STI gained 1.8% thanks for Wall St rebound

Date: September 12, 2022

  • A Wed-Friday US market rally helped push STI up 1.8% to 3,262.95
  • Wall St’s rally was said to be due to easing of pressure on bonds
  • Comments from Fed officials point to continued rate hikes
  • Probability of 75-points hike later this month is now 90%
  • ECB raised rates by an unprecedented 75-points to fight raging inflation
  • Oil prices down to pre-Russia-Ukraine levels
  • Nio’s 2Q loss widened to 2.7b yuan
  • KOP’s auditors flagged going concern uncertainties

Wall St’s Wed rebound helped stocks return to firm footing

A rebound on Wall Street that stretched from Wednesday to Friday helped shore up some of the nerves that had been rattled by several consecutive days of interest-rate-led selling that extended back to the week before.

The rebound also helped add 57 points or 1.8% to the Straits Times Index at 3,262.95. Volume however, remained low at a daily average of S$963m.

For the week, the Dow, the S&P, and the Nasdaq gained 2.8%, 3.6% and 4.1%, respectively.

Easing of pressure on US bonds helped stocks…

Wall St’s Wednesday rally was said to have come courtesy of an easing of pressure on US Treasuries which brought the 2-year yield down below 3.5%.

The yield attempts to forecast the level of the US federal-funds rate a couple of years from the present. When it rises, it signifies that the bond market is assigning a higher probability of Federal Reserve interest rate hikes, which are designed to reduce inflation by cooling economic demand.

…but for how long?

The reprieve, however, could prove only temporary. Also on Wednesday, the Federal Reserve’s second in command Lael Brainard said that the central bank would stick with its inflation-fighting strategy, keeping money tight for “as long as it takes” to bring the rate back down to a 2% target.

“We are in this for as long as it takes to get inflation down,” Brainard said in her remarks. Brainard noted that inflation moderated in July—the annual rate dropped to 8.5% from 9.1% in June—and looks poised to slow in the coming months for a handful of reasons, including tighter financial conditions and less consumer demand dampened by the higher prices.

But while July’s slowdown was “welcome,” Brainard made clear the Fed will need “to see several months of low monthly inflation readings to be confident that inflation is moving back down to 2 percent.”

“The policy rate will need to rise further,” Brainard said. “Monetary policy will need to be restrictive for some time to provide confidence that inflation is moving down to target.”

On Thursday, Fed chairman Jerome Powell said “History cautions strongly against prematurely loosening policy’’ during a moderated discussion at the Cato Institute, a libertarian thinktank in Washington. “I can assure you that my colleagues and I are strongly committed to this project, and we will keep at it until the job is done.”

The central bank has already raised interest rates by 2.25 points this year—a quarter-point in March, a half-point in April, and a three-quarters point in both June and July.

Probability of 75-points US rate hike now 90%, Tuesday’s CPI could be key

After Ms Brainard’s comments, the probability of a 75-basis points rate hike later this month rose from 56% at the end of the previous week to 76%. After Mr Powell’s comments, the probability rose to 87% and settled at 90% on Friday.

This all sets the stage for the stock market’s next big test: Inflation data. When August’s consumer price index hits the wires on Tuesday, the results could show a decline to 8.1%, from 8.5% in July. If that prediction proves accurate, it would be the second consecutive year-over-year decline in inflation. Another decline would increase the chances that the Fed can soon slow down the pace of rate hikes.

The European Central Bank raised rates by 75 points

The European Central Bank produced an oversized interest-rate hike of 75 basis points on Thursday yp 0.75-1.25% as it tries to keep pace the US Fed.

Economists at Morgan Stanley and Nomura, who correctly predicted the decision, argue that inflation at a record rate of 9.1% is unbearable for ECB President Christine Lagarde, despite the outlook for the economy deteriorating.

Oil prices down to pre-Russia-Ukraine invasion levels

Oil prices declined to the lowest in eight months on Wednesday as concerns intensified that a global economic downturn would hurt demand for energy. West Texas Intermediate, the U.S. benchmark, traded down more than 4% at US$83.22 a barrel, falling below US$85 for the first time since late January. The last time it settled below US$84 a barrel was Jan.24, one month before the Russian invasion of Ukraine.

Nio’s Q2 loss widened to 2.7b yuan

China’s electric car maker Nio reported that its net loss for the second quarter ended 30 June rose to 2.7b yuan (S$545m) from 659.3m yuan a year ago.

Revenue for the quarter rose 21.8% to 10.3b yuan but gross profit fell 14.8% to 1.3b yuan, weighed by a rise in the cost of sales. Its bottom line was further brought down by heavier research and development costs as well as higher selling, general and administrative expenses.

KOP’s auditor flagged going concern uncertainties

The auditor of Catalist-listed property and entertainment firm KOP Ltd has flagged a material uncertainty that may cast significant doubt on KOP’s ability to continue as a going concern.

Several issues highlighted include the inability to determine whether any adjustments to KOP’s opening balances were needed for its FY2022 statements as the auditor was unable to ascertain if the opening balances as at 1 April 2021 were fairly stated.

The auditor also experienced difficulties in obtaining the financial information needed to audit Shanghai Snow Star Properties, KOP’s joint venture in which it holds a 30% interest. Also, on top of posting a net loss of S$11.5m for the financial year ended 31 Mar 2022, the auditor noted that the group’s current assets comprised mainly development properties and non-current assets held for sale.

Despite this opinion, KOP’s directors believe it is still appropriate to prepare KOP’s FY2022 statements on a going concern basis as they expect the group’s hospitality segment to recover. They are also confident that KOP will be able to generate enough cash flows from operations in the next 12 months.