Markets Insights

US tax reform to set tone for markets

Traders on the floor of the New York Stock Exchange. US equities set a new high last Friday, with both the S&P 500 and Nasdaq rising to uncharted territory on renewed hopes that President Donald Trump will get his way in legislating for a big cut in
Traders on the floor of the New York Stock Exchange. US equities set a new high last Friday, with both the S&P 500 and Nasdaq rising to uncharted territory on renewed hopes that President Donald Trump will get his way in legislating for a big cut in corporate taxes.PHOTO: BLOOMBERG

For S'pore, property stocks back in vogue amid view that recovery is under way

Fears of a bad month for equities have turned out to be largely unfounded, given how last month has been safely negotiated with tension easing between the United States and North Korea.

US equities set a new high last Friday, with both the S&P 500 and Nasdaq rising to uncharted territory on renewed hopes that President Donald Trump will get his way in legislating for a big cut in corporate taxes.

Historically, US equities have been lacklustre in the last month of the third quarter. September is the only one out of the 12 months in a year in which the Dow Jones Industrial Average has been lower on average in the past 20, 50 and 100 years.

This playbook was turned on its head this time around, with the Dow eking out a 2.1 per cent gain last month. The focus this week will be on Congress where Republicans will move to pass a fiscal 2018 Budget resolution with the House taking a vote on Thursday.

Once both the House and Senate pass a Budget resolution, they can move forward with a tax Bill, noted UOB Global Economics and Markets Research in a weekly report.

Aside from the tax cut boost, there is also a marked difference this time around, thanks to the strength of the US economy.

CMC Markets Singapore analyst Margaret Yang noted that the US economy has been expanding at its fastest pace in over two years, registering an annualised gross domestic product growth rate of 3.1 per cent in the second quarter.

In contrast, the Singapore market has had a subdued month, with the benchmark Straits Times Index dropping 1.7 per cent to 3,219.91. The index is down 4 per cent since reaching a year high of 3,354.71 on July 27.

The pullback was not unexpected, given its sharp rise earlier. The prospect of higher interest rates was also a dampener.

But leading into the final quarter, analysts are calling for an overweight on property stocks as a recovery in the residential sector both in terms of demand and price is well under way.

Even before the Urban Redevelopment Authority releases today its flash estimates on private home prices for the third quarter, OCBC Investment Research has predicted that the worst is over.

"From our analysis of caveats lodged to date, we expect third-quarter figures to show the first rebound in home prices in four years - which will be a key inflection point marking the end of the Singapore housing bear (market)," said its head of research Carmen Lee.

"While the consensus is that the bottom in the property market lies shortly ahead, we believe that the trough is in fact behind us and Singapore home prices likely hit their cyclical lows in mid-June 2017."

Although the start of October heralds a full working week in Singapore, it will be rather quiet in the North Asian markets as China, South Korea, Hong Kong and Taiwan have various public holidays, including the Mid-Autumn Festival or a variation of it on Wednesday.

Even reclusive North Korea will be celebrating a holiday - the Harvest Moon Festival on Wednesday.

So investors can expect another week of reduced tension on the Korean peninsula unless, of course, Mr Kim Jong Un starts firing rockets at the moon.

A version of this article appeared in the print edition of The Straits Times on October 02, 2017, with the headline 'US tax reform to set tone for markets'. Print Edition | Subscribe