It’s US-China trade war fears – again

Date: July 16, 2018

  • The Malaysian general election provided the main focal point;
  • Local energy stocks in play as oil touched US$77 per barrel after the US withdrew from its Iran nuclear deal;
  • The US 10-year Treasury yield crossed 3% on Wednesday;
  • Strength of US dollar puzzles analysts;
  • SGX regulators order VARD to hold EGM again

The Trump administration on Tuesday released a proposed list of an additional US$200 billion in Chinese goods to be hit with tariffs. China’s Commerce Ministry said the tariffs, which cover everything from refrigerators to handbags, are “totally unacceptable.”

On Wednesday, Asian stocks reacted negatively to this development, with the STI plunging more than 50 points at the opening. It eventually managed to recoup about half that loss, most likely thanks to intraday short-covering.

For the week however, it managed a 69-points or 2.2% rise at 3,260.35, thanks mainly to rises on Thursday and Friday. Average daily volume was S$1.2 billion. Helping support the STI were remarks by US Treasury Secretary Steve Mnuchin to the House Financial Services Committee on Thursday that he is available for negotiation and that the administration is not advocating tariffs but free trade instead.

Also helping was that China’s vice-president for commerce said the two countries should “sit down and try and find a solution”.

Analysts at a loss

Analysts however, appear confounded and frustrated by the uncertainty shrouding the situation.

Trump’s escalation of the trade war between the world’s two largest economies is going to trigger a chain reaction of negative events around the world

said Nigel Green, chief executive of independent US financial consultancy deVere Group.

“It is going to lead to higher inflation in the US, as import tariffs raise the cost of imported goods while domestic producers find that they can increase their prices as foreign competition weakens. This means interest rates will be hiked and the dollar will go up.”

“China’s cheap goods have helped keep prices, and therefore US and global inflation, low.
To counteract increasing inflation, the US Federal Reserve is even more likely to raise interest rates. A jump in rates will, of course, strengthen the dollar…Trump’s trade war is a masterclass in self-harm for the US and global economy”.

In a Bloomberg News survey of 31 economists and analysts, responses varied widely on how long the tariffs will last and how big they will get. Estimates of the trade war’s duration were distributed fairly evenly in a range of three months to three years, with a median estimate of 12 months.

The variation in responses underscores the difficulty of predicting President Donald Trump’s actions, along with skepticism that either China would quickly fold or that Trump would follow through on his biggest tariff threats. In the latest developments, the U.S. and China signalled this week they were open to resuming negotiations over trade after days of exchanging retaliatory threats
reported Bloomberg.

In local news

Food court operator Koufu last week priced its mainboard public offer at S$0.63 per share. The float will comprise 51.2 million new shares and 45.8 million vendor shares. Koufu last year generated S$51m in net cash flow from operations and S$26.8m in net profit.

Elsewhere, Catalist-listed travel agent, whose shares have been suspended since 6 July, may have its licenses suspended by the Singapore Tourism Board after audior Ernst & Young flagged going concern issues in its 2017 audit. incurred a net loss of S$34.6m for the year ended 31 Dec 2017.

In a 10 July Sector Update, CIMB maintained an “overweight” on the offshore and marine sector, singling out Yangzijang Shipbuilding as possibly the only one in the sector to deliver stronger quarter-on-quarter earnings.

Keppel Cor (KEP), SembCorp Marine and SembCorp Industries (SCI) are likely to post weaker qoq earnings. KEP could dish out a special 50th anniversary dividend on stronger balance sheet while SCI should see better utilities earnings with higher load factors in India

said the broker.

As for the property sector, stocks hit by the sudden introduction of curbs a week ago managed to stabilise last week but analysts remain cautious.

Maybank Kim Eng (MKE) said in a 6 July report that it has cut its earnings per share and revalued net asset value estimates for property developers to reflect its 5-10% cuts in home-price assumptions.

We downgrade the sector to NEUTRAL from POSITIVE in view of the tightening overhang

said MKE.