A rocky week for markets

Date: March 27, 2023

  • The STI managed to rise 29 points in volatile trading to 3,212.64
  • US FOMC and Yellen’s comments paved the early direction
  • Other central banks followed the Fed and raised rates
  • US Treasury bond yields down again
  • Banks were in focus, worries surround Deutsche Bank now
  • Analysts say Asian banks are preferred
  • UOB Kay Hian raised Malaysian glove sector to “overweight’’
  • Sembcorp Marine shares crashed 8% on Friday on news of Brazil probe


STI gained 0.9% at 3,212.64, all eyes on FOMC and Yellen’s comments

The Straits Times Index managed to rise 29 points or 0.9% to 3,212.64 in a volatile week in which banks and US interest rates were the main focus.

The US Federal Reserve’s Open Markets Committee meeting on Wednesday and US Treasury Secretary Janet Yellen’s comments to the Senate Appropriations Committee on the same day proved instrumental in dictating direction in the early part of the week.

On the one hand, the Fed’s decision to raise interest rates by only 25 basis points – its ninth consecutive hike since early last year – and its accompanying statements which signalled that the end to rate hikes could be near reassured Wall St and initially sent stocks rising, but on the other hand, Ms Yellen’s statements about the ongoing banking crisis then sent stocks reeling.

When asked if the Treasury was considering use of the Exchange Stabilization Fund to guarantee all deposits over US$250,000 at every Federal Deposit Insurance Corp (FDIC) insured bank without Congressional approval, Yellen responded: “This is not something that we have looked at. It’s not something that we’re considering.”

The market had been hoping for such guarantees in the wake of the current turmoil among European and US banks caused by the collapse of Credit Suisse, Silicon Valley Bank and Signature Bank.

Other central banks followed the Fed and raised rates

Markets had also partly been hoping that there would be no rate hike, though central banks everywhere last week followed in the Fed’s footsteps – the Bank of England lifted its benchmark by a quarter point, the Swiss National Bank increased its rate by a half point and Norway’s central bank raised its key rate by a quarter point.

Flight to safety pushed US Treasury bond yields down

The two-year Treasury yield fell to 3.777% last week, extending a recent losing streak to three weeks. A decline of 1.082 percentage points over that span marks the largest three-week yield decline since November 1987, according to Dow Jones Market Data. The 10-year yield declined to 3.379%.

According to the CME FedWatch tool, the market is now pricing in a 64% chance of no rate hike at the next FOMC meeting on 3 May, and a 36% probability that the Fed will raise rates by 25 basis points.

Banks were in focus, Deutsche bank next?

Not surprisingly given the events unfolding overseas, local banks were in play throughout the week. All three underwent volatile trading but managed to post gains for the week. Over the five days, DBS rose $0.82 or 2.55% to S$33.37, UOB added S$0.75 or 2.6% at S$29.29 whilst OCBC finished at S$12.36 for a gain of S$0.10 or 0.8%.

In a sign that the worst may not yet be over, Deutsche Bank fell 11.6% in Frankfurt trading on Friday whilst the US-listed shares fell 6%. The move followed a spike in the price of the lender’s credit default swaps to a four-year high on Thursday, according to Reuters.

Analysts: Asian banks preferred

According to analysts spoken to by the Business Times, Asian banks are seen as being relatively lower risk given their exposure to US and EU corporate bonds. Whilst most US and European banking stocks have come under pressure given the collapses seen in both jurisdictions, the impact on Asian banks has been much more contained.

According to the Wednesday report, the MSCI Asian Financial Index fell by 4.2% between 8-22 March, much less than the 10.6% loss sustained by the MSCI World Financials Index.

CGS-CIMB analysts were quoted as noting that Asian banks operate differently from their Western counterparts, which puts them at much lower risk than small- and mid-sized US banks.

As a result, the broker has retained its “overweight’’ on the Asian banking sector, preferring banks whose re-rating may be driven by economic re-opening and recovering domestic consumption.

Eastspring’s Asian equities portfolio manager Sundeep Bihani was quoted as noting that most Asian central banks tend to be conservative in their oversight of banks and apply strict standards when it comes to bank funding parameters. He is more optimistic on larger, better-capitalised, low-cost funded banks in Asia.

These banks’ hold-to-maturity investments should only make up a small percentage of total assets and their short-term liquidity coverage ratios are high relative to history.

UOB Kay Hian raised Malaysian glove sector to “overweight’’

After reporting unprecedented losses for 4Q 2022, the Malaysian glove sector is expected to bottom out in the first half of 2023 before gradually returning to profitability.

UOB Kay Hian has therefore upgraded the sector from “market weight’’ to “overweight’’ saying it expects average selling prices (ASPs) to improve across all producers.

“In addition, with costs expected to moderate in 2H 2023, we expect losses to narrow’’ said the broker.

Asean manufacturing indicators are pointing up: SGX

According to Singapore Exchange (SGX) market strategist Geoff Howie, manufacturing sentiment in South-east Asia is on an uptrend, which would placed Singapore’s listed manufacturers in a good position.

Based on data collected between 10-22 Feb, the S&P Global Asean Manufacturing Purchasing Managers’ Index (PMI) highlighted expansions in output and an improvement in new-order momentum.

Employment also rose in Feb, marking the first increase since Oct 2022.

Sembcorp Marine shares crash 8% on news of probe

On Friday, shares of Sembcorp Marine plunged S$0.009 or almost 8% to S$0.104 on huge volume of 769m after the company issued a notice in the morning that its wholly-owned Brazilian subsidiary EJA was being investigated for alleged irregularities.

It added that it was unable to assess the impact on EJA and said EJA is cooperating fully with the authorities.

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