How long can banks support the STI in the face of rising interest rates and geopolitical risk?

Date: February 14, 2022

  • Large gains in banks pushed the STI up 2.9% to 3,428.95
  • Wall St came under pressure from two fronts – inflation and Ukraine war concerns
  • US bond yields initially spiked up, then dropped after flight to safety
  • The 10-year yield rose above 2% on Thursday but ended Friday at 1.92%
  • SPH terminated Keppel’s implementation agreement, Keppel started arbitration proceedings against SPH

The local stock market spent most of last week decoupled from Wall Street, with the Straits Times Index forging ahead to new multi-year highs thanks mainly to buying of the banks.

It managed five consecutive gains, only coming under pressure on Friday when it dipped into the red during the day when the Dow futures registered a large drop. However, a late bounce meant that the index ended Friday in the black, and that it added 97 points or 2.9% over the week at 3,428.95.

Friday’s intraday bounce could once again be traced to the banks – all three recorded decent rises, led by DBS’s $0.40 jump to S$37.25 on volume of 6 million shares traded.

Over the course of the week, DBS added S$1.30 or 3.6%, UOB’s gain was S$1.30 or 4.2% at S$32.60 and OCBC’s was S$0.53 or 4.1% at S$13.33.

The big question next week, however, will be whether the banks can continue to support the index in the face of mounting concerns on two fronts – runaway inflation which means faster-than-expected interest rate hikes, and the likelihood of war in Europe if Russia invades Ukraine.

The first concern badly affected Wall Street on Thursday when it was announced that the US’s consumer-price index rose 7.5% year over year in January, beating expectations of 7.2% and accelerating from the 7% for December. The core consumer-price index, which strips out the more volatile food and energy prices, rose 6%, above estimates of 5.9%.

The second emerged on Friday, after US President Joe Biden ordered 3,000 additional troops to Poland, amid concerns that Russia could invade Ukraine “any day now.”

Those were the words of National Security Adviser Jake Sullivan, and they helped sink a market that was already slipping on concerns about inflation, the Federal Reserve and consumer sentiment.

On Friday, the Dow Jones Industrial Average dropped 504 points, or 1.4%, while the S&P 500 fell 1.9%, and the Nasdaq Composite plummeted 2.8%. The indexes finished higher than their lowest levels of the day.

Bond yields spiked up – then down

The 10-year US Treasury yield rose on Monday to 1.96%, then jumped to 2.06% on Thursday. The 2-year US Treasury yield, which tries to forecast the number of short-term rates hikes within the next couple of years, rose to 1.63% from 1.36% just before the inflation print on Thursday.

On Friday however, the 10-year yield dropped to 1.92%, thanks mainly to a flight to safety that ensued after Ukraine war concerns emerged.

The rising yield, which is a headwind for stocks, comes as the US Federal Reserve tightens monetary policy. The central bank is expected to soon reduce the size of its balance sheet, which means less money moving into the bond market, pushing bond prices down and lifting yields. The Fed is also expected to lift rates several times this year to stave off high inflation.

St. Louis Fed Chair James Bullard, a voter on the FOMC this year, said on Thursday he now favours a half-point interest rate hike in March, the first increase of that magnitude since 2000.

As of Friday, the federal funds futures market was pricing in a 54% chance of a 50 basis point hike at the Fed’s next meeting over 15-16 March.

While yields are still low by historical standards, the speed of the recent Treasury movement is highlighting a meaningful shift for borrowing costs across the economy, or an input that investors use to value stocks and other assets. It was only a month ago that the 10-year yield was hovering around 1.5%.

SPH terminated Keppel’s implementation agreement, Keppel started arbitration against SPH

Singapore Press Holdings (SPH) last week said it has decided to terminate Keppel Corp’s implementation agreement relating to the latter’s takeover offer, while pressing ahead with preparations for shareholders to vote on Cuscaden Peak’s rival offer.

This in turn prompted Keppel to file a notice of arbitration with the Singapore International Arbitration Centre (SIAC) to start arbitration proceedings against SPH.

On the same day, Cuscaden said any action that delays the vote on its bid would go against the interest of SPH shareholders.

SPH’s termination notice, among others, stated that the Securities Industry Council (SIC) – the regulator for takeovers and mergers – had no objections to SPH’s exercise of its right to terminate the implementation agreement with Keppel, and that not all the conditions of the Keppel scheme had been satisfied on or before the Feb 2 cut-off date.

But Keppel’s unit for the takeover bid, Keppel Pegasus, said SPH should not have consulted with SIC on the termination, “given the prevailing circumstances where the Keppel scheme should have been put to shareholders of SPH for their consideration”.

Keppel also said the SIC ruling does not affect Keppel Pegasus’ rights under the Keppel implementation agreement, which sets out the terms and conditions for how the offer for SPH, which has shed its media business, would be carried out.