SINGAPORE (Aug 5): The US Federal Reserve has cut interest rates for the first time since December 2008, following intense pressure from US President Donald Trump to stimulate the economy. Interest rates are down 25 basis points to 2% to 2.25%, a decision made at the Federal Open Market Committee (FOMC) meeting on July 31.
The move is in line with the expectations of market watchers and was signalled ahead of time by comments made by two Fed officials. Citing concerns over global economic developments as well as muted inflation pressures, the Fed says its easing of the cost of borrowing serves to overcome possible risks from other countries.
Speaking to reporters, Fed chair Jerome Powell said the move will “insure against downside risks from weak global growth and trade policy uncertainty, to help offset the effects these factors are having on the economy”. He added that he remained confident of the US economy and saw no sectors en route to going “bust”.
Taimur Baig, chief economist at DBS Bank, says the cut implies that the “US dollar will remain well supported [amid] a weak outlook for China and Europe”. However, he notes that “the Fed has pushed itself into a corner by cutting rates at a time of record-high employment, frothy asset markets, rebounding consumer sentiment and housing prices”. Like many other analysts, Baig is apprehensive about another impending cut.
In the wake of the rate cut announcement, the Dow Jones Industrial Average and Standard & Poor’s 500 suffered their biggest daily percentage drops since May 31. This comes after Trump’s comments on the move’s falling far short of his expectations. “What the market wanted to hear from Jay Powell and [the Fed] was that this was the beginning of a lengthy and aggressive rate-cutting cycle which would keep pace with China, the European Union and other countries around the world,” Trump tweeted.
Minutes later, he added: “Powell let us down, but at least he is ending quantitative tightening, which shouldn’t have started in the first place — no inflation. We are winning anyway, but I am certainly not getting much help from the [Fed]!”
Powell dismissed concerns that the Fed’s decision was swayed by external pressures. “We never take into account political considerations.” He added that the Fed’s decision is going to depend on “the evolving data and the evolving risk picture”.
Baig believes a subsequent rate cut will be administered if the trade war is not resolved and asset markets become listless. There is a possibility that such a scenario may not occur, following an agreement between US and Chinese negotiators to meet in September for “constructive talks” to settle the trade dispute.
Back home, Singapore’s manufacturing output decreased 6.9% in June 2019, deepening the 2% drop recorded in May. The decline marks the fourth straight month of y-o-y decline, preliminary estimates from the Economic Development Board (EDB) released on July 26 showed. While this is an improvement from the 8.5% fall expected by economists, it indicates a continuation of the downtrend in the manufacturing sector — a key industry that accounts for nearly five times the size of Singapore’s GDP.
Stocks in focus
In yet another blow to Singapore Telecommunications, which is already suffering from lower earnings, S&P Global Ratings cut its credit rating outlook to “negative”, citing more intense regional competition and increasing cash needs for capital expenditure and dividend payout. S&P’s cut follows a similar downgrade by Moody’s Investors Service and Fitch Ratings in March. According to S&P, there is a one-in-three chance that Singtel’s leverage may not improve after 18 to 24 months, owing to greater-than-expected competitive pressure and capital expenditures. “We remain financially disciplined and committed to maintaining our investment-grade credit ratings,” the telco said in response to S&P’s downgrade. Singtel will announce its 1Q results next week. Singtel shares closed on Aug 1 at $3.36, up 0.9%.
Meanwhile, Delong Holdings’ share price surged after its trading suspension was lifted and a new offer was made by its controlling shareholder. Delong, a China-based steel manufacturer and trader, is owned primarily by Best Grace, a Hong Kong manufacturer that has an 81.8% stake.
Best Grace had, on behalf of Delong’s chairman and CEO Ding Liguo, made a $7 per share voluntary conditional cash offer for all the Delong shares it did not own, in a bid to privatise the company. This plan was eventually aborted. The Securities Industry Council (SIC) has since publically censured law firm Shook Lin & Bok and financial adviser PrimePartners Corporate Finance for their roles in the aborted privatisation attempt last September.
SIC found that, through an unintended breach, Shook Lin & Bok fell short of the standards expected of a legal adviser. It also said that PrimePartners should have exercised due care and independent judgement when relying on advice it received from Shook Lin & Bok on the offer price. PrimePartners has now been replaced by Stirling Coleman Capital. Delong shares closed on Aug 1 at $6.98, down 0.14%. Just before the suspension was lifted, Delong traded at $6.
The earnings in this reporting season thus far have been quite muted, giving investors little reasons to cheer. Singapore Airlines posted a 6.7% y-o-y increase in revenue to $4.1 billion for 1Q ended June 30. However, owing to higher fuel costs and depreciation charges, earnings for the same period suffered a 20.7% y-o-y drop to $111 million from $140 million. Two of its subsidiary airlines, SilkAir and Scoot, posted losses. SilkAir turned in an operating loss of $16 million against a marginal profit of $200,000 a year ago, as it was significantly impacted by the grounding of its six 737 Max 8 aircraft. Scoot too had an operating loss of $37 million from a $1 million operating profit a year ago on higher expenditure, restrained capacity growth and lower yields. SIA closed on Aug 1 at $9.20, down 4.86%.
The week ahead
The earnings season continues in the coming week, with several index heavy-weights of the Straits Times Index and other notable companies such as Jardine Matheson and Jardine Strategic Holdings reporting on Aug 2, along with Hi-P International, Oversea-Chinese Banking Corp, United Overseas Bank and Genting Singapore.
CapitaLand is set to announce its earnings on Aug 7, while telcos StarHub and Singtel will report on Aug 6 and 8 respectively.
