Date: June 18, 2018
- The STI dropped 80 points or 2.3% over the four trading days;
- The US-North Korea summit did not have much impact;
- Trade war fears were renewed after the G-7 meeting, now dubbed as G6 + 1;
- Adding to trade tensions were US tariffs on China;
- The US Fed’s “dot plot” suggested two more rate hikes this year, bringing the sellers out;
- Investors here will be watching Hyflux’s High Court hearing on Tuesday;
The US-North Korea meeting
The much-anticipated summit between US President Donald Trump and North Korean leader Kim Jong Un turned out to be a non-event as far as markets were concerned. This may have surprised and disappointed observers who might have been hoping for a significant reduction in geopolitical risk if the two countries had announced concrete steps towards peace and denuclearization of the Korean peninsula but as it turned out, other than vague promises to work towards those goals, nothing meaningful emerged from the 2-day summit held here.
Adding confusion to the mix was that US Secretary of State Mike Pompeo two days after the summit declared that China, Japan and South Korea support Washington’s stand on North Korean denuclearization before sanctions on the country would be lifted but Beijing did not confirm this. Furthermore, North Korean news reported that US President Trump had agreed to lift sanctions as part of the summit’s pact, but this was then denied by Mr Pompeo.
G-7 is now dubbed G-6+1
The G-7 meeting held in Canada a week ago ended acrimoniously with Canadian Prime Minister Justin Trudeau saying in a press conference that the tariffs which the US had imposed on Canada a few weeks earlier were “insulting,” and insisted Canadians “will not be pushed around.”
For his part, Mr Trump arrived late, discussed the possibility of re-introducing Russia to make the grouping G-8, and then left early for Singapore. Global trade tensions then rose after Mr Trump refused to endorse the joint communique that was issued after the meeting.
US vs China – again
After a short lull period in the ongoing trade drama involving the US and China, tensions were revived late in the week when the US announced a 25% tariff on US$50 billion worth of China goods, effective 6 July.
Not surprisingly, China has vowed retaliation, saying the tariffs would harm both countries and hurt the world trade order.
US FOMC takes over
With trade worries lurking in the background, markets then took their cue from the US Federal Open Markets Committee meeting, held on Tuesday and Wednesday. In its post-meeting statement, the central bank increased the target range for its benchmark interest rate by 0.25% to a range of 1.75%-2%, the highest since September 2008.
It was the seventh rate hike since the US sub-prime crisis and all eight voting members of the FOMC voted in favour. The Fed’s “dot plot” which shows the 16 members’ interest rate forecasts suggested there will be two more hikes this year. If this occurs, then 2018 would see four rate hikes instead of the three that markets had expected at the start of the year.
Perhaps more importantly though, the statement dropped the sentence “the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run” which, when read together with the dot plot, explains the pressure on regional stocks on Wednesday and Thursday.
In its Talking Point last week titled “Upbeat Fed turns more hawkish on rates”, Schroders said the latest move means that its forecasts are in line with the Fed on interest rates for the rest of 2018, with hikes in September and December.
However, we only see two hikes in 2019 and expect the central bank to pause once rates reach 3%. In our view, the cumulative effect of higher interest rates and an ebbing of fiscal stimulus should be enough to cause the Fed to pause in its hiking cycle and take stock. We expect the economy to decelerate in the second half of 2019, such that 3% proves to be the peak
In local news…
Over the course of the holiday-shortened week, the Straits Times Index lost 80 points or about 2.3%. Volume was highest on Thursday, when 2.6 billion units worth S$2.1 billion were traded – almost twice the S$1.2b done on Wednesday.
On Wednesday, OCBC Investment Research said banking stocks have performed well this year, gaining 9% at the high as measured by the FTSE ST Financial Index.
The outlook is definitely improving with several quarters of improvement as allowances declined, NPLs (non-performing loans) plateaued and margins started to reverse up. Quarterly profitability trends have also shown good improvements in recent quarters. We think that the recent price weakness, partly due to the lull period in May and June, is an opportune time to accumulate said the broker, adding that DBS is its top pick while upgrading UOB to a “buy” with a S$31.02 fair value.
CIMB in an 8 June strategy note said it recently completed a marketing trip to Tokyo and Hong Kong, during which it found that investors with Singapore investment mandates stuck to a few tried-and-tested benchmark names, mainly DBS, OCBC, UOB, CD, VMS, CDL.
There was also interest in STE, KEP, SMM and Wilmar. Those with stock-picking mandates lamented the lack of high- conviction stocks with more than 30% returns that are reasonably priced. There were concerns over the banking space getting too crowded and risk of global fund flow exiting emerging Asean markets which could also have a negative spillover to Singapore
reported CIMB, adding that its top picks are DBS, KEP, STE, UOL, SingPost, ThaiBev, Sheng Siong, China Sunshine, mm2, Yongnam, Riverstone and Sunningdale.
Among the events to watch out for in the coming week is Hyflux’s High Court hearing on Tuesday, at which the company will seek a six-month extension of a moratorium on claims by its creditors.