“Is 75 the new 50?”

Date: June 20, 2022

  • Wall St plunged into bear market territory
  • The STI lost the 3,100 level, down 83 points or 2.6% at 3,098.09
  • The US Fed raised interest rates by 75 basis points on Wed
  • Worries are that the Fed playing “catch-up’’ might tip US into recession
  • Bond market’s stability on Friday helped ease pressure on US stocks
  • Frasers Property to privatise Frasers Hospitality Trust at S$0.70 per unit
  • SIAS urged Hwa Hong shareholders to wait before deciding on offer

US stocks are now in bear market territory

Wall Street came under intense pressure this week on concerns over inflation and the direction of interest rates. On Monday, the S&P 500 fell into bear market territory, which is defined as a fall of at least 20% from a recent high. As US stocks plunged, so did the local market – the Straits Times Index dropped 75 points between Monday and Wednesday.

There were hopes of some respite on Thursday morning when the index bounced 30 points intraday, but these were quickly dashed when the selling resumed in the afternoon to drag the STI into the red for the day. On Friday, the pressure continued and the 3,100 level was lost.

A late bounce however, brought on by a rise the Dow futures, helped the index close with a marginal gain for the day. It wasn’t enough however, to make an appreciable impact on the net loss for the week, which amounted to 83 points or 2.6% at 3,098.09.

Average daily volume was S$1.52b, ranging from a low of S$1.16b on Wed to a high of S$2.3b on Friday.

On Wednesday, the US Federal Reserve’s latest Open Markets Committee meeting ended with the Fed raising rates by 0.75 percentage point, to a range of 1.5%-1.75%. It was the biggest increase since 1994 and was undertaken in an attempt to cool inflation that is running at a 40-year high.

How Wall St fared

The selling pressure on US stocks eased a little on Friday – as was anticipated here when the Dow futures rose ahead of Wall St’s opening. However, the S&P 500, the Dow, and the Nasdaq still ended the week down 5.8%, 4.6%, and 4.8%, respectively.

Bond market stabilised on Friday after a rocky week

The Fed’s projected rate hikes looking ahead would bring the benchmark lending rate up to 3.75% by the end of 2023. That has brought the 2-year Treasury yield, which attempts to forecast the level of the benchmark lending rate a couple of years from the present, up by several times from where it started the year. It initially gained more on Thursday, before slipping to about 3.1%, just under a multiyear high.

Friday’s stability in the US stock market came about thanks to relative calm in the bond market. The 10-year Treasury yield ended at 3.24%, just under Thursday’s close, and down from a multi-year high earlier this week. The 2-year Treasury yield ended at 3.18%, close to its Thursday close of 3.16%, and also down from a multi-year high this week.

Will 75 prove to be the new 50 as the Fed plays catch-up?

Wednesday’s hike follows a 50-points increase in May, which at that stage was the largest increase since 2000. Until just about a week ago, another 50-points rate increase this month seemed all but guaranteed. Fed Chairman Jerome Powell in May had taken a bigger hike off the table, and markets had almost fully priced in 0.5% increases for June and July.

“The Committee is highly attentive to inflation risks,” the Federal Open Market Committee, the Fed’s policy-setting arm, said in its statement. It pointed to Russia’s invasion of Ukraine, which is worsening food- and energy-price inflation, as well as to Covid lockdowns in China, which are likely to exacerbate supply-chain disruptions.

CME data showed a 98% chance of a three-quarter point hike, with similar odds for another three-quarter point hike in July. During his press conference Wednesday, Fed Chairman Jerome Powell said that he and his colleagues “are acutely aware that high inflation poses significant hardship.” He didn’t rule out another 0.75-percentage-point increase in July, but he said he doesn’t expect rate increases of June’s magnitude to be “common.”

Markets are now worried about higher rates pushing the US into a recession as the Fed is seen as having fallen far behind the inflation curve.

“The positive spin from Powell is gone,” wrote NatAlliance Securities’ Andrew Brenner whilst Jason Brady, president and CEO of Thornburg Investment Management was quoted by US newspaper Barron’s saying the Fed “are so far behind the curve that they have little choice” but to act aggressively in lifting interest rates.

Frasers Property to privatise Frasers Hospitality Trust

Frasers Property Hospitality Trust Holdings, a wholly-owned subsidiary of Frasers Property, last week proposed to take Frasers Hospitality Trust (FHT) private at S$0.70 per stapled security through a trust scheme of arrangement that will take S$1.3b off the local market.

“Hospitality remains one of our core businesses. This transaction will allow FPL Group to increase its investment in hospitality assets at locations that we are already familiar with,” said Loo Choo Leong, FPL’s group chief financial officer.

The offer price represents a premium of 43.8 per cent over the 12-month volume-weighted average price of FHT and is 16.7 per cent over a recent analyst consensus target price.

The offer values FHT at 1.07 times its net asset value. This is higher than the historical average of FHT’s trading value since its listing.

FHT owns some S$2 billion worth of hospitality assets such as hotels and service apartments in key cities in Asia, Australia and Europe. The properties it owns in Singapore include the InterContinental Singapore hotel.

SIAS urges Hwa Hong shareholders to wait for more information

SIAS on Friday urged Hwa Hong shareholders to wait for more information from the company’s management before deciding on the offer to privatise.

The offer from Sanjuro United was initially priced at S$0.37 per share before it was later revised to S$0.40 per share. The independent financial adviser for the firm, Provenance Capital, said that the offer price was “fair and reasonable”, even though it represented a 20.8 per cent discount to the adjusted revalued net asset value (RNAV) of the group of S$0.5052 per share.