STI drops 0.7%, markets unsure of where US interest rates are headed

Date: February 13, 2023

  • Ambiguous Fed statements are confusing markets.
  • With US Treasury bond yields rising, all 3 Wall St indices closed lower for the week.
  • The STI reflected this uncertainty, dropping 0.7% to 3,360.69.
  • All eyes on Tuesday’s US CPI data.
  • Starhub shares under pressure after earnings disappointment.
  • SGX reported 7% rise in adjusted net profit to S$237m for first half

Unsure markets stuck in no-man’s land

Equity markets appear to be stuck in a sort of no-man’s land, unsure of which way US interest rates will head.

On the one hand are hopes that the US Federal Reserve is nearing the end of its rate hiking cycle, which if this were actually the case, would mean rates might then soon head downwards.

On the other hand, there have been ambiguous comments from Fed officials about inflation, the state of the labour market and the need for more rate hikes.

STI dropped 0.7% to 3,360.69

All of this makes for a confused market, unable to discern which direction to take and therefore equally likely to rise as it is to fall at any given day. The Straits Times Index displayed this confusion, alternating between rising and falling every day of the week. It recorded a net loss of 24 points or 0.7% at 3,360.69.

Volume, which had picked up since the start of the year, amounted to an average of S$1b per day versus S$1.32b for the previous week.

US Treasury bonds and stocks reflected current uncertainty

On Monday, the two-year Treasury yield, a barometer for expectations about the federal funds rate, rose from 4.1 to 4.49%. The 10-year Treasury yield then rose from 3.4 to 3.6%.

On Tuesday, Fed chair Jerome Powell spoke at the Economic Club of Washington and reiterated that continued interest-rate increases will be appropriate but acknowledged that inflation was dropping.

“Powell had a chance to signal a shift to a more aggressive posture and he didn’t take it,” wrote Bill Adams, Chief Economist for Comerica Bank.

Consistent with that, short-dated bond yields then dipped. The two-year Treasury yield, a barometer for expectations about the federal funds rate, then slipped from 4.49 to 4.47%.

However, by the end of the week, bond yields had inched up again. The 10-year Treasury yield climbed to 3.74%, a level it hasn’t risen to since early January while the two-year’s yield rose to 4.51%, a level not seen since late November.

For the week, the Dow, the S&P 500, and the Nasdaq dropped 0.2%, 1.1%, and 2.4%, respectively.

Watch out for Tuesday’s CPI data

Stocks could easily establish a longer path upward or downward after inflation data hits the wires early next week. Tuesday, the consumer-price index for January comes out, and economists expect a 6.2% year over year increase. That would be down from the 6.5% result for December and could be enough of a drop to support the narrative that the Fed could stop hiking rates soon.

“Traders are fearful that the Valentine’s Day inflation report will vindicate the Fed’s stance that ongoing rate increases will continue,” wrote Edward Moya, senior market analyst at Oanda.

Starhub shares came under pressure after earnings disappointment

Cable TV operator StarHub on Tuesday reported a 98.4% year-on-year drop in net profit for its second half ended 31 Dec 2022 to S$1.3m. As a result, its shares on Wednesday plunged S$0.07 or 6.3% to S$1.04 on volume of 8.9m.

StarHub attributed the lower profit to a fall in profit from operations, including provisions from its Dare+ transformation initiative which is a five-year transformation plan the includes the establishment of its 5G network.

Maybank on Wed downgraded the counter from “buy’’ to “hold’’ with a target price of S$1.15 versus S$1.33 previously.

Citi in the meantime, raised StarHub’s target price from S$1.00 to S$1.10 to factor in a 5% yield target and maintained its “neutral’’ call on the stock. It believes the company’s commitment to a minimum dividend allows for downside protection.

SGX reported adjusted net profit of S$237m for first half

The Singapore Exchange (SGX) on Thursday reported a 30.1% increase in net profit to S$284.6m for its first half of FY2023 ended 31 Dec 2022. This came on the back of a 9.6% rise in revenue to S$571.4m, driven mainly by increases in derivatives trading and clearing revenue, as well as treasury income.

Earnings before interest, taxes, depreciation and amortisation for the six months grew 9.2% to S$334.1m. After adjusting for non-cash and non-recurring items, net profit attributable to equity holders of the company was up 7% at S$237m.

An interim quarterly dividend of S$0.08 per share, payable on 24 Feb was declared, which brings the total dividend for the first half to S$0.16, unchanged from a year earlier.

Maybank said SGX’s multi-asset derivative platform continues to deliver and offers a strong competitive moat in the current volatile markets backdrop. “Cash equities may see slower conditions, but outlook is improving for listings going in to FY24E…. raise target price to S$10.73. Maintain BUY’’.

SGX’s shares added S$0.01 on Thursday at S$9.16 on volume of 1.57m, a day in which the STI plunged 29 points or 0.86% to 3,359.48. The counter added S$0.03 on Friday to end the week at S$9.19.

Earnings in brief

Property and retail group Wing Tai Holdings reported an 18% increase in net profit to S$63.3m for its first half ended 31 Dec 2022 despite a 15% drop in revenue to S$261m that was due to lower contribution from its development properties. The company said net profit rose due to the higher share of profits from its joint venture companies as well as the write-back of a deferred tax provision that is no longer required which amounted to S$13.5m. Net asset value per share as at 31 Dec was S$4.26 versus S$4.32 as at 30 June 2022. No dividend was declared.

Beer brewer Thai Beverage reported a 4.9% increase year-on-year in sales revenue to 80.9b baht (S$3.2b) for its first quarter ended 31 Dec 2022, but a 7.7% drop in earnings before interest, taxes, depreciation and amortisation to 13.5b baht. Its spirits business recorded a 6.4% fall in sales revenue to 33.7b baht, with total sales volume having declined 15.2% year-on-year. The company said this was due to the high base in Q1 FY22 that was driven by trade-inventory loading ahead of price increases.