Date: May 17, 2022
- Despite Friday’s 25-points rise, the STI lost 100 points or 3% at 3,191.16
- Wall St also rose on Friday, reportedly because of Fed chief Powell’s comments as well as falling bond yields
- More observers are now raising the spectre of recession
- US inflation readings are still high
- “Cryptocrash’’ becomes a trending word on Google and Twitter as cryptos take a bashing
- The crash in risk assets drove money into safe havens like bonds – the 10-year US Treasury yield fell below 3% at 2.92%
The STI fell four days in a row but rebounded on Friday the 13th
The local stock market came under pressure last week but managed to cut its losses on Friday the 13th, a date normally associated with bad luck by the superstitious.
Still, despite Friday’s 25-points rebound, the losses of the previous four days meant the Straits Times Index nevertheless registered a fall of 100 points or 3% at 3,191.16. Average daily volume was S$1.6b, ranging from Monday’s S$1.17b to Thursday’s S$1.99b.
US inflation worries, China’s lockdown and Ukraine war – the same concerns remain
The selling between Monday and Thursday was caused by the same combination of negative factors that had sent Wall Street tumbling over the past month.
In no particular order, these factors were inflationary worries in the US and the US Federal Reserve’s monetary policy tightening, China’s lockdown to combat a resurgence of Covid-19 and the ongoing war in Ukraine that is driving up commodity prices.
More analysts are raising the possibility of a recession
An increasing number of observers are now speaking about the possibility of a global recession, starting with the US, where there are doubts that the Fed can achieve a “soft landing’’ for the economy.
However, Fed chairman Jerome Powell last week did manage to calm at least some market nerves when he said in a radio interview on Thursday that he expects the Fed to lift rates by half of a point at each of the next two meetings as the central bank combats inflation, thus confirming what the market has already priced in.
Although Mr Powell left the door open for more aggressive tightening, reports said the market took his comments to mean that the Fed would proceed carefully and do its best to limit the damage to the economy from rate hikes.
Also possibly helping Wall St rebound on Friday were falling bond yields – the 10-year Treasury yield, which hit 3.13% on 6 May, closed Friday at 2.92%. However, investors should note that this fall is more likely due to a flight to safety than a major change in inflation and interest rate expectations.
US inflation readings are still high – will 75 be the new 50?
Notwithstanding the stock market’s reaction on Friday, the fact remains that interest rate and inflation worries still abound. The US producer price index rose 11% year-over-year for April, the US Labor Department reported on Thursday, above estimates for 10.7% and a tick lower than March’s increase of 11.2%.
The CPI’s year-over-year gain was 8.3% for April, below the March result, but higher than expected. Markets are having to grapple with the fact that inflation is not declining very quickly, which could force the Fed to lift short-term interest rates faster than currently expected. The ultimate result? A potential recession.
As far as the market is concerned, the worry is that although the Fed has said earlier this month that it is not actively considering raising interest rates by 75 basis points, some analysts think the latest data places pressure on the US central bank to be more aggressive.
Bloomberg news quoted observers saying that the next inflation report will be highly important. Also quoted was Cleveland Fed president Loretta Mester, who said during the week that the Fed did not rule out 75 points forever.
Cryptocurrencies take a beating
Bitcoin prices fell 9% on Thursday to around US$28,000, having dipped below US$26,000 in the trough of volatile trading. Bitcoin has lost more than a quarter of its value in the past week and has not consistently traded this low since late 2020.
Ether, the second-largest digital asset, dropped 20% to around $1,900—the lowest levels since July 2021. The token underpinning the Ethereum blockchain network has lost one-third of its value in the past seven days. Tokens pegged to the value of the dollar have also taken a beating.
The word “cryptocrash’’ has been trending on Google and Twitter. According to some estimates, the combined market value of all crypto-currencies is now reportedly US$1.12trillion, about a third of its November value, with more than 35% of that loss coming last week.
Bond yields fall as investors on safe-haven buying
With most risky assets coming under tremendous pressure, money flowed into bonds, pushing prices up and yields down.
The yield on the benchmark US 10-year Treasury note dropped nearly 5 basis points to 2.866% on Thursday after rising to its highest level since 2018 earlier in the week. The yield on the 30-year Treasury bond moved lower to 3.034%. Yields move inversely to prices and 1 basis point is equal to 0.01%.
The 10-year yield ended Friday at 2.92% whilst the 30-year finished at 2.99%.
The Fed’s May Financial Stability report
In its Financial Stability report dated 9 May, the Fed noted that “inflation has been higher and more persistent than expected, even before the invasion of Ukraine, and uncertainty over the inflation outlook poses risks to financial conditions and economic activity’’.
“A sharp rise in interest rates could lead to higher volatility, stresses to market liquidity, and a large correction in prices of risky assets, potentially causing losses at a range of financial intermediaries. Declining depth at times of rising uncertainty and volatility could result in a negative feedback loop, as lower liquidity in turn may cause prices to be more volatile.”
