The STI and 3,200 – still a work in progress

Date: March 25, 2019

  • The Straits Times Index gained 12 points or 0.4% over the week at 3,212.1;
  • US-China trade talks – still no deal;
  • Support for Wall Street came from a dovish FOMC;
  • US yield curve inverted on Friday, stocks sold off on worries of a recession;
  • Companies in focus – Best World, Hyflux, Yuuzoo


The STI has struggled with the 3,200 mark

For several weeks the Straits Times Index has been unable to push convincingly above the 3,200 level, regularly breaking below to around 3,190 before rebounding. A major reason for this indecision is the on-off-on again trade negotiations between the US and China – in fact, investors could be forgiven for having grown tired of the ongoing trade saga that have dragged on for almost two years.

During this time, markets have wondered if a mutually acceptable deal would ever be reached, with prices rising every time a “breakthrough’’ is announced, only to fall back when investors learn that no such thing actually occurred. Last week, the STI traded within a tight range before ending at 3,212.10, a 12 points or 0.4% rise for the five days.

US-China trade – still no deal

On Tuesday, reports emerged that Chinese officials have shifted their stance because after agreeing to changes to their intellectual-property policies, they haven’t received assurances from the Trump administration that tariffs imposed on their exports would be lifted.

According to a Bloomberg report, Beijing has also stepped back from its initial promises over data protection of pharmaceuticals, didn’t offer details on plans to improve patent linkages, and refused to give ground on data-service issues. Also, Beijing is trying to bring in wording that would ensure rules in the trade agreement have to comply with Chinese laws.

Despite US trade personnel maintaining their stance that progress is being made, US President Trump on Thursday said he expects tariffs on China to remain for a “substantial time’’.

Stocks enjoy FOMC support

The US Federal Reserve Open Markets Committee meeting kept interest rates on hold and said “in light of global economic and financial developments and muted inflation pressures, the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate to support these outcomes’’.

In a media briefing accompanying the announcement, Fed chair Jerome Powell said “it may be some time before the outlook for jobs and inflation calls for a change in policy’’.

This statement was widely interpreted as meaning the Fed will probably not raise rates again, perhaps even for the rest of the year. However, although stocks have risen in response, it’s worth noting that the core reason for the Fed’s policy is a slowing global economy, which is very possibly affecting the US as well.

Yield curve inversion and the “R” word

All three major U.S. stock market indexes took a downturn on Friday, as investors responded to one of the key recession indicators: the so-called inversion of the yield curve between the 10-year and three-month Treasuries.

The yield curve is the difference between the yields on longer-term and shorter-term Treasuries. A yield curve inversion happens when long-term yields fall below short-term yields. It has historically been viewed as a reliable indicator of upcoming recessions.

The reason is that whilst the short-term side of the yield curve is mainly driven by Federal Reserve policy that reflects current economic strength, the long-term end of the yield curve—10-year Treasuries and further out—is thought to indicate bond investors’ long-term views of the market.

If bond investors are bullish on the economy and believe interest rates will go up, they are more willing to hold short-term bonds and hope to enjoy higher yields later on. However if bond buyers believe the economy is heading downward and interest rates are likely drifting lower, they’d prefer to hold the longer-term bonds in order to lock in the current higher yields. Since bond prices and yields move in opposite directions, buying of long-term bonds pushes the price down – and in this case, to below the 2-year yield.

Stocks in focus

Beauty products seller Best World on Tuesday announced it is appointing Pricewaterhouse Coopers (PwC) to examine Best World’s franchise model, especially in China. This was in response to a Business Times article recently which questioned the model. The objective of the review is to verify the existence of franchisees and to identify internal control weaknesses or any other regulatory breaches.

Hyflux returned to the headlines when its white knight, Indonesian SM Investments (SMI) said that the default notice served on Hyflux’s subsidiary Tuaspring Pte Ltd by national water agency PUB could see SMI withdrawing its financial support. However, PUB on Thursday said SMI should not use the default notice as an excuse to withdraw because PUB would only take over Tuaspring’s desalination plant and not the power plant.

PUB said if this occurs, Hyflux itself has pointed out that the move would be beneficial to Tuaspring, which should then increase the chances of Hyflux’s restructuring proceeding.l

Also in the news was social media firm Yuuzoo. Early in the week it was reported that the company had vacated its flagship offices without settling its rent. A few days earlier, its chief executive resigned.