Inflation and interest rate worries returned as US bond yields spiked upwards

Date: August 21, 2023

  • The STI fell every day, dropping 3.7% to 3,173.93
  • The fall was led by the banks, SIA and Sembcorp Industries
  • Hawkish Fed minutes, China’s property worries and weak July export numbers were the main reasons
  • US Treasury yields spiked upwards, 10-year yield at highest since 2008
  • Market waiting for this week’s Jackson Hole summit for interest rate clues
  • Sats’ 1Q loss widened, however analysts still positive on the stock


The Straits Times Index fell every day, down 3.7% at 3,173.93

The Straits Times Index fell every day last week, losing 121 points or 3.7% along the way at 3,173.93. There were three main reasons for the drop – minutes of the US Federal Open Markets Committee’s July meeting which showed that most officials saw a continued risk from inflation, China’s alarming economic slowdown and sobering news that Singapore’s key exports had plunged 20% in July.

Banks led the decline; SIA lost 6.8% and Sembcorp fell 8.9%

Most of the index’s losses came from the three banks, Singapore Airlines (SIA) and Sembcorp Industries.

For the week, DBS lost S$0.90 or 2.7% at S$32.72, UOB fell S$1.05 or 3.6% to S$27.93 while OCBC’s loss was a substantial S$0.81 or 6.2% at S$12.27.

The STI component which sustained the largest percentage loss was Sembcorp Industries, its S$0.52 fall over the week to S$5.38 amounting to 8.9%. SIA was not far behind with a S$0.50 or 6.8% fall to S$6.88.

Hawkish FOMC minutes started the ball rolling

Typically released several weeks after each FOMC meeting, the minutes revealed that members are still grappling with an unusual level of uncertainty regarding the economic outlook.

With inflation still well above the Committee’s longer-run goal and the labor market remaining tight, most participants continued to see significant upside risks to inflation, which could require further tightening of monetary policy… ‘’ the minutes showed.

“Participants generally noted a high degree of uncertainty regarding the cumulative effects on the economy of past monetary policy tightening… and emphasized the importance of communicating as clearly as possible about the Committee’s data-dependent approach to policy and its firm commitment to bring inflation down to its 2% objective.”

US Treasury yields spiked upwards, the 10-year yield at highest since 2008

The yield on a 10-year treasury rose to 4.258% on Wednesday after release of the FOMC minutes, a new 52-week high and the highest yield since June 2008. On Thursday, the yield continued to rise, touching 4.29% before ending the week at 4.25%.

“This higher-for-longer narrative is coming out of the Fed, causing nominal rates and real rates to keep moving higher,” declared Lawrence Gillum, chief fixed income strategist at LPL Financial.

“Whether they can continue to keep moving higher is the question. Ten-year Treasury yields have a direct impact on mortgage rates, so if they go higher, we’re likely to see continued stress in housing markets’’.

All eyes on Jackson Hole meeting on Thursday

US Fed chief Jerome Powell is due to deliver his scheduled speech at Jackson Hole on Thursday. It will be scrutinized for clues as to where interest rates are headed and the Fed’s assessment of the state of the US economy.

China Evergrande filed for bankruptcy protection

Anxiety over China’s economic slowdown, particularly in the property sector, has dampened market sentiment. On Thursday, China Evergrande Group filed for bankruptcy in New York on Thursday, seeking to protect its US assets from creditors as it undergoes restructuring.

The move comes as concerns grow over indebtedness among property developers in China and the potential for their financial woes to damage growth in the world’s second-largest economy.

China’s state-owned property developers warned of widespread losses, fuelling concerns that the housing crisis will spread to companies with government backing.

Eighteen out of 38 state-owned builders listed in Hong Kong reported losses in the six months to 30 June, up from 11 which reported losses for 2022.

Over the week, the Hang Seng Index lost 746 points or about 4% at 17,950.85.

Singapore’s key exports fell 20.2% in July

Non-oil domestic exports slid 20.2% on the year in July, steeper than June’s 15.6% contraction. It was the 10th consecutive month of decline and exceeded the median drop of 14.3% forecast by economists in a Bloomberg poll.

Year-on-year, electronic exports shed 26.1% in July, worse than June’s 16% drop. Non-electronic shipments fell 18.5% versus 15.6% in June.

DBS economist Chua Han Teng was quoted in the Business Times as expecting further year-on-year drops in the near term. UOB senior economist Alvin Liew expects “a few more months’’ of year-on-year contractions before recovery later in the second half.

SATS’ loss widened; analysts still positive

Airline handling agent and air cargo firm Sats reported a net loss of S$29.9m for its first quarter ended 30 June. The net loss for the same period last year was S$22.5m.

Sats said the higher figure was due to one-off costs related to the integration of Worldwide Freight Services (WFS) which was bought in April. Excluding integration one-off expenses, underlying core loss after tax and minority interests narrowed to S$17.4m versus a loss of S$19.5m last year.

DBS Group Research noted that Sats’ bottom line was “skewed by accounting nuances’’ such as the front-loading of interest expenses and the added amortisation of intangible assets at WFS and added that the company’s overall business momentum appeared to be positive.

CGS-CIMB noted that contributions from joint ventures and associates improved 21% quarter-on-quarter to S$21m. “On a standalone basis, Sats recorded a profit of S$15m in the first quarter of fiscal year 2024, a S$9.5m improvement quarter-on-quarter’’ said the broker.

UOB-Kay Hian said that excluding accounting treatment differences and one-off integration expenses, Sats’ first-quarter net loss of S$17.4m was in line with expectations.

CGS-CIMB, UOB-Kay Hian and DBS set 12-month target prices of S$2.86, S$2.99 and S$3.20 respectively for Sats. The stock finished the week at S$2.52.

Selected earnings in brief

The Singapore Exchange (SGX) reported that its net profit for its second half ended 30 June rose 23.1% to S$286.3m, lifting its earnings per share for the half year to S$0.268 versus S$0.218 in 2022. A final quarterly dividend of S$0.085 has been proposed which is expected to be paid on 20 Oct after the record date of 13 Oct. If approved, this would bring total dividends for FY2023 to S$0.325 compared to S$0.32 in FY2022. The exchange’s revenue for its H2 was up 7.9% to S$623m, driven largely by fixed income, currencies and commodities segments. Meanwhile, revenue contribution from cash equities fell 11.5% to S$175m.

Yangzijiang Financial reported a 19.2% increase in net profit for its first half ended 30 June to S$162.5m versus the same period last year. Earnings per share was up from S$0.0345 to S$0.0439 which the company said was thanks to its earnings growth and buyback activity. Total income rose 14% to S$198.4m but interest income, which was the main income generator for the period, was down 18% to S$151.6m.

United Hampshire REIT reported a distribution per unit (DPU) of S$0.0265 for its first half ended 30 June, which was 8.9% lower than the DPU for the same period last year. It said its manager decided to retain distributable income of US$1.5m as capital reserves for asset enhancement and development initiatives. Excluding this retention, DPU would have held steady at US$0.0291. Gross revenue was up 13.3% to US$36m, partly thanks to contributions from Upland Square, located in Montgomery, Pennsylvania. Net property income was up 14% to US$25.8m.

ComfortDelgro reported a 31.9% drop in net profit for its first ended 30 June to S$78.5m versus the same period last year mainly due to higher operating costs and the absence of a one-off disposal gain. Still, the transport company has raised its dividend payout ratio to a minimum of 70% from 50% to reward shareholders “more appropriately with what is going to be the traditional strong cash flow from current businesses’’. Revenue rose 1% to S$1.86b, net asset value per share was S$1.1854 versus S$1.1879 last year and the company has declared an interim dividend of S$0.029 per share – 80% of profit – payable on 1 Sep after books closure on 22 Aug.

Golden Agri-Resources reported a 53.3% fall in net profit to US$182m for its first half ended 30 June, mainly because of weak crude palm oil prices and slowing production that dragged its second quarter net profit down 55.4% to US$90m. Revenue for the first half fell 11.2% to US$4.9b and earnings per share was US$0.0144, down from US$0.0307 last year. No interim dividend was declared.

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