Date: April 30, 2018
A common thread running through our market reports over the past few weeks is that investors should be keeping a close eye on developments in the US bond market, where the 10-year Treasury had been flirting with the 3% mark since early February.
Last week’s report also discussed the possibility of the yield curve inverting or flattening, which occurs when short-term rates as measured by the 2-year yield either exceeds or equals longer-term rates as measured by the 10-year yield. According to some theories, a flattening or inverted yield curve tends to forecast an impending recession.
On Tuesday, the 10-year yield crossed 3%, sending Wall Street equities plunging, with the Dow Jones Industrial Average down 425 points or 1.7% at 24,024. On Wednesday, the resultant selling here was relatively well-contained, at least as far as the Straits Times Index was concerned, with the index dropping just under 17 points to 3,568.
Perhaps more importantly, the 2-year yield on Wednesday rose to 2.5%, the highest since 2008. CNBC that day reported that investors have switched about US$868m out of exchange-based funds or ETFs invested in US stocks, into funds that trade short duration bonds.
And why not – as observers have noted, there would be some investors who would be happy with a 2-year, risk-free return of 2.5% given the current volatility in stocks, the high valuations at which US equities are trading and the S&P 500’s dividend yield of 1.9%.
The reasons for why the bond market is coming under pressure are difficult to pin down. The obvious explanation is that it is pricing in more rate hikes by the US Federal Reserve ahead of increased inflationary pressure. Equity bulls would then argue that this would mean that the US economy is growing nicely, so the rise in rates is justified and the upward march in stock prices should soon resume.
Bears on the other hand, might argue that with the yield curve looking like flattening and possibly even inverting, the economy is slowing. If inflation then rises, a condition known as “stagflation” may even set in – stagnant growth amidst rising inflation.
For the local market, the Straits Times Index rose for 4 of the 5 trading days, the net result being a 4-points rise for the week to 3,577.21. Volume increased progressively as the days passed, from S$1.14b on Monday to S$1.4b on Friday, possibly as portfolios get rebalanced (or windows get dressed) at month end.
In the local corporate front, financially-troubled commodities trader Noble Group’s long-standing run-in with one of substantial shareholders, Goldilocks Investment Company, continued last week when the latter on Wednesday filed two lawsuits to stop Noble from holding its annual general meeting next week and from taking action to further a restructuring support agreement that Noble says is aimed at saving the company. This was granted by the High Court on Thursday. Goldilocks is also looking win legal standing that it is entitled to propose directors for appointment to Noble’s board.
Also, in the news was technology firm Trek 2000 International, whose shares crashed on Wednesday after release of a report by forensic accountants from RSM Corporate Advisory revealed millions in suspected fake sales and roundtripping. The company’s chairman and CEO Henn Tan has since denied any malicious intent or financial improprieties. The SGX weighed in with a notice of compliance for the company to hold a shareholders’ meeting to vote on the suitability of Mr Tan continuing in his present role.
Elsewhere, high-flying Venture Corp last week became the latest target of an unknown party named Valiant Varriors, who is possibly a short seller in the mold of Muddy Waters and Iceberg Research. On Monday, an online report by VV was circulated, claiming that Venture makes 30% of its revenue from making a cigarette substitute whose sales have plateaued.
On Wednesday, Venture reported a 72% increase in net profit for its first quarter ended 31 March to S$83.7m versus the same period last year, and a 1.5% rise in revenue to S$856m. Credit Suisse in a 26 April report downgraded Venture to “neutral’’ with a target price of S$24, describing the 1Q results as being below expectations.
Maybank Kim Eng however, said Venture has “multifaceted growth drivers and see the recent correction as an even more attractive opportunity to buy”. The broker described the 1Q figures as “very respectable” and set a target price of S$28.83. OCBC Investment Research in the meantime, reiterated its “buy” with S$30 target.
