Monthly wrap for July 2019: Strong start, disappointing finish

Date: August 2, 2019

  • STI fell 21 points or 0.6% to 3,300.75;
  • Hope of a 50 basis points US rate cut was the main driver;
  • Dragging prices lower was disappointment that the cut was only 25 points;
  • IMF downgraded its economic growth outlook – again;
  • During July, SGX announced new privatisation rules;
  • SGX also said to be considering scrapping minimum trading price

Alternating between hope and disappointment

Throughout July markets were buffeted by the same forces that were evident in May and June – expectations of how US interest rates would move, and to a lesser extent, developments on the US-China trade front.

In each of the past three months markets alternated between bouts of greed and fear, or if you prefer, hope and disappointment.

In June, the predominant sentiment was hope – either that rates would be cut and that the US and China would at least sit down at the negotiating table to iron out their differences.

In July the pattern was similar for most of the time, though hope in the first few weeks gave way to disappointment as the month wore on.

Hope – Jerome Powell’s comments

Hope arose when US Federal Reserve chairman Jerome Powell in his Congressional testimony during the second week of July spoke of his intent to lower interest rates in response to signs that global growth is slowing and this sparked off a large rally in stocks.

This was reinforced by comments from other Fed officials – such as it was better to act early before it’s too late – but by the end of the month, markets had convinced themselves that only a 50 basis points rate cut would justify continued buying.

Disappointment – the cut was only 25 basis points

Indeed, by the time the Fed met in the last week of July, markets were demanding a 50 basis points cut, or, if the cut was to be only 25 points, then clear signals that more would follow.

So it was that the 25 basis points cut on Wednesday last week that came with no signs that this was the start of a concerted lowering cycle was taken as disappointing, triggering a large selloff around the globe. Wall Street in particular, was hit badly with the Dow Jones Industrial Average first plunging 500 points before a late rebound cut its loss to 334 points.

Interestingly, Asian markets on that day registered large losses before the Fed meeting, despite the Dow futures having risen some 70 points in Asian trading.

Analysts also noted a slight change in emphasis in the Federal Open Market Committee statement—from “closely monitor” the incoming data on the economy in the previous one, to “continue to monitor” information this time, which might suggest a slight diminution of concern about the expansion.

In addition, two FOMC members dissented from the decision to lower rates by 25 basis points. Kansas City Fed President Esther George and Boston Fed President Eric Rosengren, both of whom have expressed more hawkish inclinations on monetary policy in the past, preferred to hold the fed-funds rate unchanged.

To be honest, the case for a Fed rate cut was not at all clear. But the central bank – and others around the globe – already had strongly suggested that such a cut was coming to counter uncertainties about global growth and the persistent undershoot in inflation.

To fail to deliver on those expectations would have badly hit financial markets, arguably even undoing the boost given to the economy via higher stock prices.

IMF downgraded its growth forecasts

The International Monetary Fund in July downgraded its global growth outlook to 3.2% this year and 3.5% for 2020, both down 0.1% from its April projections.

The principal risk factor to the global economy is that adverse developments – including further US-China tariffs, US auto tariffs, or a no-deal Brexit – sap confidence, weaken investment, dislocate global supply chains, and severely slow global growth below the baseline,” said the IMF.

SGX said privatisation offers have to be fair and reasonable

The Singapore Exchange in July announced that with immediate effect, exit offers have to be fair and reasonable, and the shareholder vote in a delisting/privatisation scenario will have to exclude the offeror and concert parties.

“Arising from feedback, the approval threshold is maintained at 75% of total number of shares held by independent shareholders and voting’’ said SGX. The exchange also removed the 10% block vote, which said the voluntary delisting resolution must not be voted against by more than 10% of the total number of shares held by shareholders present and voting.

SGX said to be mulling doing away with MTP

The Business Times reported that the Singapore Exchange intends to seek public feedback on whether to scrap its minimum trading price (MTP) requirement for mainboard companies. This was first introduced in 2016 and revised in 2017 and basically required companies to take steps to ensure their shares traded for at least 20 cents for at least six months and to have an average market capitalisation of at least $40m during that time.

Failure to satisfy these requirements would see the counter added to an SGX watchlist. Once on that list, companies have 3 years to to satisfy the requirements or face a delisting.

The MTP rule was aimed at addressing worries that low-priced issues were more susceptible to excessive speculation and potential manipulation. The rule was also introduced at a time when SGX was looking to improve quality of mainboard offerings.

A public consultation would open the door to scrapping the rule and could avert the prospect of the exchange having to delist up to 54 companies in June 2020 currently on the watchlist.

Singapore’s market cap down 0.8% to $925b

The late selloff described above meant that the entire market’s value as at 31 July was $925b, about 0.8% less than on June 30. The 30 STI stocks accounted for $575b, down 1.2% on the month whilst the value of Catalist stocks rose 1.4% to $10b.