Inflation, interest rates and the Fed

Date: January 31, 2022

  • The STI lost 48 points or 1.45% at 3,246.33
  • Main concerns were US Fed tightening in face of rising inflation
  • Question is how many rate hikes there will be – 3 or 4?
  • 3rd SPAC Novo Tellus ended debut below its offer price
  • Contractor Alpina Holdings ended debut just above its offer price
  • iFast continued to come under pressure
  • Outlook: more volatility ahead

Wall St’s weakness eventually took a toll here

Last week was all about whether the local market could hold its ground in the face of a nervous and unsteady Wall Street where inflation and interest rates fears took centre stage whilst the US Federal Reserve held its first Open Markets Committee meeting of the year.

As it turned out, the answer initially was “yes it could’’, but as the selling in the US market intensified as the week wore on, so did prices here come under pressure.

Over the course of a volatile five days in which the three banks once again played a pivotal role in the fortunes of the Straits Times Index (STI), the index finished with a net loss of 48 points or about 1.45% at 3,246.33.

The loss was not totally unexpected, given that the index had risen 171 points or 5.5% from the end of 2021 to the start of last week, thanks mainly to the three banks who are believed will be beneficiaries of higher interest rates.

In contrast, the US market had weakened during the same period as worries intensified over the fate of interest rates and also as concerns grew over possible military conflict in Ukraine, following Russia’s buildup of troops at the Ukrainian border.

Daily volume averaged S$1.47b, ranging from a low of S$949m on Monday to S$2.15b on Friday. Turnover on Friday was elevated by Singtel, the counter dropping S$0.04 to S$2.46 on volume of 55.1m for a value traded of S$136m. It was the day’s most active stock.

Wall St and the Fed

On Monday, just before the start of the US Federal Reserve’s 2-day Open Markets Committee meeting, panic prevailed on Wall St when the market’s “fear gauge’’, the CBOE’s Volatility Index shot up as high as 38.94, the highest since October 2020, before it pulled back to 29.90.

The Fed on Wednesday confirmed what investors already knew: Interest rates will start to rise in March just as the central bank’s emergency bond-buying program fully concludes.

Investors also got new, if vague, details over officials’ plans to shrink the Fed’s US$9 trillion balance sheet, which has doubled since the start of the pandemic and represents nearly 40% of US gross domestic product.

Perhaps more worryingly, Fed Chairman Jerome Powell during his press conference expressed growing concerns over inflation alongside rising uncertainty over economic growth.

US observers now say that instead of three interest rate hikes this year, four is more likely. This is because the Fed, which already knew that the market was debating the number of hikes, did nothing to address this issue.

Despite Friday’s bounce, the S&P 500 is still down almost 8% from its all-time high hit in early January and had previously dipped into correction territory. The index is also still slightly below its 200-day moving average.

Market’s 3rd SPAC Novo Tellus ended debut below offer price

The local market’s 3rd Special Purpose Acquisition Company Novo Tellus Alpha Acquisition (NTAA) debuted on Thursday and closed at S$4.86, S$0.16 or 2.8% below its S$5 offer price. Volume traded was 1.3m units.

The counter managed a S$0.04 rise on Friday at S$4.90. NTAA has said it will target companies in the technology and industrials sectors in the Indo-Pacific region.

Alpina Holdings ended its debut with marginal gain

Contractor Alpina Holdings debuted on Catalist on Friday and finished the day at S$0.32 versus its S$0.31 offer price. Former minister for national development Mah Bow Tan is among those who subscribed to the company’s placement shares.

Alpina is a contractor specialising in providing integrated building services, mechanical and electrical engineering services, as well as alteration and addition works. The company is engaged in both public and private sector projects including those by the Singapore government ministries and statutory boards, and public universities and institutions.

iFast’s slide continued

Shares of wealth management platform iFast, which have been under pressure after the company announced it is buying into UK’s BFC Bank, continued to slide last week.

Citi Research during the week said iFast is likely a risky investment due to its dilutive merger and acquisition plans, and uncertainty over its near-term earnings. It maintained its “sell’’ call on the stock.

iFast’s shares traded at S$9.88 just three months ago, ended Friday at S$6.13. To partly fund the BFC purchase, iFast placed out shares at S$7.50 apiece.

The outlook – more volatility ahead

The Business Times on Friday quoted OCBC Investment Research’s research head Carmen Lee as saying that inflation has been a key focus for many months now and that the Fed’s move had been widely expected.

“However, global economic and corporate earnings growth are positive mitigating factors for the longer term. For the near term, as the market grapples with uncertainties related to rising rates, we expect market volatility to remain’’ said Ms Lee.