Date: October 1, 2024
- As was widely expected, the US Fed cut its interest rates in Sep
- The reduction was 50 basis points to 4.75-5%
- Market is now pricing in 52% chance of another 50-pts cut in Nov
- STI gained 143 points or 4.2% at 3,585.29 in Sep
- STI to hit 3,890 within 12-months: Maybank
- China announced a large stimulus package
- The US Treasury yield curve “un-inverted’’ signalling probable soft landing
- Institutions were net sellers in the last few days of Sep: SGX Research
The market demanded a rate cut and the Fed duly delivered
The most important market-moving event of last month was the US Federal Open Market Committee meeting’s decision to declare victory over its fight with inflation and therefore cut interest rates by the relatively large margin of 50 basis points.
Prior to the meeting, markets had priced in a 100% chance that there would be a rate cut, the only question being how much. The 50-points reduction and the Fed’s confidence that inflation is now under control has now left markets pricing in a 52% chance that there will be another half-point cut in November.
Thanks to Wall Street’s resilience during the month – on Friday, the Dow Jones Industrial Average closed at its 32nd all-time high of the year – the Straits Times Index rose to several consecutive 17-year highs, the most recent being 3,638.54 on Monday, 23 Sep
However, possibly because of “buy in anticipation, sell on news’’ the index weakened thereafter, finishing the month at 3,585.29.
Still, it was a very respectable gain of 143 points or 4.2% for the month, and an even more respectable rise of 253 points or 7.6% for the third quarter.
STI to hit 3,890 within 12-months: Maybank
By now, the plunge in August which took the STI just below 3,200 is probably a distant memory, leaving some to predict more gains ahead. For instance, Maybank last week set a fresh 12-month STI target of 3,890:
“We believe Singapore’s yield friendly market and resurgence of sectors such as O&M, data centres and increasing investments in sustainability should support investment rotations. A continued tight policy by MAS should keep the SGD supported, raising market appeal. Scale and cost benefits from past AI investments are likely to show up in margins going forward’’.
“A positive conclusion of the JS-SEZ (Johor-Singapore Special Economic Zone) by year-end is a strong upside catalyst, in our view. As a result, we raise our 12-mth STI target to 3,890’’ said the broker adding that its top picks reflect rate cut and secular themes winners – CDL Hospitality Trusts, CapitaLand Investment, CSE Global, DBS, Far East Hospitality Trust, Genting SG, Marco Polo, Sea, SingTel, Starhub.
China announced a large stimulus package
On Sep 24, China announced it is cutting the reserve requirement ratio for banks. This means banks can keep slightly less cash in reserve and can lend slightly more. The spokesman also said the PBOC intends to “drive the market benchmark interest rate downward”.
Funds and brokers will be allowed to tap a PBOC swap facility to buy stocks, and a plan is in the works to set up a refinancing facility to help listed companies and major shareholders buy back shares.
China will also inject capital into various banks to strengthen the financial industry. Separately, the China Securities Regulatory Commission said it will actively back mergers and acquisitions involving strategic industries and key assets in a bid to support “economic transformation”.
China stocks rallied in response – on 30 Sep, the Shenzhen Composite Index soared 10.93% whilst the Hang Seng Index rose 2.43%. The CSI 300 Index jumped nearly 16% last week and the Shanghai Composite was up 13%.
The US Treasury yield curve “un-inverted’’ signalling probable soft landing
Since July 2022, investors have been experiencing an anomaly known as an inverted yield curve where longer-term debt has offered lower yields than shorter one and one that traditionally has signalled an impending recession.
An inversion tends to prompt banks to tighten lending standards and investors usually become more cautious about making long-term commitments with their money.
Out of the six recessions the U.S. has faced since 1980, five were preceded by a yield-curve inversion of at least 20 days. The sixth, the 2020 downturn that resulted from Covid-19, also followed an inversion, though that was shorter, at only six days in August 2019.
Fund managers DWS said in the historically longest inversion of the U.S. yield curve, which lasted 793 days, is now behind us.
“The spread between two- and ten-year U.S. Treasury yields is back in positive territory. We expect the curve to steepen further as the Federal Reserve continues to cut interest rates’’.
“The end to inverted yield curves is being driven by a so-called “bull steepening.” This means that while both ten-year and two-year yields have fallen sharply from their highs in May of this year as inflation falls, the decline has been more pronounced at the short end’’.
“This is often the case when investors anticipate an imminent cycle of rate cuts and do not expect a longer-term deflationary trend. In other words, it could be a sign that investors believe the U.S. economy is heading for a soft landing – that, however, remains to be seen’’.
On Friday, the 2-year US Treasury bond yielded 3.57% versus 3.75% for the 10-year bond.
Institutions were net sellers in the last few days of Sep: SGX Research
In his Inside Insights column published in Business Times on Monday 30 Sep, SGX market strategist Geoff Howie reported that institutions were net sellers of Singapore stocks over the five trading days 20-26 Sep with S$54m of net institutional outflow thus reducing total net inflows from the 20 trading sessions from 30 Aug (which included MSCI rebalancing) to 26 Sep to S$1.165b.
“Leading the net institutional outflows over the five sessions to 26 Sep were Singtel, Yanzijiang Shipbuilding, CapitaLand Investment, Singapore Exchange, Mapletree Logistics Trust, CapitaLand Ascendas REIT, City Developments, Jardine Cycle & Carriage, Frasers Logistics & Commercial Trust and Mapletree Industrial Trust. Thus telecommunications and REITs led the net institutional outflows’’ said Mr Howie.
“Leading the net institutional inflows over the five sessions were DBS, Sembcorp Industries, Capitaland Integrated Commercial Trust, UOB, Keppel, Seatrium, Suntec REIT, ComfortDelgro Corp, Singapore Airlines and OUE REIT. Thus, financial services and utilities led the net institutional inflows’’.
