Spectre of Halloween haunts Singapore bourse

Singapore

THE year-long gyrations in the Singapore bourse, similar to those seen in its regional peers, will culminate in an event-packed October with the on-going US-China trade spat, Brexit deadline, Hong Kong protests and political uncertainty in Washington adding more stress.

Call it the "October effect", which essentially refers to a month that has gained a bad reputation for stock returns. Last year, the key Straits Times Index plunged seven per cent over the Halloween month.

Even so, many analysts deem the October scare, which earned its reputation based on two big market crashes in the past, as largely folklore and point out instead that equity indices have generally trended upwards over the period.

OCBC Investment Research head Carmen Lee points out that the US' key equities gauge S&P 500 has advanced 13 times in October over the last 20 years with an average monthly gain of 1.4 per cent. Hong Kong's Hang Seng Index has on average added 1.64 per cent in October over the same period with 14 rises. For Singapore, the trend appears little different.

"For the STI, the average gain was 0.6 per cent in October over the last 20 years and there were eight periods when the STI closed down in October versus 12 when it was up," Ms Lee added.

But these are rough times and markets can stomach very few shocks.

"Markets are walking a tightrope now, with the fundamental outlook continuing to deteriorate globally but equity market valuations are elevated by central bank rate cuts and the prospect of restarting quantitative easing (QE)," said CMC Markets' Margaret Yang.

This "imbalance" makes global equities susceptible to another round of selloff in the event of resurging trade risk, no-deal Brexit, worsening macro picture or unexpected shocks, she added.

For the local bourse, that means "defensive" mode will dominate with utilities, consumer staples and REITs outperforming cyclical industrials, banks and technologies. Ms Yang expects the Straits Times Index which is up 1.7 per cent for the year at 3,121.74 to face strong resistance at 3,200 points.

The US and China have locked down Oct 10 to reopen trade talks - the 13th such high-level negotiations between the sparring giants - with some semblance of order returning to markets that were earlier whiplashed after US President Donald Trump raised tariffs on Chinese imports.

Mr Trump's move unfolded amid gloomy macro data and renewed fears that the feud could tip the global economy into recession.

"Progress in any shape or form will probably be enough to boost Asian stock markets, including Singapore, in the short-term," said Jeffrey Halley, Oanda's senior market analyst for Asia Pacific, adding that regional currencies would also benefit for a bit. But with US Treasury yields so high vis-à-vis the rest of the G-10, he expects the greenback to "inevitably strengthen" again into end-2019.

Any such relief could be shortlived though, as the downstream effects of a trade deal - which still remains a big "if'' - would take a few months to flow through. "In that respect, I expect any euphoria on regional stock markets to run its course fairly quickly," he continued.

The trade headwinds and recently-released weak August production data, which dashed hopes for a recovery in manufacturing activity, have heightened expectations that the Monetary Authority of Singapore (MAS) will reduce the slope of the Singapore dollar nominal effective exchange rate appreciation at its policy review in October.

"A more competitive currency would help the Singapore economy absorb the external shocks," said CIMB-CGS in a recent note.

Policy meetings by the US Federal Reserve, European Central Bank, as well as the Reserve Bank of Australia, are also upcoming.

For Brexit, as the end-October deadline fast approaches with no convincing deal with the EU on sight, the shadow of a potential "no-deal" Brexit or possibility of a further deadline extension could continue to weigh on the currency.

"Brexit and the current shambles of UK politics essentially provide an unmissable signal to stay clear of sterling for the time being," said FXTM global head of currency strategy and market research Jameel Ahmad.

The impact of this on the Singapore market, however, will largely remain at the sentiment level.

Last week saw a major shock when the US Speaker of the House Nancy Pelosi announced that the House of Representatives will launch an official impeachment inquiry into Mr Trump. "Impeachment politics is highly uncertain, and the process will take months to unfold," said Bank of Singapore investment strategy head Eli Lee.

Investors are now assessing how this might influence the US-China trade talks.

"A potential impeachment could exert more pressure on Mr Trump to strike a mini-deal, in order to suspend the planned tariffs in October and December which is expected to exert significant negative economic impact," said Mr Lee.

"However, the risk is that Trump could decide to play up trade conflict again to distract from the impeachment proceedings, especially considering that aggression against China has proved positive for his popularity polls and a weak deal with China could give his opponents political fodder ahead of his re-election campaign."

One other item that could potentially crank up volatility and impact Asian markets is the US earnings season which commences mid-month.

"Another earnings decline is expected for the Q3 season. As such, I would not be surprised to see regional markets take on a more cautious and defensive stance ahead of these event risks," said IG Asia's Jingyi Pan.