Deal or no deal?

Date: November 5, 2018

  • STI rebounded 4.8% on hopes of resolution to US-China trade war;
  • Sceptics express doubt that a deal will be reached soon;
  • US mid-term elections will be closely watched – no clear picture as to how the US market might behave;
  • Banks and Jardine group were main index drivers;
  • Singapore’s manufacturing growth slowed for second straight month in Oct.


The STI’s performance

The Straits Times Index for the week ended 27 Oct shed 90 points, so last week’s 144 points or 4.8% rebound to 3,116.39 meant that it recovered all the previous week’s loss. Most of the selling throughout October was attributed to the US-China trade war which is already extracting a toll on China’s growth and its stock market; the rebound in the second half of last week was reportedly because the market believes there is some progress in current US-China trade negotiations, a belief that originated from tweets by US president Trump.

US-China – deal or no deal?

Some sceptics however, have wondered aloud about the timing of these tweets, coming as they have so close to the US mid-term elections next Tuesday. On Friday, Wall Street weakened, probably after White House economic adviser Larry Kudlow downplayed the potential for a quick deal.

“We’re doing a normal, routine run-through of things we already put together and normal preparation,” Kudlow said on CNBC Friday. “OK, there’s no mass movement, there’s no huge thing, we’re not on the cusp of a deal.”

Furthermore, Bloomberg reported that Mr Trump has a history of agreeing in principle to deals before backing out. “His critics say the trade pacts that he has so far completed, including a renegotiation of Nafta, represent little more than incremental improvements. And he has previously made concessions to U.S. adversaries that have drawn backlash from both Democrats and Republicans’’ reported Bloomerg in its “Trump Risks Backlash in Zeal for Deal to End China Trade War’’ last Friday.

US-midterms will be significant

Meanwhile, the mid-term elections are seen as crucial since analysts have said that shifts in the balance of power in Washington could have significant implications for the market via changes in fiscal policy and foreign relations. There have been many studies into how Wall Street behaves before and after the mid-terms, but there is no real pattern that has emerged.

For example, reported that Binky Chadha, chief strategist at Deutsche Bank, noted that the three-month period running from a month ahead to two months after the election has produced a median 8% gain. And that includes only one decline, a 4% drop in 1978, over that period in the last 21 midterm years.

However, after controlling for growth and seasonality, the magnitude of the performance attributable to the elections in the October-to-December period during midterm years is smaller than first appears and is more likely on the order of 0.5% to 2.5%, said Mr Chadha.

Some observers have also pointed out that if the Democratic party wins significant majorities in either the House of Representatives or the Senate or both, it would make for greater disruption, including government shutdowns, investigations into Trump administration activities and even the threat of impeachment, which could unsettle markets.

Meanwhile, prices in the US bond market have risen slightly, possibly a consequence of investors seeking refuge in a period of heightened volatility. However, a strong US jobs report on Friday brought a bit of pressure to bear, pushing the 10-year yield to just above 3.2%, whilst the 2-year yield ended at 2.92%.

Jardine and banks were main index movers

As for the local market, index activity was concentrated mainly in the Jardine group and the three banks. In particular, a significant contributor to Thursday’s 42-points rise was Jardine Cycle & Carriage, which surged $1.60 or 5.3% to $31.87 on relatively heavy volume of 1.1 million traded.

Analysts last week issued fresh, positive reports on the banks. KGI for example, on Friday said it was re-initiating coverage of DBS with a “buy’’ and fair value of S$27.70, based on a Residual Income Model.

“As Singapore’s largest bank, DBS is well-positioned to benefit from rising interest rates, as well as Singapore’s continued growth as a private banking hub’’ said the broker.

DBS Group Research in a 19 Oct report on the banks said it remains watchful on the Singapore property market and believes that impact from 6 July new property cooling measures with the latest URA restrictions on the minimum sizes of new condominiums is not imminent.

“Pipeline of property-related loans is likely to see through at least 1H19. While we expect some slowdown in mortgage growth, we think it is unlikely to see a huge correction (previous peak in mortgage growth was 16% in late 2012 when cooling measures were introduced, current mortgage growth is at the c.4% level)’’ said DBS.

It added  that it prefers UOB with a target price of $31.70 to OCBC, which it rates as a “hold’’ with $12.40 target.

“Our BUY call on UOB is premised on its higher dividend yield with potential upside and continuous loan growth supported by its strong funding portfolio, on top of its strong capital position. We currently have a HOLD call on OCBC as there are limited catalysts for its share price currently due to OCBC’s bigger exposure to trade and wealth management income which may moderate on the back of volatile market conditions’’ said DBS.

October’s manufacturing slowed

The purchasing manager’s index, which is a leading indicator of economic activity, fell 0.5 to 51.9 in Oct, the lowest level since August 2017. However, the sector expanded for the 26th consecutive month as indicated by a reading of 50 or more.