US-China tensions at the forefront again

Date: December 10, 2018

  • STI flat for week as a large early rally fizzled out when US-China problems emerged again;
  • This time it was the arrest of a key China corporate figure that sent stocks down;
  • Plunging stocks meant US bonds benefited but worries over yield curve inversion returned;
  • A weak US November jobs report cast doubt on the strength of the economy;
  • Jardine group, banks, Best World were among main plays here;
  • Regulators decided not to allow New Noble to list.


In our November monthly report last week, we stated that even if the US and China appear to resolve their differences at the G-20 summit in Buenos Aires, there was no guarantee that any agreement would last. This turned out to be the case last week.

Stocks got off to one of their best starts to a week this year when traders and investors woke to news last Monday that the US and China had agreed to a 90-day truce in their ongoing trade war. In response, the Straits Times Index on Monday rose 73 points or 2.3% to 3,190.62 and the Dow Jones Industrial Average later that day gained 288 points or 1.1% at 25,826.

On Tuesday, Wall Street collapsed – the Dow plunged 800 points or 3.1% to 25,027 and bond yields ticked lower again, the 10-year ended at 2.915% and the 2-year at 2.795%. The impact here was relatively muted on Wednesday, the Straits Times Index first dropped 30 points but a rise in the Dow futures that came despite the US market being closed on Wed in memory of the late President George Bush, meant that the STI’s final loss that day was just 11 points.

Over the course of the week, the STI added 2 points at 3,111.12. Daily volume was poor, falling below $900m on Wed, Thurs and Fri.

US-China tensions returned after Huawei CFO’s arrest

On Thursday however, volatility returned after the US requested the arrest in Canada of the chief financial officer of China’s technology giant Huawei for allegedly breaching US sanctions against Iran.

Ms Meng Wanzhou, who is the daughter of Huawei’s founder, was detained at Vancouver airport on Saturday on an extradition request from the US.  China has demanded her release, calling the arrest a human rights violation.

Commenting on the arrest, Karishma Vaswani, BBC Asia Business Correspondent said it is hard to overstate the symbolism and significance of this event.

Huawei is the crown jewel of Chinese tech and Ms Meng is effectively its princess. Even though it’s still not clear what the charges against her are, this is not simply a case about the arrest of one woman, or just one company. This arrest could materially damage the relationship between the US and China at possibly one of the most sensitive times between the two countries in their long and torrid history’’ wrote Ms Vaswani.

 “The gloves are off. Things have taken a dramatic turn for the worse’’.

 US yield curve inversions

Keen-eyed traders however, would have seen that on Monday, bond prices rose, and yields fell, signaling a flight to safety and suggesting not all was as well as the equity indices were indicating – the 10-year US Treasury slipped below 3% at 2.97%. Also significant was that the 2-year yield rose slightly to 2.87%, the narrowing gap between the two stirring worries of a yield curve inversion, a phenomenon that is often interpreted to signal a forthcoming recession.

In “Flattening yield curve just produced its first inversions’’ by Bloomberg news agency on Tuesday, it was reported that a section of the yield curve had inverted for the first time in a decade.

“The spread between 3- and 5-year yields fell to -1.4 basis points on Monday, dropping below zero for the first time since 2007, and the 2- and 5-year gap soon followed. The 2- to 10-year is more closely watched as a potential indicator of pending recessions but Monday’s move could be the first signal that the market is putting the Federal Reserve on notice that the end of its tightening cycle is approaching’’ reported Bloomberg.

However, analysts were also quoted as saying the short-end’s underperformance could be because of demand for riskier assets, following the easing of trade tensions between the US and China.

Whatever the case, the shift of money into Treasuries continued throughout the week, with the 10-year yield falling steadily over the five days. On Friday, the 10-year yield closed at 2.851% after having started the week at 3.032%.

Weak US jobs report – good or bad for stocks?

On Friday, the US Labor Department reported that only 155,000 non-farm jobs were added in November, way below the 200,000+ in previous months. Also, October’s figure of 250,000 was revised down to 237,000.

Some reports attributed Wall Street’s Friday selloff to disappointment over the weakness in jobs that could signal underlying economic softness, but this explanation doesn’t fit with the fact that a slowing economy suggests that the US Fed will have to reduce the pace of its interest rate rises. Whatever the case, all eyes will be on the next Fed meeting on 18-19 Dec.

Local stocks in focus: Jardine group, banks, Best World – and Noble

The main index movers throughout the week were the banks and Jardine stocks, most notably Jardine Matheson and Jardine Strategic. Outside of blue chips, multilevel marketing firm for beauty products Best World International’s shares continued to defy gravity when they rose for four of the five days. They closed at $2.59 on Friday, a rise of $0.21 or 8.8% over the week.

In other news, the Monetary Authority of Singapore, (MAS), SGX and the Singapore Police Force on Thursday released a joint statement that they have decided not to allow Noble Group Limited (NGL) to transfer its listing status to New Noble as part of NGL’s proposed restructuring.

This follows a careful review of the findings to-date from the ongoing investigations into NGL and Noble Resources International Pte Ltd (NRI) by MAS, the Commercial Affairs Department (CAD) of the Singapore Police Force, and the Accounting and Corporate Regulatory Authority (ACRA)’’ the statement said, adding that here could be significant write-downs in New Noble’s net asset value arising from investigations by CAD and MAS that extend beyond the potential non-compliances with accounting standards highlighted by ACRA.

As a result, the decision was made not to allow the new entity to list as trading would not have been on an informed basis.