Uncertainty over geopolitics and trade wars rule the day

Date: June 1, 2018


  • A strong start to the month, followed by a weak finish – the STI lost 5%;
  • Malaysia’s general elections yielded an upset win for Opposition;
  • US-China trade war put on hold (but not for long);
  • US-North Korea meeting may or may not happen;
  • Italy’s potential departure from eurozone emerged as latest geopolitical worry;
  • Hyflux filed for court protection, SGX dispute with Indian exchange goes to Indian court

Strong start, weak finish; US pulls out of Iran nuclear deal

Trading in the local market got off to an encouraging start last month when the Straits Times Index closed at a ten-year high of 3,615.28 on Wednesday, the 2nd of May. Volume done that day was S$1.8 billion – significantly above the broking industry’s unofficial breakeven figure of S$1 billion but very likely artificially elevated by spillover “portfolio rebalancing’’ or “window-dressing’’ from 30 April. Two days later volume done dropped sharply to S$1.2 billion.

However, on 31 May, month-end “portfolio rebalancing” saw volume reach the highest for the year, at 2.7 billion units worth S$3.53 billion.

On Monday 7 May, oil prices rose to a 4-year high of US$70 per barrel, bringing the gain to about 13% in three weeks. This came in tandem with strength in the US dollar, leaving many analysts puzzled as rising oil usually comes with a weaker dollar.

Adding to the upward momentum in oil was news on 8 May that the US was pulling out of its Iran nuclear agreement, a move which pushed the price to US$73 per barrel. The 10-year Treasury yield, which had slipped slightly below 3% at that point, rose closed at 3.006% on 9 May, rising to 3.082% on 15 May, the highest since July 2011 after March’s retail sales figure was revised higher.

On 16 May, the 10-year yield rose to 3.1% after the Atlanta Federal Reserve’s Raphael Bostic said it was his job to prevent the yield curve from inverting, a phenomenon often associated with an impending recession. A day later on 17 May, the 10-year yield closed at 3.115% and the 2-year yield ended at its highest since Aug 2008, 2.598%.

The trigger for the bond selloff was worry that a tight labour market (one nearing full employment) where wages were rising would mean rising prices and therefore inflation.

All yields however, dropped sharply in the final days of the month, courtesy of a flight to safety brought on by Italian political turmoil (see below).

Malaysian elections

On 9 May, Malaysia held its 14th general elections, which many observers thought would be won by the ruling Barisan Nasional (BN) party. As it turned out, the elections were won by the main opposition coalition Pakatan Harapan, led by the 92-year old former Prime Minister Mahathir Mohamad.

It marked a historic defeat for the ruling BN coalition, which had been the governing party of Malaysia since independence in 1957. It also raised concerns among analysts that investors might pull money out of the country.

The initial signs were that this was indeed the case. According to The Business Times, as of May 21, foreign outflows from stocks stood at US$21.2 million, after overseas investors sold a total of US$949 million worth of stocks in 11 straight days. It added that Malaysia had enjoyed inflows amounting to US$2.4b in 2017. (“Malaysia’s foreign stock inflows for 2018 just got wiped out”, BT 22 May).

US-China trade war on hold (maybe), ditto for North Korea summit (maybe)

On 21 May, US Treasury Secretary Steven Mnuchin said the US was “putting the trade war with China on hold’’, a declaration that helped boost market sentiment. This proved short-lived though – on 31 May, the US announced steel and aluminium tariffs that sparked worries of retaliatory measures from China, Mexico and Canada.

US President Trump on 22 May said the planned talks with North Korea scheduled for 12 June in Singapore might be “delayed or put on hold’’. What appeared to be confirmation that the talks were cancelled came on 24 May when Mr Trump sent a letter to his North Korean counterpart Kim Jong Un, citing “tremendous anger and open hostility” by Mr Kim’s administration as the reason.

A few days later though, Mr Trump said conciliatory overtures from Pyongyang meant that the talks might still take place as planned. As the month drew to an end, stronger signs emerged that the meeting might go ahead as planned.

Italian politics and global trade war worries to the fore

Italy moved to the foreground as the latest source of angst for markets after President Sergio Mattarella on Sunday 27 May blocked the formation of a government that would have been decidedly against the euro.

The anti-establishment 5-Star Movement, Italy’s biggest party, and the far-right League party picked euro critic Paolo Savona as their economy minister. The two parties had won more than half the votes in March’s parliamentary elections. Mr Mattarella however, vetoed the choice and instead asked Carlo Cottarelli, a former IMF official, to form a temporary government. Both parties object to Mr Cottarelli and a new vote is now expected in late July.

Investors believe the election – which sources said could be as early as July 29 – will deliver an even stronger mandate for anti-establishment, eurosceptic politicians, casting doubt on the Italy’s future in the euro zone.

On Tuesday 29 May, a huge Italian bond selloff sparked contagion worries and a flight to safety, mostly US Treasuries. Wall Street’s major equity indices all dropped sharply and on Wednesday, the Straits Times Index suffered a 75 points or 2.1% loss at 3,443.95. Even though Wall Street rebounded that day, it then plunged again on Thursday – reportedly because of trade war worries.

Local stocks in focus – Hyflux, SGX

Water treatment specialists Hyflux shocked the market on 22 May when it announced it has applied for High Court protection from its creditors for 30 days in order to reorganise its debts. The firm has appointed WongPartnership as its legal advisers and Ernst & Young Solutions as its financial advisers.

In the weeks to come, it will apply to extend the protection for six months. In a letter to shareholders, Hyflux’s executive chairman and group chief executive, Ms Olivia Lum, said in taking a step back to “assess holistically” how to reorganise its liabilities, the group stands to protect the viability of its core businesses and position itself for long-term growth that is sustainable.

Meanwhile, the Singapore Exchange announced that it will head for arbitration in India to resolve its dispute with the National Stock Exchange (NSE) of India over launch of SGX’s India derivative products.

NSE has sought to block SGX’s 4 June launch by filing an injunction in the Bombay High Court last week. In February, NSE said it was ending all licensing agreements with overseas exchanges and would stop providing a live price feed for those exchanges.