Date: May 28, 2018
- Easing of US-China trade tensions helped week get off to firm start;
- Hyflux’s problems took a toll on sentiment;
- Fed’s dovish minutes helped prop up Wall St;
- Cancellation of US-North Korea summit brought pressure as week progressed;
- SGX embroiled in legal tussle with India’s National Stock Exchange;
- Straits Times Index traded within narrow range, dropping 16 points or 0.5% over the week at 3,513.23;
- MTI revised full-year domestic growth upwards to 2.5-3.5%;
- Daily trading volume averaged S$1.09b.
US-China trade war
Last week’s report discussed geopolitical concerns as possibly making a comeback and as things turned out, the week was book-ended by two such worries. Trading kicked off with news that US Treasury Secretary had said that the US is “putting a trade war on hold’’, referring to planned tariffs against China.
This brought the buyers out in force (and probably triggered short sellers to quickly over their positions), pushing stocks up on Monday. The Straits Times Index, which often moves in tandem with the Dow futures, rose about 19 points that day and later when US trading commenced, the Dow itself added almost 300 points.
Investors however, should note that putting tariffs on hold means temporarily setting aside punitive action for the time being, and that the war of words could very well resume soon. Moreover, most analysts reckon that so far, China is ahead on the trade war front.
The water treatment specialists, a long-time favourite of investors, shocked the market when it suspended trading of its shares on Tuesday and announced it has applied for court protection in order to sort out its finances and creditor claims.
Over the ensuing 30 days, the company has to formulate a convincing business plan to convince its key lenders and the Singapore High Court that it deserves a 6-month moratorium to revive its business and reorganize its debts.
According to a news report on Thursday, Hyflux has not generated positive cash flow from operations since 2009 and the situation has been deteriorating since then. (“Can Hyflux get it right this time?” Business Times. 24 May). The report also stated that the company’s net debt stood at 32 times EBITDA (earnings before interest, taxes, depreciation and amortization), versus just 5.4 times in 2016.
Coming only a few weeks after the market was shocked by governance worries surrounding similar market favourites Midas Holdings and Trek 2000, observers say investor confidence will be shaken by Hyflux’s news.
Released on Wednesday, the minutes of the latest US Federal Open Markets Committee meeting indicated that Federal Reserve officials would be content to let inflation briefly run above their 2 percent target as the economy continues to recover. This was received positively by Wall Street, as was the signal from the minutes that there is going be to a June interest rate hike.
Though Fed officials indicated in March that a total of three rate hikes this year were likely, traders in the fed funds futures market in recent days briefly put chances of a fourth hike above 50 percent. That probability has since declined to about 43 percent.
US-North Korea talks cancelled – or are they?
Early in the week the market got wind of a likely cancellation of the 12 June meeting between the US and North Korean leaders when US President Trump said the event may be delayed or put on hold.
Confirmation that the summit was off came on Thursday when Mr Trump issued a letter to North Korea’s Kim Jong Un cancelling the meeting, citing “tremendous anger and open hostility’’ shown by recent North Korean statements. Pyongyang’s vice foreign minister Choe Son Hui recently called US Vice President Mike Pence a “political dummy” for comparing North Korea with Libya recently.
News that the talks will not happen dragged Wall Street lower on Thursday. The STI on Friday fell 15.69 points to 3,513.23, bringing its loss for the week to 16 points or 0.5 per cent.
On Friday however, it was reported that the talks may be revived after conciliatory overtures by North Korea.
SGX and India
The Singapore Exchange (SGX) during the week reported that the National Stock Exchange (NSE) of India has filed a legal injunction to stop SGX from launching derivative contracts on Indian stock market indices.
This was the latest development in a dispute that started in February when NSE announced it would axe licensing agreements with overseas exchanges, a move seen as part of a plan to keep money within the country and promote a tax-free trading zone in Prime Minister Narendra Modi’s home state.
Although SGX has responded that it is confident of going ahead with its 4 June launch, its shares have suffered, dropping $0.12 or 1.6% on Friday to S$7.39 with 2.2m traded. On Tuesday when it made the announcement, its shares lost 2.1%. For the week, they fell 3.4%.
Domestic growth revised upward
On Thursday the Ministry of Trade and Industry (MTI) announced that Q1 GDP grew 4.4 per cent, and that full-year growth is expected to be 2.5-3.5 per cent. It had previously forecast the full-year figure to be “slightly above the middle’’ of 1.5-3.5 per cent.
The last time MTI revised the full-year estimate based on Q1 data was 2011 when it also lifted the range.
The week ahead
Wall Street is closed on Monday for Memorial Day, so the local market will likely trade within a narrow band in low volume. Developments on the US-North Korea front will be keenly followed, although even if the talks are revived, it remains to be seen whether they could be cancelled again.
In a fortnight the US Federal Reserve meets for its next Open Markets Committee meeting and markets are currently pricing in a 90% chance of a rate hike, down from 100% the previous week. The fall is likely because of the dovish stance displayed in the latest Fed minutes.