Banks help keep the STI afloat as Wall St tumbled

Date: January 24, 2022

  • UOB took over from DBS as main bank play
  • The STI added 13 points or 0.4% at 3,294.86 despite sliding Wall St
  • SPACS Vertex Tech and Pegasus Asia debuted on Thurs and Fri respectively
  • SGX RegCo issued trading warning on Metech
  • Wall St fell every day of the week as bond yields spiked up on rising rate expectations
  • Fed funds futures pricing in 5.6% chance of a 25-basis points rate hike at this week’s FOMC
  • Nasdaq is now 14% below its Nov all-time high

UOB took over from DBS as main bank play

Earlier in the month it was gains in DBS that contributed the most towards the Straits Times Index’s upward push. Last week as DBS’s momentum stalled, UOB and OCBC took over, their gains helping the index add 13 points or 0.4% at 3,294.86 – a rise that came despite surging US bond yields that caused Wall St to undergo yet another wobbly week in which tech stocks took a beating and investors worried about the number of interest rate hikes the US Federal Reserve might undertake this year.

In UOB’s case, the news a week earlier of its S$5b purchase of some of Citigroup’s Asean assets was clearly the main driver of its S$0.44 or 1.5% gain over the week at S$30.37. DBS on the other hand, lost S$0.33 or 0.9% over the five days at S$35.55 whilst OCBC shed S$0.02 at S$12.31.

Local brokers Maybank, for example, described UOB’s purchase as being “well-timed’’ to take advantage of Asean’s opening.

The acquired client base is synergistic to UOB’s mass-wealth, omni-channel strategy and should further strengthen its integrated ASEAN franchise. Execution risks need to be watched, particularly from a cultural, systems and regulatory perspective. Going forward we see upside risks from improved NIMs (net interest margins) from higher rates, better loan and fee growth plus provision write-backs. Maintain BUY’’ said Maybank as it maintained its target price of S$31.15 for UOB.

Other than the banks, main plays as far as STI components were concerned included Singtel, Jardine Matheson and Thai Beverage. Gains in these stocks enabled the STI to hit an intraweek high of 3,299.64 on Tuesday, the highest since 1 Aug 2019.

First SPAC Vertex debuted on Thursday

The local market’s first Special Purpose Acquisition Company or SPAC debuted on Thursday and ended with a modest gain. Units of Vertex Technology Acquisition Corp (VTAC) finished at S$5.05 with 1.69m traded versus its offer price of S$5. It was unchanged on Friday.

Second SPAC Pegasus Asia debuted on Friday

Units of the second SPAC to list on SGX, Pegasus Asia, ended Friday at S$5.02, marginally above their offer price of S$5, on volume of 2.1m. The SPAC is sponsored by European asset manager Tikehau Capital and luxury goods company LVMH’s chief executive Bernard Arnault’s family office.

A third SPAC, Novo Tellus Alpha, registered its final prospectus on Friday and is expected to start trading on 27 Jan.

SGX RegCo issued Trade with Caution on Metech International

The regulatory arm of the Singapore Exchange, SGX RegCo, on Thursday issued a “Trade with Caution’’ warning on Metech International and said recent trades were driven by individuals who appear to be connected to one another. It noted that the stock’s price surged by 51% from 1 Nov 2021 to a high of S$0.375 on 21 Dec 2021, then fell by 44% by 19 Jan 2022.

In both cases, the price activity was in contrast with the STI’s movements. SGX RegCo has now found that a group of accounts was behind more than half of the “buy’’ volume in the Nov-Dec period and more than half the “sell’’ volume afterwards.

On Thursday, before the warning was issued, Metech’s shares rose S$0.04 to S$0.25 on volume of 6.6m. On Friday, they fell S$0.064 or 25.6% to S$0.186 on volume of 8.2m.

Inflation and interest rate worries rocked Wall Street and bond yields rise

US stocks were largely on the receiving end of selling pressure last week, with the major indices coming under pressure every day, except for Monday when the market was closed for Martin Luther King Day.

Throughout the week the main cause of the selling was surging bond yields which hit mainly technology stocks – on Tuesday, the Dow Jones Industrial Average lost 1.5%, the S&P fell 1.8% and the Nasdaq Composite plunged 2.6% when the 10-year Treasury yield shot up to 1.88%, the highest since before the pandemic. It ended Friday at 1.76%.

The yield has soared this year, rising from a low of 1.36% in early December. Driving the move higher has been persistently high inflation, which has forced the Federal Reserve to plan interest rate increases this year, possibly as many as four. Plus, the central bank is considering shrinking its bond portfolio, which drives less money into the bond market, lowering bond prices and lifting their yields.

Rate hike expectations, rising oil prices added to the pressure

Markets keep reflecting the tighter policy, in the form of rate-hike expectations. The 2-year Treasury yield, which forecasts the expected benchmark lending rate for the next couple of years, rose as high as 1.05% on Tuesday, a pandemic-era record.

In the commodity space, oil was at its highest level since 2014 amid geopolitical tensions in the Middle East, with Iran-backed fighters in Yemen claiming to have launched drone strikes at the United Arab Emirates. The U.A.E. is a major producer of crude and an influential member of OPEC+, the group of national exporters that includes Saudi Arabia and Russia.

“Inflation and interest rate concerns are going nowhere soon and with traders now increasingly considering the possibility of [interest rate] hikes larger than 25 basis points, the possibility of more pain in stock markets is very real,” wrote Craig Erlam, senior market analyst at Oanda on Wednesday.

All eyes on the Fed for its 26 Jan meeting

The US Federal Reserve meets this week and its decision with regards to interest rates is expected on Wednesday. The federal funds futures market is pricing in a 5.6% probability of a rate hike.

Tech stocks now on correction territory

The tech selloff means that the Nasdaq Composite is now firmly in correction territory and is about 14% lower than its all-time high hit in late November.

The Dow and the S&P 500 are approximately 7% and 8%, respectively, lower than their January all-time highs. The S&P 500 also experienced its worst weekly performance since the week ending March 20, 2020.

Also, the S&P 500 ended Friday below its 200-day moving average, which indicates investors are now less comfortable buying stocks at prices consistent with their longer-term trends.