Trade wars + privacy breaches + more Trump resignations/sackings = more volatility

Date: March 26, 2018

In the meantime, Mr Trump’s withdrawal of the US from the TPP (Trans Pacific Partnership) agreement was dismissed as having not much consequence for the country.

About 14 months after Mr Trump came into power and trade war fears have returned. The selling equity markets suffered on Thursday and Friday was widely attributed to those worries, though one has to wonder why the market only reacted last week when the US’s intention to impose tariffs on steel and aluminum – widely attributed as targeting China – was announced more than a fortnight ago, over the weekend of 3-4 March.

Whatever the case, China’s ambassador to the US, Cui Tiankai, last Thursday was quoted by Bloomberg news saying that his country does not want a trade war but is not afraid of one, adding that the US’s claims of intellectual property violations are “groundless” and that China will “fight back and retaliate”.

Cui also said Trump’s trade sanctions against China make “no economic sense” because the escalating conflict “will affect the daily life of American middle-class people, the balance sheet of American companies and the indexes of the financial market”.

The latter certainly was the case, as a market that looked like returning to its pre-January complacent self was jolted by those comments and a spike up in the VIX Index, sometimes known as the “fear” index, by a huge 5.48 points or 30.68% on Thursday to 23.34. On Friday it continued to rise, up 6.5% to 24.87.

The VIX measures the options market’s estimates of future volatility; a low reading is often equated with heightened complacency whilst a high reading suggests fear.

Also notable was that bond prices remained steady, with the 10-year Treasury slipping marginally on Friday from 2.82% to about 2.81%, the support suggesting a modest flight to safety took place amidst turmoil in stocks.

The second troubling development came early last week when it was revealed that a UK political consulting firm Cambridge Analytica had obtained personal information of Facebook users without the latter’s permission, possibly to aid the Trump presidential bid. Concerns that Facebook users could abandon the social media platform have led analysts to downgrade the stock, prompting a selloff that has seen its price fall about 10 per cent in three sessions.

Observers also noted that Facebook’s CEO Mark Zuckerberg’s Wednesday statements about the data leak did little to address criticism over how the company deals with privacy issues.

The third developments of concern also come from the US, where there were a series of sackings and resignations associated with Mr Trump. The first was the firing of deputy director of the FBI, Andrew McCabe, just two days before he was due to retire. According to most news reports, his departure was likely linked to the ongoing investigation into Russian meddling with the 2016 US presidential election, though the reason given was that Mr McCabe “lacked candour” when questioned under oath.

Also worrying was the resignation of lawyer John Dowd who was Mr Trump’s legal adviser for the Russian investigation, followed by national security adviser HR McMaster.

There was a fourth major market-moving occurrence during the week but with everything else that happened, it had less of an impact than it should. We’re referring to new US Federal Reserve chairman Jerome Powell’s first Open Markets Committee meeting in which the Fed did the expected when it raised interest rates by 25 basis points but then confused the market with its comments and projections. As things stand now, opinions are split over whether there will be two or three more hikes in 2018.

All of the above added up to weakness for Wall Street, where the Dow Jones Industrial Average lost 1,413 points or almost 6% over the week. Meanwhile, the Straits Times Index fell for four of the five days, with Friday’s 69.98 points or 2% drop to 3,421.39 taking its loss for the week to 91 points or 2.6 per cent.

Volume for most of the week was low – between Monday and Thursday, dollar business averaged S$950 million, below the S$1b the industry needs to break even. On Friday however, 1.9 billion units worth S$1.9billion was done, indicating heavy selling of blue chips.

Among the stocks in the news was financially-strapped Noble Group, which is being sued by substantial shareholder Goldilocks over allegations that Noble inflated its profits to raise money. The suit also alleges management paid themselves inflated salaries, and then tried a cover-up when the accounts came under increased scrutiny.

Noble later in the week it is likely to be able to continue as a going concern as there are reasonable grounds to expect its restructuring to be successful. It also warned that attempts to wind it up would be very difficult and fraught with complex legal challenges. The commodities trader has defaulted on bond payments in the past few weeks.