US-China trade, HK unrest were key factors

Date: November 25, 2019

  • The STI dropped 13.21 points or 0.4% over the week to 3,225.65;
  • Mixed signals from US-China trade talks was one factor;
  • Rising unrest in HK was the other;
  • Also contributing was US bill supporting HK protestors;
  • Fed minutes suggests US interest rates are on hold for now;
  • Worst may be over for local economy;
  • Morgan Stanley upgraded banks

Despite a 33.44 points, or 1.1% rebound on Friday, the Straits Times Index last week recorded an overall 13.21 points or 0.4% loss at 3,225.65.  There were two main reasons for the weakness – a lack of progress on the US-China trade front and escalating unrest in Hong Kong.

Both factors are actually not new. Trade negotiations between the two superpowers have dragged on for more than two years now and despite both sides occasionally placing a positive spin on the talks, there has really been little genuine progress.

As for Hong Kong, the situation there has been tense for more than five months and there have been no signs of a peaceful resolution throughout.

Further complicating matters was that the US legislature passed a Bill that supported the pro-democracy movement in HK, a move which drew stinging criticism from China. On Wednesday, China threatened retaliation if the Bill is signed into law by US President Trump.

US-China trade – “They said, but then he said..’’

At the start of the week, markets digested a claim by US President Trump that although China had earlier said a Phase One deal was about to be signed and that tariffs might be rolled back, the US had not yet agreed to this.

On Tuesday, Mr Trump told his cabinet that if a deal isn’t reached with China, then he would simply raise tariffs. Financial markets, which have tracked trade developments for many months now, were mainly weaker as a result, although in Wall Street’s case, its Tuesday selloff was attributed to a weakening retail outlook after Home Depot cut its sales growth forecasts and department store Kohl’s reduced its profit guidance for the year.

However, helping to offset trade pessimism was that the Trump administration issued a 90-day extension of a license allowing U.S. companies to keep doing business with Chinese telecom giant Huawei Technologies Co.

Backed by a wall of central banking support on both sides of the Atlantic, investors are taking the relief provided by the president’s Huawei olive branch as positive in terms of equities while the ongoing trade spat remains more than justification for a continued bid for safe haven government bonds, notably Treasurys” and German government bonds, wrote analysts at Rabobank.

US interest rates and the FOMC minutes

According to the minutes of the October Federal Open Markets Committee meeting, most Fed officials saw interest rates as “well calibrated to support the outlook for moderate growth,” but staff “judged that the risks to the forecast for real GDP growth were tilted to the downside, with a corresponding skew to the upside for the unemployment rate.”

Behind that assessment: “International trade tensions and foreign economic developments seemed more likely to move in directions that could have significant negative effects on the U.S. economy than to resolve more favorably than assumed’’.

The Fed cut its short-term benchmark interest rate to its current range between 1.5% and 1.75% at the October meeting It was the third cut in four months.

In local news

  1. Morgan Stanley upgraded the banks

Analysts from Morgan Stanley have upgraded Singapore banks to “overweight’’ because of stronger returns on equity, earnings visibility and dividend yield.

According to the investment bank’s 2020 Asia EM Equity Strategy Outlook, Singapore banks have performed well because of “undemanding valuation multiples at the beginning of the year, plus high capital ratios, which have the market some comfort on dividend sustainability’’ said MS. It cited UOB as its preferred bank as it has the most defensive business mix among the three banks.

OCBC on the other hand, is the least preferred “given the overhang of potential mergers and acquisitions on potential returns’’.

  1. CapitaLand to sell Star Vista stake to New Creation Church for $296m

Property giant CapitaLand on Wednesday announced plans to sell its stake in The Star Vista mall to its partner who jointly developed the property, Rock Productions, which is the business arm of New Creation Church. The price tag is $262m. On Thursday, CapitaLand’s shares dropped in line with a broad market selloff, losing xx at xx on volume of xx.

  1. GDP growth revised upward, technical recession avoided

A better-than-expected 3Q economic performance last week prompted the government to narrow its official full-year growth forecast for 2019 to 0.5-1%. This is an improvement over initial expectations of 0-1% growth which had previously been downgraded from the 1.5-3% forecast made a year ago.

Economic growth for Q3 was 0.5%, faster than the 0.2% recorded in the previous quarter. It also surpassed an official flash estimate of 0.1% and beat expectations of private sector economists polled by Bloomberg whose forecast was 0.4%.

On a quarter-on-quarter basis seasonally adjusted annualised basis, the economy grew 2.1%, reversing the 2.7% contraction in Q2. The Business Times quoted Barnabas Gan, an economist from UOB as saying “with a positive quarter-on-quarter growth rate, Singapore has officially avoided a technical recession’’.