Rising bond yields sends stocks tumbling

Date: October 23, 2023

  • The 10-year US Treasury yield is threatening to cross 5%
  • Wall St stocks took a beating despite reporting good earnings
  • The Straits Times Index lost its hold on 3,100, down 3.4% at 3,076.69
  • Fed chief Powell: The Fed is committed to bring inflation down to 2%
  • Most analysts bearish on airlines including SIA: BT report
  • New Initial Public Offerings: Sheffield Green and Niks Professional
  • Singapore’s exports fall by better-than-expected 13.2% in Sep


Wall Street last week continued to fret over the state of the US economy, the rate of inflation and consequently, the fate of interest rates.

Comments from US Federal Reserve chair Jerome Powell on Thursday on the Fed’s resolve to bring inflation down to 2% added to nervousness and US stocks suffered the most over Wednesday and Thursday when US Treasury yields spiked upwards – on Thursday, the 10-year yield was up 0.1 percentage point to 4.98%, close to the psychologically-important 5% mark which has not been breached since 2007. On Friday, the 10-year yield pulled back slightly to 4.918% after earlier touching 4.995%.

The 10-year US Treasury yield has climbed 1.2 percentage points since July alone, as investors have increasingly priced in the likelihood that the Federal Reserve will lift interest rates higher than expected and leave them there longer.

It was 0.5% in 2020 when Covid-19 hit and when the Fed cut rates to near-zero and when bonds were the beneficiaries of safe-haven buying.

The Straits Times Index lost the 3,100 mark

As a result, the Straits Times Index, which on 12 Oct closed higher than 3,200, plunged 109 points or 3.4% over the week, losing its hold on the 3,100 mark when it ended at 3,076.69.

Average volume increased gradually over the week from S$713m on Monday to S$1.13b on Friday, which brought the average daily turnover to S$965m versus S$813m the previous week.

US stocks fell despite solid earnings

Of the S&P 500 firms that have reported results so far, 73% have topped earnings expectations, according to FactSet. Major tech firms including Microsoft, Alphabet, Meta Platforms, and Amazon.com will all report results next week. Other big names include Coca-Cola, General Electric, Chipotle Mexican Grill, and Comcast.

On Friday, the Dow Jones Industrial Average fell more than 280 points, or 0.9%. The S&P 500 fell 1.3%. The Nasdaq Composite slid 1.5%.

The S&P 500 closed below its 200-day moving average for the first time since March 17, which is usually taken as a bearish signal.

For the week, the Dow was down 1.61%, the S&P lost 2.4% and the Nasdaq Composite dropped 3.16%.

“The market action is confusing many investors, with earnings not disappointing, employment and GDP still looking in good shape, and inflation falling, but stocks are swooning and despite high geopolitical risk bonds are trading down,” wrote Navellier & Associates founder Louis Navellier.

“If earnings hold and the GDP stays positive this will likely be looked back upon as an attractive buying opportunity, but it takes nerves of steel to buy a falling knife.”

US Fed chief Powell: The Fed is committed to bring inflation down to 2%

In a speech at the Economic Club of New York, Mr Powell said:

“My colleagues and I are committed to achieving a stance of policy that is sufficiently restrictive to bring inflation sustainably down to 2 percent over time, and to keeping policy restrictive until we are confident that inflation is on a path to that objective’’.

He noted that after peaking at 7.1% in June 2022, 12-month headline PCE (personal consumption expenditure) inflation is estimated at 3.5% through September.

Core PCE inflation, which omits the volatile food and energy components, provides a better indicator of where inflation is heading. Twelve-month core PCE inflation peaked at 5.6% in February 2022 and is estimated at 3.7% through September.

“We are attentive to recent data showing the resilience of economic growth and demand for labor.

 “Additional evidence of persistently above-trend growth, or that tightness in the labor market is no longer easing, could put further progress on inflation at risk and could warrant further tightening of monetary policy’’ said Mr Powell.

Financial markets are overwhelmingly pricing in another Fed pause on rate hikes for the October 31-November 1 meeting, but the chances of an additional pause in December are much lower, at around 61%, according to the CME FedWatch Tool.

Most analysts bearish on airline prospects including SIA: BT report

The Business Times (BT) on Friday reported that short interest in Singapore Airlines has been increasing since May, making it the second-most shorted counter after AEM Holdings in Singapore as of 13 Oct.

“Short interest – defined as the percentage of outstanding shares on loan – in the mainboard-listed national carrier has stayed above 4% since May 9. This is higher than the average of 2.06 per cent short interest logged by the stock over the past three years, since January 2020’’ said BT.

The recent short interest in SIA might be due to the general bearish outlook of the airline industry and the stock’s rich valuation. There were seven “sell” recommendations on SIA, Bloomberg consensus showed, compared to four “hold” and one “buy” call.

Director of securities finance at S&P Global Market Intelligence, Matt Chessum, was quoted saying : “Despite air travel picking up recently, a lot of airline stocks are still trading far away from their pre-pandemic levels. An increase in interest rates is expected to hit consumer spending and leisure travel (if a recession does kick in as a result). Also, in general, many airline stocks are trading well below the market average in terms of forward earnings.”

Since closing at S$7.91 on 15 June, SIA’s shares have been on a downtrend. Last week they fell S$0.47 or 7.3% to S$5.97.

New Initial Public Offerings: Sheffield Green and Niks Professional

Singapore-based human resources provider Sheffield Green, which mainly fulfils the staffing needs of the renewable energy industry, last week launched its initial public offer (IPO) of 24 million new shares at S$0.25 apiece to raise a total of S$6m.

The public will be offered 3.6m shares, with the remaining 20.4 million forming a placement tranche.

After taking into account expenses relating to the listing, the company expects net proceeds of S$3.8 million from the sale of the shares, most of which would be used to expand the scale of the company’s existing business and geographical coverage, as well as for complementary offerings, new product lines and other technical services.

Applications close at noon on 26 Oct and trading on Catalist is expected to start on 30 Oct.

Medical skincare provider Niks Professional is raising S$5m in gross proceeds via an offering of 21.8m shares at S$0.23, of which one million will go to the public and 20.8m will be placed out.

Net proceeds are estimated at S$3.3m, of which S$792,000 will go towards organic growth, S$2.18m towards acquisitions, joint ventures and/or strategic alliances and the remainder towards working capital.

The offer closes at noon of 25 Oct and trading on Catalist is expected to start on 27 Oct.

Singapore’s exports fall by better-than-expected 13.2% in Sep

Non-oil domestic exports (NODX) fell by a better-than-expected 13.2% in September from the same month a year ago, following a revised 22.5% contraction in August, data from trade agency Enterprise Singapore showed on Tuesday.

Economists polled by Reuters had expected a drop of 14.7%, while economists in a Bloomberg poll were looking at a 15% decline.

Exports to China jumped 26.2%, the best showing since Dec 2021, reversing the 19.3% contraction in August. Shipments to Hong Kong were up 55%, also a turnaround, given the 5.9% fall in Aug.

The Business Times said several economists now think that NODX could gradually recover by the end of this year. It quoted Maybank economists Chua Hak Bin and Brian Lee saying they see “green shoots of recovery in the electronics cycle’’.

They added that exports to China were “surprisingly robust’’ with further improvements possible in the coming months due to the low base and a gradual rundown of industrial inventories.

RHB acting group chief economist Barnabas Gan said key economic indicators across the US and Asean have continued to improve as key central banks are at or are approaching their peak interest rate objectives.

However, OCBC chief economist Selena Ling expressed reservations because of the ongoing conflict in the Middle East which has fuelled concerns of spillovers to the rest of the region and the energy market, which “could in turn complicate the disinflation trajectory that was supposed to allow central banks to remain on pause mode, or pivot to easing down the road’’.

News and earnings in brief

Sabana REIT’s interim manager announced that the REIT had achieved total portfolio occupancy of 91.8% for the third quarter ended 30 Sep, down from 93.9% versus the second quarter. Its leverage ratio was 33.8% on 30 Sep, whilst its weighted average lease expiry was 3.1 years.

Keppel DC REIT reported a 3.6% drop in distribution per unit (DPU) for the third quarter versus the same period last year due to higher finance costs and less favourable foreign currency hedges. DPU for the 3 months ended 30 Sep fell to S$0.02492 whilst distributable income was down 6.5%. Gross revenue rose from S$70.3 to S$70.7m due to contributions from acquisitions as well as “overall positive income reversions and income escalations’’. Net property income rose 0.8% to S$64.6m.

Keppel REIT reported a 5% increase in property income for the nine months ended 30 Sep to S$172.6m thanks to higher rentals and increased portfolio occupancy. Distributable income from operations however, fell 10.1% to S$148.6m due to higher borrowing costs and higher property tax and utility costs. Net property income attributable to unitholders rose 0.3% to S$120.4m.

Keppel Pacific Oak REIT said third quarter distributable income was down 10.7% to S$13.1m mainly due to higher financing costs as a result of rising interest rates. For the nine months ended 30 Sep, distributable income was 15.2% down to S$39.2m. Net property income for the third quarter rose 3.7% to US$22.1m on the back of a 3.3% increase in gross revenue to US$38.4m. Aggregate leverage as at 30 Sep was 39.1% with no long-term refinancing requirements until Q4 2024.

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