Trade wars in the making

The fears over the imposition of steel and aluminium tariffs appeared to have simmered early in the week as President Trump has toned down his rhetoric as his home base of supporters has voiced concerns over potential retaliations by America’s key trading partners. In fact, statistics provided by Phillip Securities Research has shown that imported steel from China into US has slowed down considerably since 2015. As shown in the following chart, imports is only a quarter since 2014 levels.

Source: Phillip Securities Research (March 05, 2018)

VIX index is still not stabilised despite toning down of tariff threats

Source: (One-year daily chart of the Volatility Index (VIX), March 05, 2018)

The VIX index as shown in the chart above is still at elevated levels, though it has came down quite significantly from the early February high of about 50. At about 18 – 19 in the VIX reading, the index is far from the pre-February levels of around 10 to 12. Essentially, the markets are still feeling quite tense about unexpected events like the recent announcement of steel tariffs by President Trump.

We think a full-blown trade war, if unleashed could cause markets to turn more volatile, and could lead to the loss of market confidence as US markets will be not be a hospitable environment for investors to thrive in.

Taking stock of overall earnings performance for 4Q and FY 2017

With earnings releases winding to a close, the final report card appears to be mixed with the three local banks’ earnings performing much better than expected, and the Oil and Gas (O&G) sector remaining in the doldrums, including leaders like Keppel Corporation Limited, and Sembawang Marine Limited which are reeling from order cancellations, the Brazilian corruption case, and a lack of market confidence in general for many small to mid-sized O&G players.

The following illustration from The Business Times showed how SGX-listed companies perform so far for the quarter:

Source: The Business Times, March 09, 2018

Then, for the full year,

Source: The Business Times, March 09, 2018

If we were to compare on the 4Q and the full year 2017, the number of companies shifting from losses to profits and profits to loses remain even. The good thing is there is a majority of companies reporting higher profits in both periods. However, when compared to 2016, total earnings of S$6.2 billion, and S$23.8 billion, the are down by 0.4 per cent and 9 per cent in 4Q and FY 2017 respectively.

However, on a forward earnings guidance, most companies, especially those in the healthcare, consumer staples, and infrastructure industries have guided their earnings positively in 2018 and it is all thanks to the overall government spending priorities outlined in Budget 2018. Although there were announcements of a Goods and Services Tax (GST) hike when the Finance Minister announced during Budget Day on February 19, it is however deferred till 2021 to 2025. Nevertheless, businesses will be gearing up for the eventual GST and carbon tax hikes.

How did the stock markets ended on Friday

Source: Phillip Securities POEMS 2.0 Trading Platform (One-year weekly chart of the Straits Times Index, March 10, 2017)

The Straits Times Index (STI) closed Friday’ session, March 09, 2018 at 3,485.57, up 5.13 points. This is up 0.18 per cent for the week, and 2.43 per cent on a year-to-date basis. There were 1.75 billion shares worth S$1.11 billion changed hands on Friday. This is compared to 1.98 billion shares worth S$1.13 billion on Thursday.

Overall, looking at the STI chart above, the index showed a double-top as seen on the extreme right-hand side of the chart. This suggests that the overall market conditions are still not stable with lingering concerns over the impact of trade wars, and inflation concerns looming ahead. The US Federal Reserve has already signalled at least three rate hikes this year, and markets are still wary over the possibility of a fourth-rate hike in 2018 should wage costs start to show sustainable rises.

The index, when plotted over the Fibonacci Retracement chart indicated the immediate support level of 78.6 per cent percentile level. If the 78.6 percentile is breached, the next level to watch out for is 3,204.91. The long-term support level is 3,074.74 on the 50.0 per cent percentile level. Though it appears remote at this time, there is still a possibility given the market restlessness seen since early February 2018.

Meanwhile, the relative strength index (RSI) is hovering around the mid-point of 50. It ended up at 57.51 on Friday, March 09. This is perhaps showing the stability side of things. The index is neither overbought nor oversold. However, if events go awry, for example trade wars along with retaliation, global trade might come to a complete halt, leaving the financial markets unsettled.

Roller coaster ride for Creative

Creative Technology has stolen the limelight this week amid insider selling of shares during last week’s phenomenal rise. The Business Times reported this week that co-founder Ng Kai Wa cashed out S$1.8 million on Creative shares. That move took the stock down lower from the peak of S$10 per share to close Thursday’s session (March 08) at S$5.91. It did not help when Phillip Securities placed trading restrictions on the counter in a bid to control risk exposures of clients holding or intending to pick up the counter.

However, in a reversal of the sharp downturn on Thursday, the stock went back up by close to 10.7 per cent to close Friday’s session at S$6.54 per share.

Source: Phillip Securities POEMS 2.0 Trading Platform (One-year daily chart of Creative stock, March 09, 2018)

We urge readers and investors accessing this article to carefully consider the investment choices. As shown in the above example, Creative’s short-term surge and decline in the stock price over a period of two weeks does need to keep in check. A credit exposure on such counters where fundamentals are generally weak comes with a lot of risks and there is no reason to go into this counter unless one is in it for the pure speculation.

Hang Seng succumb heavy losses to end higher for the week

Source: (One-year weekly chart of the Hang Seng Index (HSI), March 10 2018)

Hong Kong’s Hang Seng Index suffered a momentarily scare this past week when the index closed below the psychological 30,000 level only to be saved by favourable global events. The index closed Friday’s session at 30,996.21, or 341.49 points, 1.1 per cent higher. The week was also marked with favourable developments out of China with the conclusion of the National People’s Congress meetings where the government has announced the expected outlook for full year 2018 gross domestic product (GDP) to be around 6.5 per cent. President Xi Jiping’s leadership was also recognised further as party members agreed to the constitution amendments that will see the President extending his term to beyond 2023 possibly.

Looking at the above weekly chart of HSI, the index continues to trend upwards despite a sharp drop earlier in the week as the spectre of trade wars loom, and global financial markets are feeling jittery over it. Investors are also concerned that the world’s second largest economy, China, might turn out to be the biggest loser as a result of the tariff hikes on steel and aluminium. According to reference from Reuters, China produced half of the world’s steel output, and its Ministry of Commerce noted that the tariffs would “seriously impact the normal order of international trade.”

Going forward, the trajectory of the HSI will be tested in the coming days with news that the Hong Kong Dollar is under pressure as its value slid to a 33-year low as the city’s de facto central bank, the Hong Kong Monetary Authority (HKMA) said it may not intervene until the currency peg touches the floor of its trading band.

According to The Economic Times article on Friday, March 09, the currency hit 7.8440 per US Dollar, inching closer to the weak end of the 7.75 – 7.85 per dollar band under the Hong Kong’s linked exchange rate system.

Source: (One-year daily chart of USD/HKD exchange rate, March 09, 2018)

Although the HSI appeared to be unfazed over what is going on in the foreign exchange markets for the Hong Kong Dollar, we think it is a type of risk that one should not ignore as the long-standing peg with the US Dollar has now turned vulnerable in recent years, and if not properly managed, there is a possibility of a spillover of risks that could be detrimental to the fundamentals of Hong Kong’s financial system, and its trading relations with the outside world.

The Hong Kong Dollar has often come under speculative attacks with hedge funds betting the HKMA will remove the peg one day. However, the HKMA has a more than HK$4 trillion (US$510.15 billion) war chest to defend the currency if it should hit the 7.85 level. However, we do not think that HKMA wants to undertake such extreme measures.

European markets recovered losses but still below trend

Source: (One-year weekly chart of the Stoxx Euro 600 index, March 09, 2018)

European financial markets managed to end in the black during the week with the Stoxx Euro 600 index climbing up by 0.43 per cent to end Friday’s trading session at 378.24. Though there has been some choppy trading sessions during the week over the imposition of steel and aluminium tariffs by the United States, investors remained confident over its prospects.

Looking at the weekly chart of the Stoxx Euro 600 index, the index climb this week is not sufficient to push it over the 50-day moving average (MA) line. We think it could be challenged as year-old rally faces vulnerabilities through political events in Europe such as the outcome of European elections like Italy which voted for a party called the Five Stars Movement led by Luigi Di Maio.

Moreover, this week saw European Central Bank (ECB) President Mario Draghi making remarks that the central bank will be dropping its easing bias as it continues to normalise monetary policy in the group. In the past, ECB has reiterated on several occasions regarding its stance that it stands ready to increase the level of bond purchases it makes in both.

The central bank had also given updates on its GDP forecasts for 2018 to be 2.4 per cent, 1.9 per cent in 2019, and 1.7 per cent in 2020. Moreover, President Draghi was quoted to say the solid recovery in the region supported the decision to remove the so-called easing biases. Also, during the meeting, the ECB opted to keep interest rates unchanged and to continue its asset purchase programme till September. The move has provided some relief for businesses as they cope with rising business costs.

With the gradual recovery of the Euro Zone economies, we think the ECB might dropped the quantitative easing bias by September. With the combination of slower rises in core inflation, coupled with the gradual reduction of QE from October to the tune of €15 billion per month, we think European financial markets are able to cope with potential shocks arising from the reduction of monetary support post-QE.

US markets defy tariff concerns to move higher

US financial markets move higher on Friday after the US Labour Department released the latest job numbers for the month of February which saw 313,000 nonfarm payrolls being created as compared to consensus estimates of 200,000. The unemployment rate remained unchanged at 4.1 per cent. Average hourly wage costs, which the US Federal Reserve has often raised concerns, rose 2.6 per cent on an annualised basis. This was 0.2 percentage points below expectations.

The latest job figures, as quoted one of the CNBC commentators, was ‘huge’, and at 313,000, it is probably one of the best showings in any given month. Breaking down the data, construction jobs rose the most with 610,000 new positions, followed by retail and professional and business services (50,000 each), manufacturing (31,000), and financial services (28,000). Health care added 19,000 while mining saw 9,000 new jobs.

Source: (One-year weekly chart of the S&P 500 index, March 09, 2018)

The S&P 500 stock index, along with the major US stock indices rose higher following the release of the job figures. The large cap index closed Friday’s trading session at 2,785.57, up 1.7 per cent intraday with financials leading the sector.

Looking at the weekly chart, the S&P 500 index appears to recover its footing after dropping to close to the 50-day MA line of 2,541.95 on the weekly chart. The 14-day relative strength index (RSI) chart has also regained some lost ground climbing to above the 60 levels.

A summary of the US market closing numbers:

Source: (March 09, 2018)

The robust US job figures appeared to take the main centrestage amid the official imposition of steel and aluminium tariffs by the Trump administration, and breakthroughs in US-North Korean relationships.

Going forward, with a data dependent US Federal Reserve in monetary policy making, Chairperson Jerome Powell and his team will be on a constant lookout of how inflation plays out in the next few months, and justification, if any, to hike interest rates more than three times this year.

How did your model investment portfolio perform

Source: Phillip Securities Pte Ltd, SGX, March 09, 2018 Note: Model equity portfolio performance as of March 09, 2018. For illustration purposes only, and information is not verified by third party. Past performance is not necessarily indicative of future performance. Please seek the advice of your qualified licensed financial adviser before any investments are undertaken.

Since the inception of the model equity portfolio at the end of November 2016, the latest portfolio return this week has shown a major outperformance of 85.20 per cent, inclusive of capital returns, dividends earned, and realised returns earned during the last rebalancing round on December 31, 2017. This compares to the total return of 20.11 per cent for the Straits Times Index (STI) during the same time period.

The top three holdings in total return terms (dividends plus capital gains) include Nordic (up 47.4 per cent since end June 2017); followed by Ascendas Reit (up 11.5 per cent since November 2016), and SATS Ltd (up 8.1 per cent since December 2016).

The model equity portfolio did experience a shortfall coming from Singtel (down 11.1 per cent since December 2016); followed by Straits Trading Company (down 7.3 per cent since end June 2017), and Sheng Siong (4.0per cent since end June 2017).

For now, we are not planning to make any changes or do any rebalancing for the portfolio. We shall actively monitor the model portfolio till end of March 2018.

Economic and earnings events coming up

No earnings reports next week.

Economic Reports

Singapore and United States

Source: The Edge Magazine Singapore (Issue #821, March 12, 2018)



One of the key Chinese economic reports to look out for next week is industrial production. Another key metric to gauge the rise of Chinese consumer spending power is the retail sales data. Both data releases are scheduled for Wednesday, March 14.

Have good trading week ahead. As always, stay safe.

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About Peak Hour 87 Articles
I am in my mid-to-late 40s, married, and am thankful for my wife for all the things she has done. We do not plan to have kids, but are blessed with the simple lifestyle that we truly cherished with each other. I used to be from the financial services industry, having spent 12 years of financial industry experience, including three years working as a research associate for a hedge fund company in Wall Street, US, with assets under management (AUM) close to US$400 million during its peak in 2008. I am currently working as a market analyst with a Singapore-based agrochemicals company. I have a deep interest in equities trading/research and analysis, data analytics, real estate, REITs, forex, and digital currencies. I don't consider myself as an avid writer, but I hope to learn as much possible. I am a Chartered Alternative Investment Analyst (CAIA) holder and passed his Level I Chartered Financial Analyst examinations. I hope to complete my CFA examinations within the next five years. I value all the feedback provided by fellow readers and bloggers. Please provide any feedback on the work I did. Thank you readers.