Monthly Market Wrap: US debt ceiling concerns eased to be replaced by inflation and interest rate considerations

Date: July 3, 2023

  • The month kicked off with an easing of US debt concerns
  • The month ended with US interest rates and inflation in focus
  • US Federal Reserve left the door open for two more rate hikes
  • The STI rose 1.5% in June to 3,205.91 but fell 1.4% for the first half
  • The market’s capitalisation rose 1.6% to S$804.7b
  • Probability of a technical recession rose after May’s 10.8% manufacturing contraction
  • SGX RegCo working on new rules for independent financial advisers
  • Yangzijiang Shipbuilding was in play after several contract wins
  • Russian agri firm Don Agro’s shares also in play after announcement of asset sales
  • Sabana Reit to vote on manager removal on 4 Aug


US debt ceiling worries replaced by inflation and interest rate considerations

The month started with markets heaving a sigh of relief that the US government had managed to raise its debt borrowing ceiling, concerns over which had capped Wall Street’s rises for several weeks whilst pushing inflation and interest rate considerations to be background.

However, the month ended with inflation, interest rates and the possibility of an economic slowdown very much at the forefront. This came after US Federal Reserve chair Jerome Powell said on Wednesday last week that the central bank is leaving open the possibility of consecutive interest rate hikes in the months ahead, to cool the economy further.

US Fed chief Jerome Powell left door open for more rate hikes

“We believe there’s more restriction coming,” Mr Powell told a central banking conference in Portugal on Wednesday.

“I wouldn’t take, you know, moving to consecutive meetings off the table at all,” he said.

Mr Powell said that US monetary policy will likely take more time to act against high inflation and bring it down to the Fed’s long-term target of 2 per cent.

Earlier in the month, the Fed had paused its aggressive cycle of rate increases after 10 consecutive hikes, to give policymakers more time to weigh the effects of existing moves on inflation. At the same meeting, a majority of members on the Fed’s rate-setting committee indicated that they see interest rates rising twice more before the end of the year.

However, the Federal Reserve’s preferred measure of inflation, the core personal-consumption expenditures price index, declined more than expected in May, helping push stocks higher in the session.

“This is excellent news on the inflation fight. If you don’t believe disinflation is happening, you aren’t paying attention,” Jamie Cox, managing partner for Harris Financial Group, wrote on Friday.

For the month, the STI added 1.5%; for the first half it was down 1.4%

For the month, the Straits Times Index added 47 points or 1.5% at 3,205.91. For the first half, the index recorded a loss of 46 points or 1.4%.

Singapore’s market cap rose 1.6% in June to S$804.7b

The market capitalisation of the 629 companies listed on the Singapore Exchange rose 1.6% in June to S$804.7b. The market cap of the 30 STI component stocks rose 2.8% to S$538.4b, which is about 67% of the whole market.

This was partly due to a change in the constituents as Keppel DC Reit was replaced by Seatrium. Keppel DC Reit has a market cap of S$3.7b versus Seatrium’s S$8.5b.

The biggest gain in market cap was recorded by electric vehicle maker Nio, whose market value grew S$4.4b to S$21.3b. This was followed by DBS, which added S$3.1b to S$81.4b, making it the largest stock in the market.

The first half’s largest gain was recorded by Singapore Airlines, whose market value rose S$5.9b  to S$21.3b. Its shares added 29.3% in the first half to close at S$7.15.

Economists flag risk of technical recession after 10.8% contraction in May’s manufacturing output

Singapore’s manufacturing output contracted for an eighth straight month in May. The slump was deeper than expected, putting the economy at higher risk of a technical recession.

Factory output last month fell 10.8 per cent from a year ago, the first double-digit contraction since November 2019 when it dropped 12.3 per cent.

It was also sharper than the median 7.3 per cent fall forecast by economists in a Bloomberg poll, and was steeper than April’s 6.5% fall. Excluding the typically volatile biomedical cluster, factory output shrank 13% following April’s 5.7% contraction.

RHB senior economist Barnabas Gan was quoted by the Business Times as saying Singapore faces heightened risk of a technical recession in 1H 2023 “following the annual contraction in externally-facing indicators’’.

Maybank economist Chua Hak Bin noted the persistent manufacturing downturn: “Singapore’s manufacturing PMI (49.5 versus 49.7 in April) deteriorated for the third straight month in May’’ and also wrote about the increasing chance of a technical recession.

Similarly, UOB senior economist Alvin Liew, in noting that electronics has yet to find a bottom in the current cycle, also reiterated a “substantial risk’’ of a technical recession in the first half.

SGX RegCo working on new rules for independent financial advisers

The Straits Times on Thursday reported that the Singapore Exchange’s regulatory arm SGX RegCo is working on new guidelines that will give much-needed clarity with regards to independent advice when it comes to privatisation offers.

The newspaper quoted an SGX spokesperson saying, “After considering market feedback and following engagement with relevant stakeholders, SGX RegCo intends to spell out shortly our expectations of directors when appointing independent financial advisers (IFAs) as well as of IFAs when arriving at their independent opinion’’.

Yangzijiang Shipbuilding was in play after several contact wins

Shares of China-based Yangzijiang Shipbuilding (YZJ) saw heavy trading on Tuesday onwards, following an announcement that it has secured several sizeable contracts.

On Sunday, the company announced it has been awarded a contract from Norway-based Klaveness Combination Carriers ASA for the construction of three 83,300 DWT third generation CABU vessels, due for deliveries in 2026.

On Monday, YZJ announced that it has secured a contract to build six 9,000 TEU (twenty-foot equivalent) methanol dual-fuel containerships from Maersk.

On Tuesday YZJ said it had secured orders for 37 more vessels. “With these latest order wins, year-to-date, the Group has secured new orders for 69 vessels worth approximately US$5.6 billion, exceeding its year 2023 target of US$3 billion, achieving the highest ever total outstanding orderbook value of US$14.60 billion for 180 vessels’’ said YZJ.

DBS Group Research described the company’s Q2 order wins as “mind-blowing’’ as the market had expected activity to slow down from last year amid a hefty order backlog.

“We surmise that the likelihood of them expanding current capacity and expediting delivery is increasing with the huge order intakes in Q2’’ said DBS. It has a “buy’’ on the stock with a target price of S$1.70.

Citi’s analysts were also positive on the stock, saying that the near-term outlook remains favourable and further order wins will drive a re-rating. It added that the year-to-date depreciation of the yuan could pose upside risk to YZJ’s first half performance. Its target is S$1.56.

The shares ended the week at S$1.56, up S$0.28 or 22% for the week.

Don Agro’s shares closed 74% higher after announcement of sale of businesses

Shares of agricultural firm Don Agro, which is listed on Catalist, on Wednesday rocketed up S$0.14 or almost 74% to close at S$0.33 on volume of 529,300 after the company announced it is proposing to sell its crop and milk production businesses.

Earlier that day, the stock hit an intraday high of S$0.36. The last time it traded near these levels was in February 2022. The shares ended the week at S$0.305.

Based in Russia, the company said its wholly-owned subsidiary JSC Tetra will dispose of between 99-99.99% of its stakes in four subsidiaries for 6.2b roubles or around S$113m. These subsidiaries focus on crop and milk production.

Assuming the deal was completed on 31 Dec 2022, Don Agro said it would have raised the company’s net tangible assets per share from S$0.4846 to S$1.0012 and its earnings per share to S$0.4106 from a loss per share of S$0.0118. The gain on disposal is expected to be 3,5b roubles.

Sabana Reit to vote on manager removal on 4 Aug

The extraordinary general meeting requisitioned by activist shareholder Quarz Capital to remove Sabana Reit’s manager will be held between 2-4pm at Hope@New Tech Park on 4 Aug.

Quarz had called for the meeting to pass two resolutions, the first being to remove Sabana’s manager as soon as possible. The second is to internalise the manager by incorporating a subsidiary wholly-owned by the trustee and appointing this subsidiary to act as the Reit’s manager.

Quarz had earlier stated that internalising the manager would bring cost savings to the Reit and resolve corporate governance flaws. It said this would result in higher distribution per unit and a higher price for the Reit.

Sabana’s manager and controlling shareholder ESR Group have warned that following through on Quarz’s proposals could destroy value. ESR in a 25 June letter said a change in manager could constitute a breach of loan covenants.

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