Markets Insights

US Fed, oil prices expected to sway markets

A worker at a drilling rig in an oil field in Russia. Oil prices have surged more than 20 per cent from a low of US$41.80 on Aug 2, on a weaker greenback and speculation of a deal to freeze production when producers meet next month.
A worker at a drilling rig in an oil field in Russia. Oil prices have surged more than 20 per cent from a low of US$41.80 on Aug 2, on a weaker greenback and speculation of a deal to freeze production when producers meet next month.PHOTO: REUTERS

Cues from US Fed chair's speech this week will influence direction of US dollar and, in turn, oil prices

Oil prices and United States Federal Reserve chair Janet Yellen's speech at the annual monetary policy symposium in Jackson Hole, Wyoming, on Friday will likely influence the direction of markets worldwide, including Singapore's this week.

The Straits Times Index (STI) snapped a six-day losing streak on Friday to close up 0.25 per cent, as crude oil rebounded to above US$50 (S$67.35) a barrel. For the week, the market was still down 0.8 per cent. Oil prices have surged more than 20 per cent from a low of US$41.80 on Aug 2, on a weaker greenback and speculation of a deal to freeze production when producers meet next month.

But research firm Capital Economics warned that oil prices could fall back if the outcome of the meeting underwhelms expectations.

"Indeed, we think that they could fall back quite sharply if the Organisation of Petroleum Exporting Countries (Opec) and non-Opec members are unable to agree on anything substantial.

"Our end-2016 forecast for prices is US$45 per barrel," Capital Economics analyst John Higgins said. "Our end-2017 forecast is US$60 per barrel."

Meanwhile, investors will be watching Dr Yellen's speech.

Cues from her speech will influence the direction of the US dollar and, in turn, oil prices.

Mr Higgins said Dr Yellen "isn't expected to provide any strong steer on the timing of the next rate hike". "September is now pretty much off the table, given the recent weakness in US gross domestic product (GDP) growth, although a majority of officials are still eyeing one more rate hike before year-end, presumably in December," he said.

Singapore's July consumer price index (CPI) data is due tomorrow and July industrial production (IP) on Friday. "Given that recent data on local employment, GDP and non-oil domestic exports have been quite disappointing, investors are also cautiously watching July IP," CMC Markets analyst Margaret Yang said.

The latest IPO to hit the market, AGV Group, a provider of hot-dip galvanisation (a process that prevents corrosion when applied to steel and iron) services, will start trading on the Catalist board on Friday.

Weighing on the STI is the second-quarter earnings season, which DBS Group Research called "one we'd rather forget".

"The STI has badly underperformed the rest of Asia since Brexit. An uncertain economic environment, weak corporate earnings, the stressed oil and gas sector, and concerns about banks' exposure to the beleaguered oil and gas sector led to STI's underperformance.

"It seems liquidity inflow into Asia as a result of Brexit and the low interest rate environment is flocking more to other parts of Asia rather than to Singapore," DBS said.

"For stocks under DBS coverage, 52 per cent came in within our expectations; 33 per cent below expectations and only 15 per cent beat our forecast numbers. Overall, we trimmed full-year 2016 earnings by a significant 7.4 per cent, and full-year 2017 earnings by 6.8 per cent," it said.

Meanwhile, Hyflux, which was queried by the Singapore Exchange (SGX) over unusual price movements in its preference shares, fell 2.9 per cent to 51 cents on Friday. It told the SGX that day that it was unaware of any reasons for the movement.

"Swiber made lots of investors sit up to look at their portfolios. Hyflux has been generating negative cashflows for a while since its engineering procurement contracts require hefty investments. I think people are relooking heavily leveraged companies and their ability to finance their debts," a trader said.

A version of this article appeared in the print edition of The Straits Times on August 22, 2016, with the headline 'US Fed, oil prices expected to sway markets'. Print Edition | Subscribe