Date: October 25, 2022
- Positive UK developments helped provide support early in week
- Bond yields remained high, STI caved in on Friday
- Loss for the week was 2.3%, STI below 3,000 at 20-month low
- US stocks and bonds lifted on Friday by WSJ report that Fed may consider slowdown in rate hikes
- US corporate earnings likely to be key in weeks ahead
- US Treasury yield curve remains inverted
- S-Reits earnings in the spotlight as sector under pressure from high rates
- UOB-Kay Hian: Optus breach to cut only 7% off Singtel’s earnings
- US hard landing likely: Nobel laureate Myron Scholes
Markets have entered wait-and-see mode
It was a weak five days that the local market underwent, most probably because most markets seem to have shifted to “wait-and-see’’ mode. This was very much the case on Wall Street, where investors were said to be waiting for the outcome of the 2 Nov Federal Open Markets Committee meeting and were content to either stay out of stocks altogether or try and trade within narrow limits.
US stocks lifted by WSJ report
Wall St was lifted on Friday by a Wall Street Journal (WSJ) report that Fed officials are considering when–-and how to communicate—a potential slowdown in interest rate hikes. According to the report, Fed officials have begun signalling their desire both to slow down the pace of increases soon and to stop raising rates early next year to see how their moves this year are slowing the economy.
They want to reduce the risk of causing an unnecessarily sharp slowdown. Others have said it is too soon for those discussions because high inflation is proving to be more persistent and broader that previously thought.
STI lost 2.3% over the week, closed at 20-month low below 3,000
Whatever the case, the Straits Times Index initially threatened to break below 3,000 early in the week, before recovering. On Tuesday it managed a 10.13 points rise to 3,025 after eight consecutive losses that saw it shed 138 points or about 4.4%.
However, on Friday it encountered a bout of concerted selling in the afternoon that took it below 3,000, down 52.75 points to a 20-month low of 2,969.95. The nett loss for the week was 70 points or 2.3% that came in mediocre average daily volume of S$1.06b,
Positive UK developments helped stabilise some nerves
It’s not often that the UK takes centre stage when it comes to dictating market sentiment, but such was the case last week when new Chancellor of the Exchequer Jeremy Hunt said on Monday that the government will reverse the earlier-proposed tax cuts and would walk back some of the energy price cap plan.
The overall plan was initially meant to stabilize an economy ailing from soaring inflation. But the Bank of England has been lifting short-term interest rates to combat inflation. The tax cuts, for their part, would have created more inflation and were in direct opposition to most of the country’s monetary policy. The announcement Monday reassured markets that the country’s economy and financial system can handle tighter monetary and fiscal policy.
Following this, UK markets were cheered on Thursday following news that Prime Minister Liz Truss had resigned.
Wall Street endured tug-of-war between earnings and interest rates
Corporate earnings will remain in focus—and especially how companies are describing their outlook for the months to come amid recession worries.
About two-thirds of S&P 500 companies that have reported results so far have beaten profit expectations, according to Credit Suisse. For all of the market’s concern about a recession, that’s not a bad outcome for now.
Results from big U.S. banks for example, have thus far been better-than-expected in aggregate, though the banks are setting aside large sums of money to absorb potential credit losses as risks to the health of the consumer emerges.
US Treasury yields remained high, yield curve inversion is a worry
Bond yields kept rising to reflect the risk that the Fed must continue lifting rates rather aggressively. The 10-year Treasury yield on Wed rose to 4.127%, a new multi-year high, then rose again to 4.225% on Thursday.
While the 10-year yield has moved higher, the yield curve is sending a troubling signal. Ultra-short-term rates have been catching up to long-term rates. The three-month Treasury yield is almost at 4%, and if it surpasses the 10-year yield, that part of the curve would be “inverted.”
Such an inversion signals that short-term rates are rising so quickly because of inflation that long-term inflation and economic demand expectations are under pressure. It’s often a sign of economic weakness ahead and could eventually hit corporate profits.
Thanks to the WSJ report, the 10-year Treasury yield fell to 4.212% on Friday. Still, yields on the benchmark note rose 0.207 percentage point on the week, marking the 12th consecutive weekly gain.
S-Reits in the spotlight as interest rates rise
In a Thursday report, the Business Times noted that the FTSE ST Real Estate Investment Trust has lost 20% since April, making it the second-worst correction suffered by the sector, not including the US sub-prime crisis of 2008 and the Covid-19 selloff of 2020.
As S-Reits start to announce their 3Q results over the coming weeks, analysts the newspaper spoke to said they will be keeping a close eye on Reits’ cost of funds, interest coverage, gearing ratio and proportion of loans expiring in the second half of 2022 and 2023.
RHB analyst Vijay Natarajan was quoted saying he would pay close attention net property income margins, any potential margin compression from inflationary pressures, rising utility charges and the pricing power of the Reit in terms of rent reversions and occupancy trends.
“In Singapore, we will be watching industrial Reits’ operating metrics and outlook to get a better picture of demand and supply, and the impact from the manufacturing slowdown seen in the latest monthly data’’ said Mr Natarajan. “This, in our view, could also be a bellwether for the economic outlook ahead’’.
UOBKH: Optus data breach will shave only 7% off Singtel’s FY23 earnings
Local broker UOB-Kay Hian on Thursday said in a report that Singtel’s FY2023 earnings is expected to take a smaller-than-expected hit from the Optus data breach since Singtel’s wholly-owned Australian subsidiary Optus has been spared the full cost of passport replacements for affected customers.
The broker’s analysts now forecast a potential provision of around S$240m for Singtel – including an anticipated regulatory fine of A$2.2. in Q2 2023, resulting in a 7% reduction in estimated PATMI or profit after tax and minority interests.
It had been initially thought that Optus would have had to bear the passport replacement cost for 1.4m customers; however, the telco has since clarified that only 100,000-150,000 passport details were stolen in the breach, and that it would bear costs only for unexpired passport holders waiting for replacements.
As a result, UOBKH has kept its “buy’’ recommendation for Singtel with a S$2.90 target as it believes that the telco maintains its strong growth fundamentals, with its other business segments slated to benefit from the economy’s ongoing recovery from the pandemic.
Singtel fell S$0.08 or 3.25% to S$2.38 on high volume of 37.6m on Friday. It was the day’s most active counter.
US likely to face a hard landing: Nobel laureate Myron Scholes
Investors should buckle up for an extended run of high interest rates and a likely recession, said Nobel prize-winner Myron Scholes.
“Real rates are still negative,” says the co-founding father of options pricing. “The Fed will have to keep increasing until they’re positive and biting.”
Mr Scholes recalled that it took Fed Chairman Paul Volcker “quite a long time” to quell the last binge of U.S. inflation, which peaked at 14% annually in 1980. It subsided to 3.2% only three years later, and the Fed funds rate stayed above 5% throughout the 1980s.
He was speaking at a webinar on Wednesday sponsored by Janus Henderson Investors, where he is chief investment strategist. He and co-author Fischer Black published “The Pricing of Options and Corporate Liabilities” in 1973, which won Scholes the Nobel Prize in economics in 1997.
The Fed and other central banks are “fighting against governments, which are still using deficit spending as a cheque book,” Scholes added. That all adds up to “much greater odds of a harder landing than a soft one.”