Volatility spiked in tandem with bond yields

Date: October 15, 2018

  • Rising US bond yields added to trade tensions to drag stocks lower;
  • The STI lost 4.4% over the week as China’s woes continued;
  • Concerns over China’s growth weighed on sentiment, its stock market is down 23% for the year so far;
  • Economists, including the IMF, are beginning to cut their growth forecasts;
  • Delong Holdings and Hyflux were in the news.


The 10-year US Treasury yield at 3.2% sparked equity selloff

Readers of these market reports over the past six months or so have been constantly reminded of the need to keep a close eye on the 10-year US Treasury yield for clues as to where interest rates are headed and how stocks might be affected. The 3% level has frequently been highlighted as being “psychologically important’’, given that Wall Street equities have tended to come under pressure whenever the 10-year yield has risen above it.

Last week, with the yield spiking up to 3.2% – roughly 80 basis points higher than the start of the year – US stocks underwent a painful selloff that spilled over to this part of the world. Pressure here was in no small way also affected by concerns over a slowing China and the negative effect this is having on the country’s equity market.

STI lost 4.4% in tandem with US plunge as well as China’s problems

Here, the Straits Times Index lost 140 points or 4.4% over the week at 3,069.7, losing along the way support levels that were previously considered quite strong. Despite the heightened volatility, turnover has only risen slightly, ranging between $991 million on Tuesday to $1.7 billion on Thursday, the latter coming when the index plunged 84 points.

China’s problems – Shanghai Composite is down 23% so far in 2018

China’s central bank last week announced a steep cut in the level of cash that banks must hold as reserves, stepping up moves to lower financing costs and spur growth amidst rising trade tensions that are expected to drag the country’s growth lower. The reserve requirement cut was the fourth this year, and came as Beijing pledged to expedite plans to invest billions in infrastructure to boost growth.

China’s stocks in the meantime, have suffered badly this year. The Shanghai Composite Index is down 23% for the year so far, which according to Bloomberg, makes it the second worst performer among 95 indices that the financial news agency tracks. Bloomberg also reported that China’s average daily stock market volume in July to September was 302 billion yuan, 41% lower than the same period in 2017.

In local news

Delong Holdings chief executive Ding Linguo’s bid to privatise the Chinese steel maker was called off last week amidst a probe by the Securities Industry Council (SIC) into any potential breach of Singapore’s Takeover Code.

Mr Ding pulled his $7 per share cash offer on Thursday, citing a requirement to raise the price to $7.42. The SIC separately said it is looking into whether there was any breach of a rule requiring cash offers to be made at the same price as what the offeror or any concert parties paid if they picked up a stake of 10% or more in the six months before the offer.

According to the offeror’s announcement, having to raise the price to $7.42 would “precipitate very substantial contingent liabilities that materially exceed’’ the offeror’s ability to pay for the buyout.

Elsewhere, the lawyer for troubled water treatment firm Hyflux International, a company that is hoping to find a buyer for its Tuaspring plant in order to pay its debts, last Monday told the High Court that the company has spent a lot of time meeting with strategic investors and hopefully, something concrete can be announced in November.

He added that the company has reached advanced talks with two interested parties but declined to disclose their identities. The next hearing is scheduled for 31 Oct.

Global growth downgraded

Schroders in its October 2018 Talking Point titled “Why the world economy is slowing’’ said it is downgrading its 2018 global growth forecast, led by Europe and Japan after a disappointing first half of the year, and that a prolonged US-China trade war is likely to be a drag as it adversely impacts trade and capital spending. The slowdown in developed markets is then expected to hit emerging markets in 2019, leading to the latter’s growth also being downgraded.

As for the US economy, Schroders said its growth will also have to be lowered because although “summer weather boosted retail spending thus improving consumption and investment in the second quarter, net trade was weak’’. It also pointed out that Brexit uncertainty remains high and that negotiations on Britain’s pullout from Europe will peak next year.

Also last week, the International Monetary Fund (IMF) said the world economy is plateauing, whilst cutting its growth forecasts for the first time in two years, blaming escalating trade tensions and stresses in emerging markets. It cut its 2018 global growth forecast to 3.7%, down from 3.9% three months ago.