Trade war, inflation and interest rate concerns to set tone in FOMC month

Date: March 5, 2018

The central feature of February’s trading in equity markets was that of a complacent Wall Street shaken by a sudden surge of worry over the pace of interest rate hikes which then led to a spike up in volatility.  Although these concerns were again evident this week, adding to the market’s worries was the US’s surprise decision to impose tariffs on steel and aluminum imports on Thursday, 1 March, that set off worries of a global trade war, particularly involving China and the US.


This in turn has had significant spillover effects on all markets, including Singapore’s, where the Straits Times Index also encountered heightened swings throughout the month. Heading into March and given that the US Federal Reserve will convene its second Open Markets Committee meeting of 2018 later this month, it’s difficult to see interest rate nervousness receding, at least not significantly, especially when a trade war involving essential commodities will add to inflationary worries.

First though, the local market’s performance. Over the past week the STI dropped 54 points or 1.5% to 3,479.2, losing 34.65 points alone on Friday and bringing its year-to-date return to 2.2%. As noted in previous columns, turnover has remained above S$1 billion, though this hasn’t helped the shares of the Singapore Exchange (SGX) which remain capped by concerns over the future of its India derivatives business. On Friday, the counter ended S$0.06 at S$7.48 with 1.8m traded, still S$0.41 or 5.2% weaker than before news that the Indian exchanges will stop providing data feeds to foreign parties like SGX.

The composition of turnover can be instructive – on Wed, 28 Feb, volume was 2.1 billion units worth S$2.1 billion, for an average of S$1 per unit, suggesting greater proportional trading of larger caps on the last day of the month when we can expect either “window-dressing’’ or “month-end portfolio rebalancing’’.

The next day turnover was 2.2b units worth S$1.45b for an average of just S$0.68 per unit which indicates greater concentration on smaller caps and penny stocks. A glance at the actives list on Thursday confirmed this, with stocks like DISA (S$0.011), Sinocloud (S$0.01) and Jiutian Chemical (S$0.07) all near the top of the actives list. On Friday, business done dropped even further, down to 2.3b units worth S$1.3b for an average of S$0.56 per unit.

The three banks have been the main index drivers for the past 2-3 years and so it was again last week, their swings providing day traders with plenty of money-making opportunities provided they got the timing right. Property stocks in the meantime, appear to have regained some poise after a one-day selloff following news of an additional buyers’ stamp duty for properties above S$1m that was part of the government’s Budget announcement two weeks ago.

In the tech/electronics segment, Venture Corp has been one of the standout performers, though on Thursday it succumbed to that most famous of all market axioms, “buy in anticipation, sell on news’’ when it plunged S$0.64 or 2.3% to S$26.92 on volume of 4.1 million just after it reported a 165% rise in Q4 net profit to S$143m. For the third consecutive quarter, revenue topped S$1 billion at S$1.086b. On Friday, it lost a further S$0.08 at S$26.84 with 2.5m done.

In the oil and gas sector SembCorp Marine (SMM) has been under near-constant pressure after it reported a disappointing set of results on 22 Feb. On Friday it fell S$0.06 to S$2.02 with 12.7m traded, bringing its loss over the seven trading sessions since its earnings announcement to S$0.61 or 23%.

As for Wall Street, it’s worth noting that the 10-year Treasury yield on Friday rose six basis points to 2.868% in response to the news of the steel and aluminum tariffs. The worry here is that higher raw material costs will have to be passed on the consumer, raising inflation and slowing economic growth.

Add to this the US’s recent tax cuts which in an economy operating at full employment will raise inflation fears even more and it’s very likely that the US Federal Reserve will raise rates at its 20-21 March meeting. In the federal funds futures market the current probability of a rate hike at that meeting is 83%.