Trade war worries dominate

Date: June 25, 2018

  • The tit-for-tat war of words between US and China on trade escalated;
  • The Dow fell for 8 consecutive days;
  • US Treasuries benefited as safe havens;
  • The STI fell 69 points or 2% over the week as Singapore’s economy among most affected if US-China trade war erupts;
  • Breathing space for Hyflux and Noble whilst Venture continued to slide.

Trade tensions continued

The central theme of last week was the ongoing trade war between US and China which dragged equities lower globally – in the US for example, the Dow Jones Industrial Average fell for eight consecutive days up till Thursday.

US-China trade tensions have periodically been a factor in daily trading over the past 18 months and worries were revived when the Trump administration announced tariffs on US$50b worth of China imports (mainly steel and aluminum) followed by threats of a further US$200b when China retaliated.

China then responded by accusing the US of “blackmail”, raising fears of a full-blown trade war. Its commerce ministry said the country would take “qualitative” and “quantitative” measures and “fight back firmly” against additional tariff measures by the US government.

As a result, US car makers were among the worst affected during the week as worries grew over their earnings if China slaps retaliatory import duties on vehicles made in the US. The Dow Jones Industrial Average fell for 8 straight sessions prior to its modest rebound on Friday.

The Straits Times Index in the meantime, lost 69 points or just over 2% at 3,287.4. Average daily volume traded was worth S$1.2b.

Perhaps the only beneficiary throughout the ongoing trade spat has been US Treasuries, as the week-long slump in equities has prompted a flight to safety – the 10-year yield has backed away from the 3% mark and closed Friday at 2.895%.

Singapore vulnerable

In assessing which economies could be most impacted by a US-China trade war, Schroders in its June Talking Point said the immediate damage is focused chiefly on Emerging Markets (EM) in Asia, while relatively closed economies such as Brazil and India should be more insulated than other economies in the event of a more global trade war.

Furthermore, it is apparent that tariffs on Chinese exports are much more consequential for EM than those on US exports, and that the pain is likely to be concentrated in Asian EM

said Schroders.
In its analysis, Singapore ranks as the 6th most affected by Chinese tariffs on US goods, after Canada, Mexico, Columbia, Saudi Arabia and Ireland in terms of impact on GDP.

However as for US tariffs on Chinese goods, Singapore ranks as 3rd most affected, after Taiwan and Malaysia.

Market performance since steel and aluminium tariffs were announced suggests only limited concern about trade tensions, with the global index grinding higher. However, compared to performance in 2017, gains this year have generally been mediocre, and much more volatile. Markets are perhaps not yet convinced that a trade war is inevitable, but they are equally uncertain that it can be avoided

said Schroders.

Hope rises that Hyflux and Noble can be saved; pressure on Venture continues

In local news, financially troubled firms Hyflux Ltd and Noble Group received boosts in forms of a moratorium extension for Hyflux and for Noble, an agreement from substantial shareholder Goldilocks Investments to a restructuring arrangement. In addition, Noble on Friday announced it has secured US$100m in trade financing from a consortium of exising shareholders to expand Noble’s activities in the liquified natural gas (LNG) industry.

In the case of water treatment firm Hyflux, the additional six months granted by the High Court on Tuesday gives the company time to sell off its Tuaspring water and power plant which has a book value of about S$1.3b.

For Noble, news on Wednesday of Goldilocks’ consent to the restructuring sent Noble’s shares rocketing up S$0.034 or 63% to S$0.088 on volume of 39.6m traded that day. Abu Dhabi-based Goldilocks had previously opposed Noble’s plan, one that initially gave existing shareholders only a 15% stake in the restructured firm. That figure has since been raised to 20% with Goldilocks given a board seat.

The trade financing news was welcomed by the market, Noble’s shares rising S$0.037 on Friday to close the week at S$0.141.

Among the stocks in focus over the past few weeks has been technology sector leader Venture Corp. Over the past week, the company’s shares collapsed, losing S$2.05 or 10 per cent at S$18.06 over the 5 days in relatively heavy trading.

The company in April had been the target of an online short selling report which claimed Venture’s earnings were overly dependent on one customer, Phillip Morris, and that sales of a smokeless tobacco device it makes for the latter were not great in Japan.

Looking ahead

Trade concerns are expected to continue weighing on sentiment in the week ahead. Morgan Stanley strategist Michael Zezas last week was quoted as saying markets have already priced in a growth scenario, one which is now at risk if a full-fledged trade war was to erupt. Moreover, the US tax benefits which were thought to be a tailwind for the economy could shift to being a headwind.