Date: June 11, 2018
- The Straits Times Index decoupled from Wall Street;
- Trade concerns and ECB tapering said to be playing a major part;
- G-7 summit over the weekend could shed some light on trade deals;
- Investors will look to next week’s FOMC for interest rate clues;
- All eyes will be on the Trump-Kim meeting;
- Local brokers still cautiously optimistic for Singapore market.
Over the course of the five trading days the Straits Times Index rose 8 points to 3,436.37, which brought its year-to-date performance to 0.98%. Average daily volume was S$1.11 billion.
In reporting the latest market statistics, the Singapore Exchange (SGX) said value of securities traded on 31 May at S$3.53 billion was the highest single-day total since 31 May 2013, ahead of changes from MSCI’s May 2018 semi-annual review of its equity indexes.
The exchange also reported that May’s daily average traded was S$1.34 billion, up 6% month-on-month and 6% year-on-year.
A temporary decoupling?
Traders got the impression that for the time being, activity here ran on its own steam rather than being driven by how Wall Street performed the night before or expectations of how it might perform in the session ahead. On Wednesday for example, the STI weakened 15 points in mediocre volume ahead of a large US rally that saw the Dow Jones Industrial Average gain 1.4%. On Thursday, the STI responded by rising only 5 points.
However, most observers also reckon that any decoupling can only be short-lived and that external concerns and Wall Street’s movements will, probably sooner rather than later, return to play a central role in trading here.
Trade war concerns – is the US a safe haven?
Some analysts have been quoted as saying worries over a simmering trade war between the US and China, Mexico, Canada and Europe could be affecting sentiment and placing a cap on prices here. On Thursday when US indices finished mixed – the Dow’s rise was widely attributed to a large jump in McDonald’s price that day – reports quoted observers as saying markets would be waiting for clues on the trade front from the weekend’s G-7 meeting in Quebec.
On Friday when most global equity markets ended in the red – the STI dropped 36.71 or 1.06% that day – Wall St closed higher. Reports suggested analysts were puzzled by this rise, one possibility being that in times of turmoil elsewhere, US stocks might be seen as offering a safe haven.
Schroders in its June Talking Point “Why we are shifting gears for a volatile environment” said talk of “trade wars” has been the main event of 2018.
“As the US announced its plans to impose tariffs on Chinese exports, we see this as part of a bargaining strategy on the part of the US administration, which has been quick to grant exemptions from its earlier steel tariffs and has been wary of putting tariffs on goods which the US consumer would notice”.
“These moves suggest that trade wars are not the end game here. Instead, it is likely to be a deal with China that can be held up as a victory ahead of the US mid-term elections in November”. The investment house added that it cannot afford to be complacent and have therefore increased diversification in its portfolios across asset classes.
“Based on our indicators, the traffic light is still green but expensive valuations pose a speed limit to returns and we have shifted our strategy down a gear.”
Local houses still optimistic
In its 4 June Singapore Strategy report, DBS Group Research said the fall in local stocks in May was in line with its view that the 2-mth period from May-June should be net negative in a World Cup year.
Expect trading activity to quieten further this month with the June school holidays and mid-month World Cup tournament, picking up again in early July. However, we do not see much downside for the STI following May’s tumble. Support at 3415 or slightly below, pegged to 12.76x (-0.5 standard deviation) 12-mth forward earnings
said the broker.
Also on Monday, UOB-Kay Hian said in its strategy report titled “Treading carefully after the market run” that it used an equal blend of mean price-earnings and price-book and has arrived at a year-end target of 3,720 for the STI.
“This is slightly above the STI’s 10-year high of 3,641 and would imply moderate upside, unless there is a significant upgrade in our and consensus earnings forecasts. In addition, rising interest rates could moderate economic growth and also temper rate sensitive stocks that do not deliver above-market earnings growth”.
The June FOMC
The US Federal Open Markets Committee (FOMC) meets on Tuesday and Wednesday this week to decide on whether interest rates need to be raised. A few weeks ago the market was pricing in a 100% chance that the meeting would yield a rate hike; since May’s FOMC meeting’s minutes suggested the Fed might be prepared to let inflation run for a while longer, that probability has dropped to around 91%.
The bigger question of course, would be the fate of interest rates for the rest of the year. Meanwhile in the US bond market, the 10-year yield has been creeping up and once again stands just below the 3% mark at around 2.948%.
This could be because the market strongly believes that the European Central Bank will announce it will start “tapering” or reducing its bond purchases soon, a move which could lift the lid on interest rates.