Date: July 1, 2022
- The Straits Times Index dropped 4% at 3,102.21 in June
- Rising interest rate and inflation worries were the main factor
- The S&P 500 is down 21% this year, its worst 6 months since 1970
- For the STI, 3,100 appears to be where support lies
- Overall market cap fell 2.2% to S$861.4b in June, led by banks and Jardine Matheson
- For the 10-year US Treasury yield, 3% is a key level
- Cryptos take big hit, led by Bitcoin
- Goldman Sachs: US earnings face downside risk
The STI came under pressure, losing 130 points or 4%
The Straits Times Index fell 130 points or 4% over the month of June to end at 3,102.21. The main factor behind the index’s loss was the fear of rising interest rates, primarily in the US where investors on Wall St spent the month hanging on to every utterance by US Federal Reserve chair Jerome Powell, as well as scrutinising the language of the Federal Open Markets Committee meeting releases for clues as to how high rates will be raised to combat inflation.
Central banks, led by the Fed have been raising interest rates
Apart from the Fed which raised US rates by 75 basis points in June, markets also had to contend with rate hikes by several other central banks such as the Reserve Bank of Australia, the European Central Bank and the Bank of England. All have stated that their moves are aimed at reining in inflation.
The other consideration in the minds of most investors was whether Wall St, after having sunk into bear market territory, would be able to stage a meaningful recovery.
The S&P 500 underwent its worst first half since 1970
In the first six months of 2022, the widely followed S&P 500 has tumbled 20.6%. The last time the index fell this much in the first half was in 1970, according to Dow Jones markets data.
In this connection, several competing concerns were obvious, one of them being that the Fed in its desire to curb inflation running at a 40-year high, raises rates to a level that eventually triggers a recession.
There was an element of “bad news for the economy is good for stocks’’
Trading on Wall St thus displayed a strong element of “bad news for the economy is good news for stocks” because such news would suggest less of a need for Fed action to cool down the economy. Conversely, data that indicated economic strength was generally greeted negatively by the market.
All of this pointed to a confused market in search of a bottom and direction but finding neither. Traders spent an inordinate amount of time trying to figure out if the market has fully priced in impending rate hikes, but as the month wore on, it became apparent that this was an exercise in futility as every rebound was met with fierce selling.
As it stands now, expectations are for a 50-basis points rate hike at the next meeting in September, but this could change to 75 points if the data between now and Sep show inflation is still high.
For the STI: 3,100 appears to be where strong support lies…
On the home front, the STI traded between a closing high of 3,244 (reached on 1 June) to a closing low of 3,092 (reached on 23 June). Although technically-minded observers might have been dismayed at the ease with which the 3,200 level had been lost, they might draw some comfort from the fact that 3,100 proved reasonably resilient as a support level.
This fits with a commentary published early in the month by Morgan Stanley which said that the Singapore market is a safe haven for stock market investors.
“Whilst interest and inflation rates in Singapore have risen more quickly than expected, Singapore’s macro conditions appear relatively robust’’ thanks to reopening of the economy’’ said the US investment house.
“Singapore stocks in aggregate are likely to sustain around 20% per annum earnings growth through 2024’’ based on Morgan Stanley’s earnings per share forecasts for the MSCI Singapore Index, which exceeds many developed markets and regional economies
…but volume was been shrinking
Volume, however, has been tapering off in recent weeks, with the dollar value dipping below the S$1b mark regularly. This gels with a 20 June Market Update by the Singapore Exchange’s (SGX’s) investor education portal My Gateway which said for the 2Q22 to date, the broader Singapore stock market had seen S$1.05 billion of net institutional outflow, reducing the 2022 YTD net institutional inflow to just S$74 million.
Singapore’s market cap was down 2.2% at S$861.4b
Led by UOB which fell S$5.5b in value, the entire market’s capitalisation was 2.2% lower in June at S$861.4b. UOB ended June with a market value of S$44.26b.
The other two banks, DBS and OCBC fell S$3.25b and S$1.99b to S$55.3b and S$51.4b respectively. Jardine Matheson was the other big loser, shedding S$4.88b at S$55.3b.
For the US 10-year Treasury bond, 3% is the key mark to watch
Worries about rising US inflation and interest rates have led to investors dumping bonds, pushing up yields. In early June, the benchmark 10-year Treasury yield surpassed 3% for just the second time since late 2018. Since then, any decline in the yield has stopped at 3%, creating a point of “support” for it.
The yield is now up to about 3.1% after having begun the year at 1.51%, and perhaps the most powerful driver has been the Federal Reserve pulling money from the bond market.
According to some observers, if the yield drops below 3%, that is probably a sign of more declines on the way. It would mean that demand to buy the bond at that level has strengthened, indicating a turn of sentiment in the bond market.
Cryptos take a huge hit, led by Bitcoin
The selloff in cryptocurrencies that started in May continued in June. Bitcoin was trading just below US$20,000 on Thursday, down by more than two-thirds from an all-time high near US$69,000 hit in November 2021.
It is off 56% since the beginning of the year as June nears its end. Other tokens like Ether, Solana, and Dogecoin have fared even worse, and the market capitalization of the entire crypto economy has been reduced to US$945 billion from nearly US$3 trillion in less than eight months, according to CoinMarketCap.
The consensus is that more trouble is likely on the way for the second half and beyond, making the current slide similar to previous crypto winters, but with important differences.
“We’re definitely still at the start. The crash is relatively recent,” says Clara Medalie, the head of research at crypto data provider Kaiko. “People are going to be humbled by the next six months. It’s pretty clear at this point that we will probably enter a more prolonged crypto downturn.”
Goldman Sachs: US corporate earnings face downside risk
Equity analysts look too confident in profit margin expansion across the broader market next year, according to Goldman Sachs.
That confidence means consensus S&P 500 earnings estimates are likely too high, Goldman strategist Ben Snider wrote in a 28 June note.
“Looking forward, analyst estimates show S&P 500 profit margins climbing to new highs in 2023,” Snider said. “Despite tightening financial conditions, persistent input cost pressures, and slowing revenue growth, analysts continue to forecast a rise in profit margins next year.”
“Profit margins for the median S&P 500 company will likely decline next year whether or not the economy falls into recession. While investors are focused on the possibility of recession, the equity market does not appear to be fully reflecting the downside risks to earnings.”