Singapore’s stocks are facing a negative lead on Tuesday as Wall Street dropped overnight amid signs the U.S. trade war will continue to escalate, sending traders scurrying toward safe havens.
“It shouldn’t be news, but markets are reacting to headlines about the U.S. Trump administration moving to tighten investment restrictions against China and possibly others allegedly due to national security concerns,” Scotiabank said in a note on Monday.
“While this is not new and has been in the works since late May, the fact that Treasury Secretary Mnuchin will be the driving force indicates to markets that he is of the same protectionist persuasions as the rest of the Trump administration and therefore this lessens confidence there may be hope for a more balanced internal debate on trade and investment measures,” Scotiabank said.
Mnuchin later sent a statement on Twitter calling those reports “false, fake news,” but also saying that the reported investment restrictions on Chinese companies acquiring U.S. companies with “industrial significant technology” would be broader than reported and would apply to “all countries that are trying to steal our technology.”
The Dow Jones Industrial Average tumbled 1.33 percent on Monday, while the S&P 500 shed 1.37 percent and the Nasdaq dropped 2.09 percent. Futures for the three indexes have turned nose down.
The Straits Times Index ended Monday down 0.81 percent at 3260.84; STI futures for July were at 3253 on Monday, while futures for August were at 3221.
In a note on Monday, Phillip Securities technical analysis tipped key support at 3270, which has already broken, followed by 3200.
Japan’s Nikkei 225 was down 0.53 percent in early trade.
Why the trade war isn’t hurting stocks more
But for traders wondering why the U.S. trade war hasn’t hurt stocks more than it has, Chris Rupkey, chief financial economist at MUFG Bank, has a couple potential explanations: “Markets don’t know how bad it will get as the trade story never seems to be over,” he said in a note last week.
He also added, “The trade wars can stop as quickly as they started with a tweet … This is all just the process of negotiation: Trump-style. Didn’t convince you probably.”
U.S. trade war
The U.S. casualties of the Trump administration’s trade war are beginning to pile up.
Iconic motorcycle maker Harley Davidson announced that it would move some production of motorcycles destined for Europe out of the U.S. due to retaliatory tariffs of 31 percent in Europe, up from 6 percent previously; it said that would raise the cost of the average motorcycle exported from the U.S. to the EU by US$2,200.
“Harley-Davidson believes the tremendous cost increase, if passed onto its dealers and retail customers, would have an immediate and lasting detrimental impact to its business in the region,” it said. “Therefore, Harley-Davidson will not raise its manufacturer’s suggested retail prices or wholesale prices to its dealers to cover the costs of the retaliatory tariffs.”
It estimated the incremental cost of that would be US$30 million to US$45 million for the rest of 2018; it added that Europe was its second-largest market after the U.S. by revenue.
At the same time, the company has taken a hit within the U.S. from the Trump administration’s tariffs on steel and aluminum imports, which are key production inputs.
Additionally, Mid-Continent Nail, the largest nail maker in the U.S., began laying off workers, with the whole company potentially out of business by the U.S. Labor day in September, the Washington Post reported on Monday U.S. time. That was due to the Trump administration’s tariffs on steel imports from Mexico, the report said, with a company representative saying it had needed to raise its prices, which meant its customers likely began buying Chinese nails instead.
The U.S. dollar index was at 94.30 at 8:00 A.M. SGT, off levels as high as 93.68 overnight, but still up from as low as 93.40 earlier this month.
The 10-year U.S. Treasury yield was at 2.878 percent at 8:11 A.M. SGT, after trading as low as 2.867 percent overnight; but that was a drop from as high as 2.950 percent last week. Bond yields move inversely to prices.
The dollar/yen was at 109.511 at 8:15 A.M. SGT, after trading as high as 110.042 overnight. But the safe-haven yen has strengthened since the pair’s peaks over 111 in May.
The euro/dollar was at 1.1701 at 8:16 A.M. SGT, after trading as high as 1.1713 overnight. That compared with last week’s lows of around 1.1507.
“The U.S. dollar and Japanese yen are picking up safe haven flows with most other crosses losing ground,” Scotiabank said in a note on Monday. “Sovereign bond yields are rallying as they too pick up safe haven flows.”
The Singapore dollar has also lost ground against the U.S. dollar recently. The dollar/sing was at 1.3622 at 8:18 A.M. SGT, off its high of 1.3654 on Monday, but still well above the as low as 1.3302 earlier in the month.
Changing currency positioning
Some noted that positioning in the currency markets has changed significantly, but that it wasn’t clear how much direction to take from that.
“CFTC data show that the slice of the market they cover has covered its dollar short and gone long; a sharp turnaround in positioning that doesn’t tell us what happens next really (will the market now build a big long and drag the dollar higher?) but deserves a mention nevertheless,” Kit Juckes, macro strategist at Societe Generale, said in a note on Monday.
“The other side of the same coin is that the euro short is now small. There’s no more position-squeezing to be done, but that doesn’t mean euro bulls can heave sighs of relief – there’s still plenty of political uncertainty to cope with and Europe needs further signs of better economic data, too,” he added.
Nymex WTI futures for August were flat at US$68.08 a barrel at 8:10 A.M. SGT, while ICE Brent crude oil futures for August were up 0.24 percent at US$74.91, according to Bloomberg data.
Oil prices were likely seeking direction as the market tries to make sense of whether the OPEC production decisions over the weekend amount to a planned output increase and if so, how much more oil might actually be produced.
“On the surface, we do admit that the deal will effectively raise global oil production, though it does not signal a sustain climb back to pre-2015 levels. Importantly, the deal will not end the group’s 18-month deal to limit output, but rather seeking to cut no more than the 1.2 million bpd of oil agreed back in 2016,” Barnabas Gan, an economist at OCBC Bank, said in a note on Monday.
“Accounting for the over-supplies that we are already seeing, coupled with rising U.S. and OPEC oil production into 2018, our outlook for WTI and Brent prices to close lower to $65/bbl and $70/bbl respectively by year-end remains unchanged,” Gan said.
The World Cup is set to continue distracting traders — and leave them bleary from lack of sleep.
On Monday, Saudi Arabia topped Egypt 2-1 and Uruguay defeated a previously resurgent Russia 3-0.
Iran and lesser favorite, but still favorite, Portugal tied 1-1, while another lesser favorite, Spain, tied Morocco 2-2.
Later today, Australia will face off with Peru, Denmark will match up with France, Nigeria will play Argentina, and first-time World Cup team Iceland will go toe-to-toe with Croatia.