The local market continues to inch higher despite many negatives. One of the negatives is around the spate of privatisations which may cause investors to gradually exit the local market. The reason why companies are being privatised is the low valuations they garner on the Singapore Exchange. Low valuations - based on some on announcements made by these companies - is a result of low liquidity.
It could be that the focus on derivatives may have increased SGX’s earnings, but derivatives haven’t done anything for interest and liquidity in the Singapore market. Surely a thriving capital market is important for a financial hub. Some market observers believe the SGX should seize the bull by the horns in the new disrupted global economy, attract investors into the market and ensure sufficient liquidity for valuations to rise. A pipe dream?
Following the rebound by the Straits Times Index during the week of May 13-16, the 50- and 100-day moving averages at 3,822 and 3,829 respectively remain positively placed. Quarterly momentum is still in positive territory and stationed just above its equilibrium line, and the directional movement indicators veer towards the positive. At the close on May 16, the STI (3,898) is a mere 101 points away from the roundophobic psychological resistance of 4,000 and it will not take much for the STI to get to this level at which resistance is likely to appear.
Elevated US risk-free rates
These days, falling inflation numbers have positive and negative implications. Barclays estimates that inflation cooled in April. “We estimate that core PCE (personal consumption expenditure) increased 0.12% m-o-m and 2.6% y-o-y in March, 10bp lower than our forecast. This downward revision came entirely from one PPI (producer price index) category— portfolio management services, which fell 6.7% m-o-m, deducting 11bp from core PCE, and only partly offset by modestly firmer PPI inputs for healthcare services and airline fares,” Barclays says.
Despite cooling inflation, the yield on 10-year US treasuries remains elevated. It stood at 4.398% on May 16, off the high of 4.53% on April 14, and despite the rolling back of the most punitive tariffs on China. The roll-back should have caused risk-free rates to ease more than they have done.
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The reason why the bond market continues to be skittish could be that the tariffs in place are still the highest experienced by the US since the depression years of the 1930s in the aftermath of the Smoot-Hawley Act.
According to Paul Krugman, winner of the 2008 Nobel Prize for Economics, a so-called tariff “pre-substitution” rate stands at 17.8%. This is the rate on the currently announced tariffs applied to actual imports. The “post-substitution” rate of 16.8% takes into account that China will soon supply a smaller share of US imports.
“Smoot-Hawley added to tariff rates that were already high. This time we’re jumping from very low to very high tariffs almost instantly,” Krugman points out. Tariffs will lead to lower imports, he reasons.
See also: Straits Times Index may get boost from banks’ results
How much lower depends on the elasticity of demand.
“There’s a range of estimates, but let me go with a number at the lower end. Given this number, we’d expect Trump’s tariffs after last weekend’s retreat on China to cut overall US trade by roughly 50%,” Krugman estimates. “It sounds to me like a massive disruption of the world economy, only slightly less disruptive than what we were looking at last week,” he adds.
A tariffed, new world order does not mean the market cannot rise but it may point to a lot more volatility for the S&P500. Asian markets may remain steady, and could advance further.
