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US Fed hints at rate cut; multi-front trade tensions escalate

Samantha Chiew
Samantha Chiew • 5 min read
US Fed hints at rate cut; multi-front trade tensions escalate
SINGAPORE (June 10): As trade disputes between the US and its trading partners worsen, there are widespread expectations in the market that the US Federal Reserve could cut interest rates. “We do not know how or when these issues will be resolved,” sa
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SINGAPORE (June 10): As trade disputes between the US and its trading partners worsen, there are widespread expectations in the market that the US Federal Reserve could cut interest rates. “We do not know how or when these issues will be resolved,” said Fed chairman Jerome Powell on June 4, referring to multi-front trade disputes from China to Mexico to India.

“We are closely monitoring the implications of these developments for the US economic outlook and, as always, we will act as appropriate to sustain the expansion, with a strong labour market and inflation near our symmetric 2% objective,” said Powell, who did not directly address rate cuts in his speech.

Eli Lee, head of investment strategy at Bank of Singapore, believes that one possible scenario is for the Fed to put forth a set of rate cuts of between 75 and 125 basis points as “insurance” against a downturn if the economic outlook weakens in the months ahead.

If the Fed does cut rates, it would be doing what US President Donald Trump has been urging it to do. The president has been slapping tariffs on foreign imports. Apart from Chinese products, he has threatened to impose tariffs on Mexican products. This may cause the relations between the two neighbours to spiral “out of control”, said Bruce Heyman, former US ambassador to Canada, on June 4.

If Trump does implement the 5% tariff on all Mexican imports starting June 10, as announced on his Twitter account on May 30, “the Mexicans are going to respond just like the Chinese have done, just like the Canadians have done”, says Heyman. Trump intends to gradually raise tariffs to 25% unless Mexico takes more forceful action in containing illegal immigration. He also intends to end India’s preferential trade status, further broadening the US administration’s tensions with its trading partners.

“Heightened trade risk and growth headwinds will further weigh on emerging markets and the high-yield fixed-income space,” says Lee of Bank of Singapore. “At this juncture, we continue to reduce risk by neutralising our overweight positions in developed- and emerging-market high-yield bonds.”

See also: Shock at Trump shooting prompts world calls to end polarisation

On the other hand, the US has already slapped a 25% tariff on about US$250 billion ($341 billion) worth of Chinese goods. Trump does not think this is enough, however. As the trade war between the US and China continues, he has threatened China with tariffs on a further US$300 billion worth of Chinese goods. China has retaliated by raising tariffs on billions of dollars of US products.

2H land sales

The Singapore government is further tweaking the property market. On June 6, the URA announced its land sales programme for 2H2019. Space for some 6,430 residential units will be made available — slightly lower than the 6,475 units made available under the 1H land sales programme.

See also: Taiwan, India threaten China’s top spot in EM equity portfolios

URA says there is a large supply of about 44,000 private housing units in the pipeline, which consists of 39,000 unsold units and 5,000 units pending planning approval.

The property market is still feeling the effects of the property cooling measures implemented in July 2018. Demand has continued to decline, with the overall transaction volume dropping for the third straight quarter in 1Q2019. The cooling measures have also moderated developers’ demand for land.

The share prices of local property developers did not react significantly in response to the news. On June 6, shares in Oxley Holdings closed flat at 30 cents, CapitaLand shares declined 0.31% to $3.21, while shares in City Developments rose 0.12% to $8.31.

Separately, Oversea-Chinese Banking Corp (OCBC) on June 3 received an open letter from Sanford C Bernstein & Co analyst Kevin Kwek, urging the bank to address a variety of issues, including a relatively low dividend payment, profitability in Hong Kong and earnings volatility from insurance in order to narrow the valuation discount to its Singapore peers.

Kwek noted how the bank’s price-to-book ratio has fallen behind that of its two Singapore rivals, DBS Group Holdings and United Overseas Bank, in recent years. “The insistence to keep payout lower isn’t well appreciated by investors, especially in these times,” he said. “Higher yields on top of the safety factor [are] one key reason [in] keeping the investor faith in the Singaporean banks, and this is therefore a bigger deal than management perhaps appreciates.” Year to date, shares in OCBC have fallen 4.77%, closing at $10.57 on June 6.

In contrast, shares in DBS have risen 3.23% year to date to $24.25, while shares in UOB have dropped 1.44% to $23.96.

ST Engineering on June 6 entered into a partnership agreement with Nokia on key technology areas such as 5G and the Internet of Things. ST Engineering will resell Nokia’s internet protocol, optical networking and wireless broadband solutions, which include 5G, last-mile and analytics. Nokia will in turn incorporate ST Engineering’s VSAT, or very small aperture terminal, and cybersecurity solutions in its global project offerings. On June 6, shares in ST Engineering closed 0.5% higher at $4.02.

The week ahead

LifeBrandz will be reporting its 3Q earnings on June 12. Singapore’s retail sales figures for April will be released on the same day.

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