Middle East War Led To Rebound In Stocks And Easing Bond Yields

Date: October 16, 2023

  • Fall in US Treasury yields helped STI add 11 points or 0.3% at 3,185.79
  • Also helping were less-hawkish comments from Fed officials
  • Probability that the Fed will keep rates unchanged in Nov now 94%
  • However, US CPI data suggests that inflation is still a problem
  • Analysts say Middle East conflict could add to inflation, interest rate worries
  • CapitaLand Ascott Trust to get nod from shareholders for asset purchases
  • Creative gave notice of 3 consecutive years of losses
  • Telecom stocks were most defensive over the past 10 weeks: SGX Research
  • SGX’s securities turnover down 26.5% in September
  • Singapore’s economy grew better-than-expected 0.7% in Q3


Safe haven buying of US Treasuries helped stocks rebound

Perhaps counter-intuitively, the outbreak of war in the Middle East between Israel and Palestine helped Wall Street rebound from the losses it had sustained in September and the first week of October.

The reason for this is that although conflict in the Middle East has led to worries of higher oil prices and therefore inflation and interest rates, the immediate impact last week was that the resultant flight to safety meant buying of US Treasury bonds, leading to their yields falling from their 16-year highs, thus easing pressure on stocks.

Also helping were less-hawkish comments from US Federal Reserve officials over the future of interest rates.

“If long-term interest rates remain elevated because of higher term premiums, there may be less need to raise the fed-funds rate,” Dallas Fed President Lorie Logan said on Monday, whilst Atlanta Fed President Raphael Bostic cut straight to the point in remarks on Tuesday morning. “I don’t think we need to increase rates anymore,” he said.

The outcome was a bounce in US stocks and bonds that enabled the Straits Times Index, which had lost 43 points the previous week, to claw back some of those losses last week. Led mainly by the banks, the index finished at 3,185.79 for a nett gain of 11 points or 0.3%.

Liquidity however, has been a problem for several weeks now and last week was no different. Volume done on Monday was a paltry S$581m and only touched the S$1b mark once, which was on Thursday. The average daily turnover for the week was S$813.4m.

US bond yields backed off from their 16-year highs

The yield on the 10-year U.S. Treasury note hit 4.8% on 3 Oct, which was the highest since 2007, whilst at the same time the 2-year yield rose to 5.15%.

Treasury yields were lower on Friday after a big jump in the previous session. The 30-year Treasury yield ended the week at 4.787%, while the 10-year yield closed at 4.62%. The more rate-sensitive 2-year yield was down 2 basis points on Friday to 5.05%. For the week, the Dow Jones posted a 0.8% gain and the S&P 500 added 0.4%, but the tech-focused Nasdaq fell 0.2%.

“A market obsessively focused on Treasury yields saw rates edge lower due to the market’s interpretation of the remarks in addition to global buying of Treasuries as a safe haven during the intensifying conflict between Israel and Hamas,” wrote Quincy Krosby, chief global strategist for LPL Financial, on Tuesday.

US CPI data suggests inflation is till a problem

On Thursday, the release of the US September consumer price index (CPI) showed that price growth cooled in September, but there was enough underlying strength in the data to suggest the Federal Reserve’s job of fighting inflation isn’t done just yet.

Consumer prices climbed at a 3.7% annual pace last month, coming in 0.1 percentage point above consensus expectations and matching August’s pace as energy prices and shelter costs remained firm. On a month-over-month basis, the headline index rose 0.4%, a tick above the 0.3% that had been expected but below August’s strong 0.6% climb.

Probability that the Fed will keep rates unchanged in Nov now 94%

Against that backdrop, September’s inflation data suggest the Fed is likely on track to hold interest rates steady when officials meet again on Oct. 31-Nov. 1.

After the data’s release Thursday morning, investors were pricing in a nearly 90% chance that rates will remain unchanged at the current level through November. On Friday, this rose to 94%.

Analysts say Middle East conflict could add to inflation, interest rate worries

The Business Times quoted the head of economics and strategy for Asia at Mizhuo Bank Vishu Varathan as saying the latest conflict in the Middle East “poses significant uncertainty for energy markets’’.

However, he noted that markets have been “desensitised’’ by the Ukraine war and are “unlikely to panic unless the threat of supply disruption is identifiable and imminent’’.

Oanada analyst Kelvin Wong said in the same report that any clearance with a daily close above US$89.90 for WTI crude oil futures is likely to trigger a “broad-based risk-off scenario’’ as inflationary expectations will start to pick up.

Thilan Wickramasinghe. Head of regional financials at Maybank Investment Banking Group said the bank sees oil prices firming higher and safe haven flows into the US dollar rising.

“These could stoke inflationary pressures for Singapore’’ he noted. In terms of impact, he said sectors such as transportation and utilities could face immediate increases to operating costs from higher energy prices.

CapitaLand Ascott Trust to get nod from shareholders for asset purchases

CapitaLand Ascott Trust will seek approval from stapled securityholders for several interested person transactions at its upcoming Oct 24 extraordinary general meeting.

These include the S$530.8 million acquisition of three lodging assets in London, Dublin and Jakarta, announced in August, as well as the renewal of three master leases for serviced residence properties in France, expiring on Dec 31, 2023.

Creative gave notice of 3 consecutive years of losses

Creative Technology gave notice that it has recorded pre-tax losses for three consecutive years; however, it is able to avoid being placed on the Singapore Exchange’s (SGX) watch list, as its six-month average daily market capitalisation as at Wednesday (Oct 11) was S$110.3 million.

According to SGX listing rules, mainboard-listed companies will be placed on the watch list under the financial entry criteria if they record pre-tax losses for the three most recently completed consecutive financial years and fail to maintain an average daily market cap of at least S$40 million over the last six months.

Creative narrowed its losses in the second half ended Jun 30 this year after implementing cost-cutting measures. It posted a US$6.1 million net loss, an improvement from the year-ago loss of US$12.2 million.

It has been in the news a fortnight ago after announcing a tie-up with China electronics firm Skyworth, news which caused its shares to shoot up as high as S$1.83 before ending September at S$1.68, a gain of 41% over its pre-announcement price.

On Friday last week, Creative closed at S$1.61.

Telecom stocks were most defensive over the past 10 weeks: SGX Research

In an 11 Oct Market Update, SGX Research said after ending July at 3,373.98, the STI then fell 5.2% to 3,199.07 on 10 October, with dividends reducing the decline in total return to 3.5%.

“The decline has been comparable to the 4.8% and 4.7% declines in total return for the FTSE ASEAN Extended 60 Index and FTSE Asia Pacific Index respectively’’ said SGX Research.

“Across the Asia Pacific, Telecommunication Stocks were generally the most defensive segment over the 10 weeks. In Singapore, the trio of Singapore Telecommunications, NetLink NBN Trust and StarHub averaged a 0.2% total return, led by StarHub’s 7.3% total return’’.

SGX Research also reported that of the 200 most traded Singapore stocks this year, 41 stocks generated positive total returns over the 10 weeks.

“The 41 stocks also booked a combined S$1.1 billion in net institutional fund flow over the 10 weeks, with Banks, Industrials, Financial Services (Excl. Banks), Technology, and Consumer Non-Cyclicals contributing the most the S$1.1 billion. In contrast, the entire Singapore stock market booked S$450 million of net institutional fund flow over the 10 weeks’’ said SGX Research.

SGX’s securities turnover down 26.5% in September

Total securities turnover value on SGX fell 26.5% in September to S$17.3 billion from S$23.6 billion the prior month, with September’s securities daily average value down 19% on the month to S$867 million.

Total securities market turnover volume fell 16.2 per cent to 24.4 billion shares in September, from 29.2 billion a month ago.

Total derivatives volume for the month stood at 21.5 million, down 9.1 per cent from 23.7 million the previous month. It also represents a 3.5 per cent decline from the same period a year ago.

SGX nonetheless noted a surge in derivative trading activity in foreign exchange and commodities, driven by widening rate differentials and surging oil prices.

Singapore’s economy grew better-than-expected 0.7% in Q3

Singapore’s economy grew 0.7% year on year in the third quarter of 2023, an improvement from the previous quarter as manufacturing posted a milder contraction according to advance estimates from the Ministry of Trade and Industry (MTI).

This was an improvement from Q2’s 0.5% year-on-year growth. Private-sector economists polled by Bloomberg were expecting less – 0.4% year-on-year growth.

The Monetary Authority of Singapore said on Friday that it expects full-year growth in 2023 to come in “at the lower half” of the official forecast range, which is between 0.5 per cent and 1.5 per cent.

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