Singapore stocks victims of escalating US-China trade war. Possible STI July rebound but cap at 3355 or 3417
• Trump directed the US Trade Representative office to draw up a list of USD200bil worth of Chinese imports to subject to an additional 10% tariff. This would be on top of the initial 25% tariff on USD50bil worth of Chinese imports.
• China vows retaliation but may have limited ‘firepower’ because it imports USD130bil and exports much higher at USD505bil to the US.
• Asian equities fell on escalating trade war fear. Singapore stocks not spared given the country’s status as a small-open economy much dependent on global trade flows.
• This unexpected negative turn of events led to a decline below our previous stated support level of 3385.
• STI currently trades at slightly below 12.38x (-0.75SD) 12-mth fwd PE -> Investors pricing in negative earnings impact going forward if trade war worsens.
• What to watch for in the weeks/months ahead: Will the US carry out the threat of additional tariffs or can US-China return to the negotiation table?
• Short-term view - Support level 3250 and 3200. Further dip to 3250 that coincides with 12x (- 1SD) 12-mth fwd PE is possible but odds of STI testing 3200 are low.
• Watchful of a short-term July market rebound with resistance at 3355 and 3417.
• What we are wary of beyond the short-term: First time since Dec 2016 that STI fell decisively below the crucial 200-day exponential moving average (EMA)!
• Fall below 200-day EMA indicates the long-term trend has turned negative, unless STI recovers back above it (currently at 3420).
Source : DBS Group Research