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Clouds are gathering over trade, politics

Traders have a list of reasons to stay particularly cautious, which may result in profit-taking activities and a flee into safe-havens on this last trading day of the week.

Clouds are gathering over Washington’s political sky, with the latest complaint by an intelligence community whistle-blower alleging that a number of government officials have attempted to hide President Trump’s call records with Ukraine’s leader. This marks a further escalation of Trump’s call scandal and may draw more White House officials into the impeachment probe.

‘This set of actions underscored to me that White House officials understood the gravity of what had transpired in the call’, wrote the whistle-blower.

Not only will the impeachment inquiry dampen the prospect of Trump’s 2020 election campaign, but will also likely weaken his position in trade talks with China.

Trump’s year-long trade war with Beijing has yielded little progression so far, and the US trade deficit has even widened by 8% compared to the same period of 2018. The trade war has led to a decline in US exports and a fast deterioration in its manufacturing sector, which were clearly a main drag on the US 2Q GDP figures released last night. Third quarter growth is likely to see further downside as business sentiment and consumer confidence both fell sharply in the last few months.

The negative consequence of detrimental trade tariffs have hurt both countries’ exports and growth, and has led to rising uncertainty that inhibits investment and capex around the globe.

Things to take note of in the month of October, which is likely to be an eventful month: -

  • High level US-China trade talks will be held on 10th October, in which the markets expect at least some sort of agricultural deal to be reached. However, trade risk remains high given difficulties in the past few rounds of talks and Beijing’s reluctance in giving concessions. In the event that the October trade talks fail to make any meaningful progression, risk assets may face selling pressure again.
  • Brexit. We are just weeks away from the Brexit deadline (31st October), and the UK government has not finalised a convincing deal with the EU. The shadow of a potential ‘no-deal’ Brexit is weighing on sterling and risk sentiment across UK investments. The impact to the Singapore market, however, will largely remain at the sentiment level.
  • Trump’s impeachment. Despite knee-jerk reactions by investors in response to heightened US political uncertainty, the likelihood of Trump being impeached and removed from the White house before his term ends is small. This is because a Republican-controlled Senate would be unlikely to convict him, even if the impeachment received majority of the House votes.
  • Hong Kong protests. Whether or not protesters will demonstrate en masse on October 1st to embarrass China during the celebration of their 70th year anniversary remains to be seen. How Beijing responds, remains a key event to watch out for.
  • RBA rate decision on 1st October
  • ECB rate decision on 24th October
  • Fed rate decision on 30th October

Markets are now walking on a tightrope, with the fundamental outlook continuing to deteriorate globally. However, equity market valuations are being elevated by central bank rate cuts and the prospect of renewed quantitative easing (QE). This unbalanced situation renders global equities susceptible to another round of selloff in the event of resurging trade risks, a no-deal Brexit, worsening macro picture or unexpected shocks.

In Singapore, ‘defensive’ mode is dominating, with utilities, consumer staples and REITs outperforming cyclical industrials, banks and technologies. The Straits Times Index faces strong resistance at around 3,200 points. 




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