Market enters “consolidation’’ phase as it looks to Wall Street for direction

Date: September 28, 2020

  • Market consolidated last week with the STI losing 25 points or 1% at 2,472.28;
  • Wall St continued to set direction;
  • US investors were nervous about rise in virus numbers, lack of fiscal stimulus;
  • In local news, Wilmar announced IPO details for China unit;
  • SIA replied to BT comment, explained fuel hedging actions;
  • More retail investors are trading this year

A consolidation phase

Perhaps the best description for the behaviour of the local stock market over the past few weeks is that it has entered a “consolidation phase’’, an oft-used cliché that means that investors have no idea what the next move should be and so are simply following the momentum set by other markets.

The main pacesetter for Singapore as well as most global markets is Wall Street, which of late has appeared to have been decoupled by movements here, is still nonetheless the main barometer to which local investors look for direction.

Wall Street remained nervous

Over in the US, continued concerns about a lack of additional fiscal stimulus, more weakness in technology stocks, US election-related uncertainty, and a rise in Covid-19 cases – these were the main forces that brought pressure to bear on Wall Street and in the process, dragged the Straits Times Index 25 points or about 1% down over the week to 2,472.28.

On Friday however, the STI rose 21.46 points ahead of a rally on Wall St that enabled the Nasdaq Composite at least, to avoid a weekly loss. The Dow Jones Industrial Average and S&P 500 on the other hand, recorded a fourth consecutive weekly loss.

Throughout the week US tech stocks were in focus, largely because of their recent falls after rising to record highs earlier in the month. Markets were also closely watching developments in the US surrounding more fiscal stimulus.

On Thursday for example, prices whipsawed as hopes first rose that a package would be unveiled when it was learned that US Treasury Secretary Steven Mnuchin and the Democratic House leader were open to fresh talks.

However, prices later plunged when it was reported that Speaker Nancy Pelosi’s position was not much different from, leading to concerns that the two sides would remain far apart.

Reports out of the US also said traders are growing cautious about the strength of the economic recovery because of a resurgence of COVID-19 cases ahead of what appears to be a contentious US presidential election.

Wilmar announced IPO price details for its China unit

Shares of commodities firm Wilmar International were actively traded last week after the company announced an issue price of 25.7 yuan per share for its unit to be listed in China.

However, there was an element of “buy in anticipation, sell on news’’ present, when Wilmar’s shares ended weaker on Thursday after the announcement. The stock lost 2 cents S$4.36, despite heavy volume of 23.5m.

Wilmar said the price was arrived at after taking into account investor demand, prevailing market conditions, comparable valuations of other listed companies in the same industry, the unit’s fundraising requirements and the risk to the joint underwriters. The price works out to a price/earnings multiple of 31.12 based on the unit’s FY2019 recurring net profit and enlarged post-IPO share capital.

Among the investors is Singapore’s sovereign wealth fund GIC, People’s Daily Media and Advertising Co and Rongze Investment Co.

SIA says it will remain steadfast, prudent and agile

In a letter replying to a Business Times commentary about the problems Singapore Airlines needs to address, SIA executive vice-president for finance and strategy Tan Kai Ping pointed out that pre-COVID-19, during the third quarter of FY19/20 (Oct-Dec 2019), SIA posted record quarterly revenues, passenger uplift capacity and traffic numbers.

“Given the impact of COVID-19, our aircraft delivery stream will need to be deferred. We have reached an agreement with Airbus on this, while negotiations continue with Boeing. The long-term rationale for fleet renewal however, remain valid’’ said Mr Tan.

Also in focus in recent weeks has been SIA’s fuel hedging strategies. Mr Tan said hedging allows the airline to reduce volatility of its single largest operating cost.

“The Group only hedges a portion of its planned fuel consumption. This means that in a period of rising fuel prices, fuel cost does go up but by less than if it were not hedged. Conversely, in a period of declining fuel prices, fuel cost goes down but by less than what it would be if we were not hedged’’ said Mr Tan.

“The COVID-19 pandemic led to a sharp slump in demand for oil since March 2020 and that took place amidst an unexpected price war and supply glut. As a result, oil prices plunged. This led the Group recognising fuel hedging losses on contracts that were expiring over the last two fiscal quarters’’. He added that SIA has paused its fuel hedging as announced in April.

More retail investors trading stocks during COVID-19

The Singapore Exchange (SGX) last week said between February and July, the number of Central Depository (CDP) account openings was more than two-and-a-half times that of the same period last year.

The Straits Times on Saturday reported that Standard Chartered Bank has seen  200% growth in trading volume and a 20% increase in account applications for the bank’s online platform in the first half of this year.

The report also quoted a DBS official saying that new-to-trading DBS accounts opened in the first half was more than double those opened in the whole of 2019.