its gain for the week to 4.5% and for the year to 4.2%. Average daily volume however, although improving marginally, was nothing to shout about at $1.02 billion.

A slowing outlook and the impact of an extended US government shutdown

In its Multi-Asset Outlook, money manager Schroders said we are moving into 2019 in a “sombre mood’’ after a challenging 2018. “While it is tempting to blame the political headlines, the reality is that economic growth outside of the US has been disappointing. Combined with rising rates in the US, this has led to weaker prices pretty much across the board’’.

It went on to add that the economic cycle is now turning more challenging. “Based on the indicators we track, there is now a reasonable probability of a US recession in 2020 as the impact of fiscal stimulus fades. We are cognisant that we are moving into a more challenging phase of the cycle’’.

“Growth in Europe and Asia remains dependent on an acceleration in global trade, which we view as unlikely. At the same time, the best we can hope for from the major central banks is that they step back from their planned withdrawal of liquidity’’.


For the US, Fed chief Jerome Powell has warned that a prolonged government shutdown will eventually extract a toll on economic growth.

In the short term, government shutdowns don’t last very long. They typically have not left much a market on the economy, which isn’t to say there’s plenty of personal hardships that people undergo,” Powell said during a discussion Thursday at the Economic Club of Washington.

A longer shutdown is something we haven’t had,” he added. “If we have an extended shutdown, I do think that would show up in the data pretty clear.”

You’d have to wonder though – if the data does start to show a slowing economy, would the market then view it as good or bad news?