Date: October 8, 2018
- STI dropped 1.5% over the week with Jardine and banks the main drivers;
- Turnover remained low at an average of $930m per day;
- Wall St hit record highs in first half of week, but slumped in the second;
- US-China tiff overshadowed by new trade agreement with Canada;
- EU’s problems with Italy also figured;
- US Treasury yields rose to 7-year high;
- Latest US jobs report suggests very tight labor market.
Jardine stable and banks were index’s primary movers
Over the course of the week the Straits Times Index suffered a 48-points or 1.5% loss at 3,209.79 most probably because of weakness in the US bond market. This means the 4Q kicked off on a weak footing. However, the index’s resilience midweek when it rose 25 points on Wednesday was likely thanks to investors keeping one eye on Wall Street’s fresh record highs, where although trade concerns between the US and China were still in focus, they were over-shadowed by news that the US during the week managed to reach a trade agreement with Canada after months of wrangling.
The former deal was known as NAFTA (North American Free Trade Agreement) whilst the new pact is now called USMCA (US-Mexico-Canada-Agreement).
Turnover however, has been nothing to shout about, with the dollar value of daily business done clocking in at a low of $765m on Monday when the Hong Kong and China markets were closed, to a high of $1.1b on Thursday. The daily average was $930m and as a point of reference, most brokers estimate $1 billion to be the industry’s ballpark breakeven volume.
The selloffs that came on Thursday and Friday were most probably in tandem with a sharp rise in US bond yields that brought pressure to bear on US stocks.
As always, the STI’s movements were dictated by a small handful of large caps, most notably the banks and the Jardine group. In the latter category however, it was Jardine Cycle & Carriage (JC&C) which featured more prominently than it did in the past as opposed to the more commonly-seen Jardine Matheson (JMH) or Jardine Strategic (JSH) possibly because of Cycle & Carriage’s Indonesian exposure, concerns over the Indonesian economy and the rupiah’s persistent weakness over the past few months.
On Friday when the index dropped 21.8 points, the top four losers were from the Jardine stable – C&C, JSH, JM and Dairy Farm International.
Second line activity was marked by rotational plays that involved a variety of low-priced counters such as Ezion, Nam Cheong, Jiutian Chemical and Nico Steel. In the technology sector, Venture Corp’s shares kicked off the week with an $0.89 or 5% surge on Monday to $18.52 but the momentum did not sustain as the stock ended the week at S$18.
From the manner in which trading has panned out over the past few months, it is difficult to see the STI breaking out convincingly from a trading range that spans 3,100 to 3,300. The July 6 property cooling measures have capped gains in the key banking and property sectors, whilst rising US interest rates have also been a factor. In the background is the trade war between the US and China which is widely expected to negatively affect Singapore’s open economy.
An added factor last week was the problems that have arisen in Europe between the European Union and Italy after the Italian government moved to pass a budget that did not meet the EU’s guidelines on public spending and prompted the EU’s president Jean-Claude Juncker to say the resulting Italian budget deficit will threaten the euro’s existence.
This in turn helped send the yield on Italian benchmark bonds to a four-and-a-half year high of 3.4% whilst Italian bank shares plunged. In response, the Italian deputy prime minister, Matteo Salvini, threatened to sue Mr Juncker for damages, accusing the EU president of pushing up Rome’s cost of borrowing.
US Treasury yields continued to climb
Speaking of borrowing costs, the yield on the 10-year US Treasury on Wednesday hit 3.157%, its highest level since July 2011 and the yield on the 30-year Treasury bond hit 3.3%, its highest level since October 2014 after new data fostered views of a booming economy. Meanwhile the rate on the two-year note hit 2.864%, its highest point since June 25, 2008. Bond yields move inversely to prices.
On that day, it was announced that private companies added 230,000 more positions in September, the best gain since February and well ahead of the 168,000 jobs added in August. Analysts were quoted by news agencies as saying strong economic growth and benign inflation were the likely factors behind the strength displayed by US stocks.
The yield on the benchmark 10-year Treasury has stayed above 3% for around a fortnight now, on Thursday jumping 15 basis points to 3.21%, the highest since May 2011.
On Friday it was announced that the US unemployment rate has dropped to 3.7 percent, a level not seen in nearly 50 years, even as job creation for September fell to its lowest level in a year. The Labor Department also adjusted August’s nonfarms payroll number up dramatically, to 270,000 from 201,000.
However, more importantly was that average hourly earnings rose 8 US cents — or 0.3 percent — over the month, matching August’s gain. That brings the year-over-year increase in wages to 2.8 percent.
The report adds to the now-widespread view that the labor market is near or beyond full employment and shows wages are starting to accelerate higher, which could be a worry for the Federal Reserve trying to keep a lid on inflation.
The yield on the benchmark 10-year Treasury note on Friday rose to 3.233 percent, just off its highest level since May 2011, which it hit earlier in the session.