Business

Will fire burn and cauldron bubble for equities?

Even as many hesitate to read too much into United States President Donald Trump's undiplomatic rhetoric, traders could still find themselves losing sleep over the rising rift triggered by his recent "fire and fury" threat to North Korea over the latter's nuclear programme.

That could turn the flight to safety - think gold and the Japanese yen - back into vogue, not unlike what happened last week.

"Tensions over North Korea lend support to safe-haven assets, particularly gold. Geopolitics is a binary wild card that usually provides only a temporary boost to safe-haven assets.

"We believe that the recent recovery should run out of steam once the US dollar regains strength," said Mr Norbert Rucker, Julius Baer head of macro and commodity research.

Equities could continue to suffer a hit amid the risk-off mode. US stocks finished higher on Friday, clawing back from sharp losses in the previous session, but the sense of caution was palpable over the war of words between the US and North Korea, the Dow and S&P 500 having suffered their worst weekly showing since March.

On the local bourse, the key Straits Times Index (STI) lost 47 points, or 1.4 per cent, last week.

The rising geopolitical tensions will likely linger this week even as investors look towards other relatively less prickly highlights for direction, chiefly the minutes from the US Federal Open Market Committee (FOMC) and European Central Bank meetings as well as data updates.

Citi Research expects the FOMC minutes to include some discussion on soft inflation and monetary normalisation plans.

This follows inflation data released out of the US late last week, which showed that consumer prices last month rose less than expected.

This also adds to another disappointing reading from the world's largest economy with a below-forecast rise in the cost of living, which potentially places the Federal Reserve's inflation goal further away and, in turn, could make it cautious about raising interest rates again this year.

"The Fed is still likely to push forward with balance sheet reduction in September, but it does not yet have the 'all clear' signal from the economic data for a December interest rate hike," said Well Fargo Research.

"We doubt the Fed will change course just yet... there are plenty of data points between now and December to navigate."

For this reason, the Fed's balance sheet plans through a series of Fed comments will also be the focus this week.

Besides monetary policy, US leads in the week ahead also include retail sales figures, while remaining earnings from large retailers such as Target and Walmart will be the ones to observe, said IG market strategist Jingyi Pan.

Also in the pipeline are some key Asian macro data - Japan, Malaysia, the Philippines and Taiwan are set to release Q2 gross domestic product data this week.

The Singapore market will see last month's non-oil domestic exports update on Thursday.

China will also release its industrial production, retail sales and fixed asset investment figures at the start of this week.

Moody's Analytics expects China's data dump last month to paint a "generally positive picture".

As for the direction of the local stock market, DBS Group Research expects the market to turn sideways over the current third quarter on the back of growth moderation, earnings uncertainty and possible caution heading towards the September FOMC meeting.

The house has a target range of 3,130 to 3,275 for the STI over the next two to three months.

"Currency market movements suggest a choppy third quarter for equities. The STI and USDSGD tend to move in opposite directions," it said.

It, however, expects the "choppy spell" to be short-term, with the STI heading towards 3,350 by year-end.


This article appears in The Business Times today. For full listings of SGX prices, go to http://btd.sg/BTmkts