Trade, tech earnings and weak oil – a triple whammy for stocks

Date: November 26, 2018

  • STI fell 1% over the week in line with turmoil on Wall St;
  • Turnover was below $1billion every day;
  • Concerns range from US-China trade war to technology sector earnings to weak oil;
  • Bond prices were steady;
  • Best World and Noble Group provided the local market’s main focus.

Wall Street’s worst Thanksgiving week since 2011 meant that the Straits Times Index also underwent a similarly torrid time, the index coming under severe pressure on Monday and Tuesday that saw it come close to breaking below the 3,000 mark. A rebound on Wednesday that came because of a jump up in the Dow futures helped ease some pressure, but Wall Street’s indifferent performance later that day meant the market remained nervous.

Over the course of the five days, the STI fell 31 points or 1% to 3,052.4. Volume was weak, ranging between a low of S$531 million on Friday ahead of the US market’s half-day trading later that day, to S$925m on Tuesday. It was the first time in several years that daily turnover was below S$1b every single day of the week. As for the main index movers, these were from the Jardine group, whilst the banks played a secondary role.

Reasons for nervousness – China-US trade war, falling oil, tech earnings?

You could take your pick among several possible reasons for why the market is nervous. The main one of course, is the ongoing trade war between the US and China – one side still calls the other a “thief’’ and the other has responded with “bully’’. Ahead of a G-20 summit later this month in Buenos Aires when leaders of both nations will meet and probably discuss trade, strong words continued to be exchanged about tariffs and the finger pointing continued.

Last week, Commerce Secretary Wilbur Ross said that the U.S. still planned to raise tariffs to 25% from 10% on US$200 billion worth of Chinese products on Jan. 1. After the United States Trade Representative accused China of continuous unfair trade practices in a Tuesday statement, China’s Commerce Ministry rejected the criticism as “groundless” and “totally unacceptable” and warned the U.S. that such words would “damage bilateral economic and trade relations.”

Even if President Trump and Xi Jinpeng announce a deal, markets will surely wonder whether to believe it or not. This is because there have been numerous deal breakthroughs which have been announced over the past year but nothing positive has actually materialized.

In his “The art of the flail’’ published in April this year, Nobel prize-winning economist Paul Krugman said the Trump administration really doesn’t know what it wants when it comes to trade or wants things that the US’s trading partners cannot deliver.

As a result, incoherence rules: the administration lashes out, then tries to calm markets by saying that it might not carry through on its threats, then makes a new round of threats’’.

On the subject of Mr Trump’s claim that China’s US$500b trade surplus with the US meant that China was “winning’’, or effectively stealing from the US, Mr Krugman said the figure was actually US$340b and described the claim as “junk economics’’.

“Except at times of mass unemployment, trade deficits are not a subtraction from the economies that run them, nor are trade surpluses an addition to the economies on the other side of the imbalance’’.

“Overall, the US trade deficit is just the flip side of the fact that America attracts more inward investment from foreigners than Americans invest abroad. Trade policy has nothing to do with it. Beyond this conceptual confusion, there’s a raw fact that few people – and as far as I can tell, nobody in the Trump administration – seem to appreciate: China no longer runs big trade surpluses’’.

In “Trump’s protectionist quagmire’’ in last Thursday’s Business Times, the former chief economist of the World Bank Ann Krueger said the US’s steel tariffs will neither reduce the US current account deficit not create more net jobs. “The deficit reflects the difference between domestic savings and investment, import tariffs will have no effect on that, but they will certainly raise costs for American consumers and producers’’ said Ms Krueger.

A second possible reason for market nervousness is earnings, mainly in the technology sector, and primarily in the FAANG stocks – Facebook, Apple, Amazon, Netflix and Google. Apple has been the focus over the past fortnight on concerns over demand for its iPhone products and its slide has weighed heavily on sentiment. Other than tech giants, Goldman Sachs’s shares have also been sliding on concerns over the bank’s links with Malaysia’s controversial sovereign wealth fund 1MDB.

A third reason is falling oil prices which has meant offshore and marine stocks have been hit – on Friday alone, crude oil collapsed 7% to US$50, the lowest in a year – whilst lurking in the background are rising interest rates and a US Federal Reserve that last week was again criticized by Trump for monetary tightening.

Bond prices were steady

Throughout the turmoil on Wall Street, bonds provided the safe haven. The 10-year Treasury yield slipped slightly over the week from 3.067% to 3.039% whilst the 2-year yield ended at 2.816%.

In local news – Best World continued to astound; Noble’s stakeholders were shocked

One of the local market’s outstanding performers over the past week has been beauty products and multilevel marketing firm Best World, probably thanks to a decent set of earnings figures which have prompted “buy’’ calls from analysts. However last week saw it experience heightened volatility – on Tuesday the stock crashed S$0.23 or 10.6% to S$1.95 with 22.7 million traded, before rebounding smartly on Wednesday and Thursday. It ended the week at S$2.24, a gain of S$0.13 or 6.2% for the week.

Among the brokers which are positive on Best World are RHB and CIMB, with target prices are S$2.13 and S$1.90 respectively.

The other news item that stood out was an announcement by the Commercial Affairs Department, together with the Monetary Authority of Singapore and the Accounting and Corporate Regulatory Authority (ACRA) that they are jointly investigating debt-ridden commodity trader Noble Group for suspected false and misleading statements and breaches of disclosure requirements under the Securities and Futures Act.

Noble’s wholly-owned subsidiary Noble Resources International (NRI) is also being investigated for potential non-compliance with accounting standards under section 201 of the Companies Act. ACRA has notified NRI’s directors that it has found suspected breaches of the Act and has required the directors to furnish further information as part of the ongoing investigation.

“This follows an extensive review of the financial statements of NRI for the financial years ended 31 Dec 2012 to 2016’’ ACRA said. The news came just a week before a new Noble was expected to be listed, reborn after an extensive debt revamp.