Positive sentiment for stocks
Developments over the short term giving good indications
A TRADE war which might actually be pretty tame, a dollar that is weakening despite interest rate hikes and an oil cartel that isn’t as strong as it used to be.
These things have yet to be fully priced into the market, and once it does (especially the first two), stocks just might react positively.
Amidst more than enough news about US’ protectionist tariffs against the Chinese, a sliver of good news emerged, showing that the US could be more on bluster rather than action.
On Monday, US President Donald Trump and his South Korean counterpart Moon Jaein signed a renegotiated free-trade agreement on the sidelines of the United Nations General Assembly, marking the first time the US president has finalised a major trade deal since entering office.
Trump hailed the signing of a renegotiated US-South Korea trade agreement as a “historic milestone in trade”.
Under the new deal, South Korea will double to 50,000 the number of cars each US carmaker can sell in the Asian nation without meeting local safety standards. In any case, no American company sells much more than 10,000 cars a year in South Korea.
South Korea did agree to terms that allowed the US to keep its 25% import tariff on trucks in place until 2041 rather than 2021 as originally planned.
Mild surprise
The deal also placed a quota on South Korean steel shipments to the US. South Korea expects the deal to take effect on Jan 1.
The new agreement was a mild surprise considering the Trump’s administration threat to impose tariffs on steel and aluminum from South Korea last March.
This shows that Trump is pushing for freer trade after all. He is not stubbornly set on increasing protectionism as many feared.
The US president said this deal was evidence that he was achieving his campaign promises.
Besides South Korea, the closest the administration has come to completing a new trade deal with a major trading partner is with Mexico, which agreed to a partial rework of Nafta several weeks ago. Negotiations with Canada to join the new deal also continued this week.
During the United Nations meeting, Japan has agreed on bilateral trade talks with the US, thus averting being imposed tariffs for now.
“Despite President Trump’s tendency to talk big, major change, tentative agreements announced thus far don’t appear radically different from past accords, said Fisher Investments MarketMinder.
“We find this comment on the Korean deal telling: ‘The changes made are meaningful but modest’,” said Wendy Cutler, who negotiated the original US-South Korea deal, known as Korus, under Presidents Bush and Obama.
‘The president set very high expectations that this was a terrible agreement and he was going to totally change it and reduce the bilateral trade deficit, but this seems to be pretty traditional agreement.’”
Fisher Investments MarketMinder said meaningful escalation – with China or any other country – is not impossible, but the likelihood seems low.
“As investors grasp this sunnier-than-anticipated reality, we think stocks should benefit,” it said.
Weaker US dollar
Now the other surprising issue is the dollar. Things have been going great. And its supposed to get greater from all the famously touted reasons – an outperforming US economy, Federal Reserve rate hikes, risky emerging markets and Brexit issues to name a few. The US remains the safest haven in the world.
So why isn’t it strengthening? TRADE STATISTICS ON BURSA MALAYSIA (RM mil)
A look at the performance of the US dollar against major currencies such as the Euro, British Pound, Canadian Dollar, Swiss Franc shows that the Dollar has been weakening since mid June.
Says Fisher Marketminder: “Like any other asset, currency values depend on supply and demand. Money supply globally is growing modestly today, and a number of factors (eg, uncertainty knocking sentiment) can impact demand in the short term. All else constant, though, money flows to what markets expect to be the highest-yielding asset, and investors happen to have preferred other currencies over the US dollar over the past month or so,”
“While currency traders may care about the dollar’s movements, trying to glean broad conclusions from currency wobbles is a fool’s errand, in our view. Moreover, rising or falling currencies aren’t an economic driver, a more important consideration for stocks,” says Fisher MarketMinder.
Meanwhile on Wednesday, the Federal Reserve announced a widely expected increase in its benchmark interest rates to a range between 2% and 2.25%. This was the third rate hike of the year.
The Federal Reserve’s chairman, Jerome H.
Opec isn’t as strong as it used to be
In a recent article by Bloomberg on Opec, it was headlined “Opec Like a Dying Star, Is About to Go Supernova”.
Basically it said that Opec isn’t as relevant today as it was in its past 58 years of its existence.
At its peak, Opec had a 49% share of global market production in 1973. As of 2018, it only has a 34.32% share.
Today, Opec has more members than ever, yet its share of global production is at a 27-year low. Its new members have done little to increase its share of global production.
The group’s ability to influence oil prices by either boosting or cutting output has also waned.
As of this week, oil traded near US$82 a barrel after President Donald Trump resumed his attack on Opec during his speech at the United Nations, while Goldman Sachs Group Inc. poured cold water on forecasts for US$100 crude.
That threw a bit of cold water on bullish forecasts issued this week by trading giants Mercuria Energy Group Ltd and Trafigura Group, who said that supply losses could send oil back above US$100 a barrel.
Opec is faced with a steep drop in Iran supply and Venezuela’s slumping output, while production growth from the US is slowed by pipeline bottlenecks.
According to the Goldman analysts, led by Damien Courvalin and Jeffrey Currie, production from other Opec producers and Russia will offset losses out of Iran. Also, any big jump in prices this fall ahead of US elections would likely lead to Trump authorising a release from the country’s strategic reserves.
“As a result, we expect Brent prices to stabilise back in their US$70-US$80/bbl range by year-end,” wrote the analysts.
While Fisher Investments MarketMinder agrees that Opec’s power is indeed diminishing, it is unsure about an impending death.
“Rising US and non-Opec output have changed global oil market dynamics, particularly since American output has lots of spare capacity.
“That said, the cartel has survived some pretty big challenges before: multiple episodes of war between fellow members; mid1980s threats from rising North Sea oil production and Mexican output; and 1990s internal strife and overproduction leading to a glut while Asian demand cooled. Hence, we aren’t so sure it can’t persist through the present stresses,” it concluded.
Statistic by MIDF Investment Research