The US dollar Index came off to the 94.9 area this morning as the US trade deficit widened to US$50.1 billion in the month of July, suggesting that President Trump’s trade policy has yet to show any result in narrowing down the country’s trade deficit.

A deeper trade deficit led market to suspect that the White House will come out with a new round of tariffs on Chinese imports as early as this Friday. Meanwhile, the ongoing Nafta talk with Canada may potentially be another catalyst for volatility.

Weaker dollar might bring emerging market currency a temporary relief, although it is unlikely to change the mid to long-term bearish outlook due to their intrinsic fundamental problems. The Credit Default Swap for some troubled countries including Turkey, Argentina, Brazil and South Africa is still standing at record high, suggesting that the credit outlook remains fragile and the monetary policy alone cannot solve the problem.

It was indeed a bloodbath day for Asian equities yesterday, as investors flee from risk assets as emerging market currency rout showed no sign of stopping any time soon. The MSCI Emerging Market Index dropped half a percent on Wednesday, coming to its lowest level seen since May 2018.

The ongoing NAFTA trade talk between US and Canada, on top of the threat of new tariffs on US$200 billion Chinese goods also weighed on market sentiments. The S&P 500 Index is facing selling pressure at a resistance level of 2,900 points.

This Friday’s US Non-farm payroll data will be in the spotlight again. Good or bad, the readings are unlikely to alleviate selling pressure over EM markets, as strong jobs data will reinforce Fed’s decision to raise rates. Thus, leading to stronger USD and more EM outflow.

Hurt by EM currency rout, Singapore’s benchmark the Straits Times Index tumbled over 50 points and broke down below a key support level of 3,200 points. Among blue chips, Jardine C&C is among the top losers due to its large exposure to the Indonesian consumer market. Three local banks tumbled more than 1.5% as investors turned more pessimistic about the market outlook.

Other Indonesian related companies are affected as well. Lippo Mall REITs was hammered too as its rental income might drop due to currency translation losses. However, for palm oil plantation companies like Golden Agri, their share price remained resilient as depreciating currency actually lowered their raw material cost while the products are sold in USD. Therefore, they are actually benefiting from dropping currency.

Company NameSector% Revenue from Indonesia1 Week Price Change %
Jardine C&CAutomotive Wholesalers89%*-9.70%
Lippo Malls Indonesia TrustREIT100%-5.17%
Bumitama AgriAgricultural Products100%-1.40%
Golden AgriAgricultural Products14.80%5.45%
Indofood AgriAgricultural Products91%1.60%
Wilmar InternationalAgricultural Products0%-2.20%
First ResourcesAgricultural Products23.50%-1.85%\

*Jardine C&C's data as of year 2008

Source: Bloomberg

US Trade Deficit – MoM

By Margaret Yang in Singapore

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