Oil, interest rates and US-China trade

Date: September 23, 2019

  • The STI fell 51.81 points or 1.6% over the week to 3,159.68;
  • The attack on Saudi oil, US interest rate cut and US-China trade were main focus;
  • US Treasuries benefit from flight to safety, yields fell;
  • Saudi Arabia managed to quickly restore production;
  • Market disappointed that Fed didn’t signal more cuts ahead;
  • The week ended with Wall St disappointed that China cancelled a US farm visit


There were three major talking points last week as far as markets were concerned, one that was unexpected whilst the other two were expected. The unexpected development was the attack on a major Saudi oil processing plant on 14 Sep that handles around 5% of global oil supply and prompted fears of a major disruption to global oil.

The developments that had been expected were the mid-week US Federal Open Markets Committee meeting at which US interest rates were lowered for the second time since 2008, and the start of fresh US-China trade talks.

Saudi Arabia reported to have restored production

In the first two cases, the impact on markets was short-lived – after a brief spike upwards in oil prices following the drone strike in Saudi Arabia and a push on local oil-related stocks, activity in the sector quietened down towards the end of the week.

Observers however, are waiting to see what action the US and Saudi Arabia will take against Iran, which the US said was responsible for the attack. “The market is certainly setting itself up for a surprise, considering it isn’t really pricing in that geopolitical risk premium at the moment’’ said Daniel Hynes, a senior commodity strategist at Australia and New Zealand Banking Group in Sydney who was quoted in a Bloomberg news report.

The US Fed lowered rates – as expected

As for the US interest rate decision, it also led to a muted response since Fed chief Jerome Powell a few weeks ago had already strongly signalled a rate cut would be delivered at last week’s meeting.

However, although the cut had been widely anticipated, US government debt yields fell Thursday after the Federal Reserve failed to signal further rate cuts in 2019, disappointing some investors who had been hoping for hints at looser monetary policy.

Edward Moya, senior market analyst at Oanda, said the Fed could regret not being more forthcoming. “Its lack of conviction in signalling more rate cuts will probably be a policy mistake that is wasting the effectiveness of the first two cuts’’ he said in a note. “The Fed seems set on waiting for a couple of geopolitical risks to rattle the economy before committing to a full-fledged easing cycle’’.

While there have been no major economic developments, analysts say  Middle East tensions have helped increase demand for safer assets such as Treasuries.

Fed officials were split over Wednesday’s decision to cut rates. Seven of 10 officials voted in favour of lowering the short-term benchmark to a range of 1.75-2%.

The policy statement released after the meeting was little changed from July, indicating the Fed “will continue to monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion.”

US-China trade

Markets had been hoping of a breakthrough in US-China trade when fresh talks were announced a few weeks ago in the US. However, hopes took a hit on Friday when the Chinese delegation cancelled a scheduled visit to a Montana farm. Wall St stocks fell in response and chances are there will be sympathetic selling here in the early part of this week.

How the local market fared

Other than Friday when there was a surge of trading in Reits that took dollar volume to $1.62b, trading volume in the local market remained within subdued recent levels, averaging $1b daily, and activity was described by brokers to be “situational’’, ie focused on tradeable news.

One example was China shipbuilder Yangzijiang, which has topped the actives list for several weeks now, after news that its chairman was assisting the Chinese authorities with an official investigation. On Friday, it fell 5 cents to $1 on volume of 39.3m.

Another counter in play was TEE International, after it said on Monday that its controlling shareholder Phua Chian Kin will be selling 150m TEE shares or a 23% stake, for $9m. Mr Phua has been in the spotlight for allegedly instructing unauthorised transactions totalling $6.55m made by TEE subsidiaries to related parties.

Golden Agri-Resources also saw action. Indonesia’s prolonged drought has been hurting the yield at the palm oil company – it recently reported a second-quarter loss and said it is lowering its full-year production guidance.

UOB Kay Hian Research on Tuesday downgraded the local property sector to “market weight’’. It noted that August saw robust private home buying year-on-year and said it does not expect the government to rein in demand in the near future, given that the next general elections are expected to be held in the next six months.

We have lowered our rating on the property sector as Singapore property developers appear to be trading at fair price/book valuations at present’’ said the broker.