Powell’s comments help lift stocks

Date: December 5, 2022

  • The STI and volume benefited from month-end “portfolio rebalancing’’ with the index rising 0.4% to 3,259.14
  • Comments by Us Fed chair Jerome Powell helped ease interest rate worries
  • Probability that Dec’s rate hike will only be 50 points is 78%
  • SIA to own 25.1% of Air India after Air India-Vistara merger
  • SATS to raise up to S$800m via rights issue not underwritten by Temasek
  • Singapore’s PMI contracted for 3rd straight month in Nov
  • Yield curve inversions signal coming recession

The STI rose 0.4% and enjoyed spot of month-end “portfolio rebalancing’’

The Straits Times Index enjoyed yet another firm week on the back of rising hopes that the US Federal Reserve will soon slow down the pace of its interest rate hikes.

Also helping was a spot of month-end “portfolio rebalancing’’ or possibly window-dressing on Tuesday and Wednesday that sent volume and the STI spiking upwards, and helped the index post a 15-points or 0.46% gain for the week at 3,259.14

Average daily volume amounted to $1.4b, aided in no small part by the S$2.42b done on Wed, the last day of November.

As always, it was the banks that helped the index jump a combined 50 points higher on Tuesday and Wednesday. DBS gained $0.74 or 2.1% at S$35.19, UOB jumped S$0.90 or 3% to S$31.20 whilst OCBC over the two days rose S$0.13 or 1.1% to S$12.44.

On Thursday, the first trading day of December, DBS and OCBC closed lower whilst UOB rose S$0.13 to S$31.33.

Powell’s comments were key; 78% probability that Dec rate hike will be 50 points

US Federal Reserve Chairman Jerome Powell laid the groundwork on Wednesday for the central bank to slow its pace of monetary policy tightening as soon as December, all but solidifying prospects of a half-point interest interest-rate hike at the 14 Dec Federal Open Markets Committee meeting.

“It makes sense to moderate the pace of our rate increases as we approach the level of restraint that will be sufficient to bring inflation down,” Powell said in a speech at the Brookings Institution. “The time for moderating the pace of rate increases may come as soon as the December meeting.”

All three major US indices had been in the red prior to Powell’s comments but then rallied sharply. The Dow gained 737 points on Wednesday, or 2.2%, the S&P 500 shot up 3.1% and the Nasdaq Composite 4.4%.

The federal funds futures market is now pricing in a 78% chance that the next rate hike will be 50 basis points instead of the 75 that marked the last 4 meetings.

SIA to own 25.1% of Air India after Vistara-Air India merger

Singapore Airlines (SIA) said it will invest 20.6b rupees (S$360m) in Air India as part of a deal involving a merger of Air India and Vistara, the latter being a joint venture between SIA and Tata Sons.

SIA expects the merger will boost its presence in India and allow it to continue participating directly in a large and fast-growing aviation market. It also noted that the merger will allow SIA to hold an immediate strategic stake in an entity that is 4-5 times larger in scale compared to Vistara.

The merger is expected to be completed by March 2024 and SIA intends to fund the investment from its cash resources, which stood at S$17.5b as of 30 Sep. SIA’s shares fell S$0.02 on Friday to S$5.53 on volume of 2.9m.

SATS to raise up to S$800m via rights issue which will not be underwritten by Temasek

Inflight caterer and ground handler SATS on Thursday announced it will raise up to S$800m via a renounceable underwritten rights issue to partially fund its purchase of air cargo handler Worldwide Flight Services (WFS). The rights issue will be launched in the first quarter of 2023 and is not expected to be at a large discount.

Temasek Holdings, which holds 39.7% of SATS through subsidiary Venezio Investments, has indicated its intention to subscribe for its pro-rata entitlement but will not underwrite the issue as it did for past fund raisings undertaken by Singapore Airlines and Sembcorp Marine as doing so could trigger a mandatory general offer or require it to seek a whitewash waiver from shareholders.

SATS’ chief financial officer Manfred Seah said a panel of banks stands behind the rights issue. The rest of the money for the S$1.8b purchase of WFS will come from a term loan and internal cash balances.

SATS’ shares ended Thursday S$0.08 higher at S$2.75 on volume of 5.4m. On Friday, they fell S$0.08 to S$2.67 on turnover of 4.7m.

Singapore’s PMI contracted for 3rd straight month in November

Singapore’s overall factory activity contracted for the third consecutive month in Nov as manufacturing sentiment continued to decline across the region due to cooling global demand.

The Purchasing Managers’ Index (PMI) inched up 0.1 point but remained in contraction territory at 49.8. A reading below 50 indicates contraction from the previous month while a reading above 50 means growth.

Sophia Poh of the Singapore Institute of Purchasing and Materials Management said, “The weaker global demand and China’s Covid containment measures are weighing in domestic demand despite year-end festive seasons, although there was some respite from lower cost pressures on local manufacturers’’.

Yield curve inversions indicate coming recession

The U.S. Treasury yield curve recently inverted to a point that hadn’t occurred since the early 1980s, signalling that a recession is on the way.

A little over a week ago, the gap between the 2-year and 10-year yield was 77.8 basis points, the biggest differential since Oct. 5, 1981, according to Dow Jones Market Data. That was when interest rates were in double digits as the Fed sought to fight the stagflation of the 1970s, triggering a recession in the process. The inversion back then was 79.4 basis points.

“The yield curve is confirming a growing consensus view that the economy is in trouble and that the Fed is going to blow it,” says Gibson Smith, founder and chief investment officer of the fixed-income boutique Smith Capital Investors.

Global bonds have also joined their US peers in signalling a recession, with a global yield curve inverting for the first time in at least 20 years.

The average yield on sovereign debt maturing in 10 years or more has fallen below that of securities due in one to three years, according to Bloomberg Global Aggregate bond sub-indexes.

Yield curve inversion is typically seen as heralding a recession as investors switch out of short-term bonds into longer-term bonds due to pessimism over the near-term outlook. Those fears are growing as policymakers around the world pledge further monetary tightening to tame rising inflation.

On Monday, European Central Bank president Christine Lagarde signalled more rate hikes are likely, saying she would be surprised if eurozone inflation has peaked.

According to Deutsche Bank strategists, Germany may already be in a recession, whilst the US is likely to enter one by the middle of next year.