Markets Insights

Geopolitics remains in spotlight after dismal May

Trucks wait in a queue to cross into the United States at the Zaragoza-Ysleta border crossing in Ciudad Juarez, Mexico. Uncertainty rules the markets as US President Donald Trump slapped bans on Chinese telecommunications equipment maker Huawei and threat
Trucks wait in a queue to cross into the United States at the Zaragoza-Ysleta border crossing in Ciudad Juarez, Mexico. Uncertainty rules the markets as US President Donald Trump slapped bans on Chinese telecommunications equipment maker Huawei and threatened Mexico with tariffs over immigration matters.PHOTO: REUTERS

STI's worst monthly showing in over 3 years; private PMI readings for Asia due this week

Investors are now in the first week of June after a May to forget, with geopolitical developments remaining the main driver of market sentiment.

"Developments surrounding the US-China conflict are expected to continue dominating sentiment surrounding Asian assets for the week ahead, with markets already wary of the prospects of a full-blown, US-China trade war," FXTM market analyst Han Tan said.

US President Donald Trump ratcheted up his aggression on trade matters over the past month, increasing tariffs on US$200 billion (S$275 billion) of Chinese exports to the United States, slapping bans on Chinese telecommunications equipment maker Huawei, and threatening Mexico with tariffs over immigration matters.

Those moves sent Singapore's Straits Times Index (STI) tumbling down four straight weeks of declines in May to lose 9.1 per cent, the blue chip index's worst monthly performance in over three years.

That drop almost wiped out the STI's 11 per cent gain over the first four months of the year, when the market had hummed along on optimism about a turnaround from a weak fourth quarter and on hopes of a trade deal by mid-year.

"Global market sentiments have made an abrupt turn for the worse in the past month. We see little chance of a meaningful respite any time soon," DBS Group Research's chief economist Taimur Baig said in a note on Friday.

"In the macro horizon, recent intensification of trade wars is threatening to undermine a nascent recovery in global trade. Positive data surprises are few and far between, while financial market volatility is on the rise."

A shortened week awaits traders and investors in the local market, which will be closed on Wednesday for the Hari Raya Puasa holiday.

With companies having reported earnings for the first three months of the calendar year, Singapore economic data releases for last month will be looked at for the effects of Mr Trump's onslaught on China and its repercussions on the local economy.

While preferring to stay on the sidelines for now, a trader said that he is keen to enter positions on Keppel Corp and CapitaLand, when the dust settles on the trade impasse. Both stocks lost around 10 per cent in value in May.

Phillip Securities' principal trading representative Marcus Toh said United Overseas Bank (UOB) is his favoured pick among the local banks. "UOB has the most exposure to South-east Asia, which stands to benefit from trade diversion," he said. "It also has the cheapest price-to-book value among the three local banks."

Industrial activity is the economic theme for the week. May's purchasing managers index (PMI) figures for Singapore are due, with the Singapore Institute of Purchasing and Materials Management's reading today and the Nikkei measurement on Thursday.

Even though market participants will closely watch the data releases, sentiment will still be heavily influenced by external geopolitical developments, UOB economist Alvin Liew said.

On China, today's Caixin manufacturing and Wednesday's services PMI surveys will come under scrutiny after last week's official manufacturing PMI numbers showed steeper-than-expected contraction. The surveys this week focus more on smaller and medium-sized firms.

A number of private PMI readings will also be released in Japan, Hong Kong and India across the week.

"Effects from the US-China trade dispute could further manifest themselves in the PMI readings out of various Asian economies at the onset of the week, as markets keep a close watch for signs of tensions ramping up between the world's two largest economies," FXTM's Mr Tan noted.

Inflation data for last month will be released in South Korea and Thailand tomorrow, while those in The Philippines will be out on Wednesday.

Australia's first-quarter gross domestic product data will be out on Wednesday, and according to a Bloomberg poll, economic growth is expected to ease to 1.8 per cent year on year. Growth in the fourth quarter of last year was 2.3 per cent.

Other regional markets will be in for a short work week. Thailand's will be closed today. Indonesia's will be closed all week for Hari Raya celebrations, while Malaysia's is closed on Wednesday and Thursday.

A version of this article appeared in the print edition of The Straits Times on June 03, 2019, with the headline 'Geopolitics remains in spotlight after dismal May'. Print Edition | Subscribe