US ceiling problem solved, now back to inflation and interest rate worries

Date: June 5, 2023

  • The STI fell 41 points or 1.3% to 3,166.3
  • US debt ceiling talks were resolved, markets to turn attention back to interest rates
  • US market rallied strongly on Friday after strong April jobs report
  • Seatrium under investigation for possible corruption in Brazil
  • SIAS recommended GEAR shareholders reject offer, IFA defended its methodology
  • DBS: STI should hold around the 3,180 level for next 1-2 months
  • Futures market pricing in 73% chance Fed holds rates unchanged this month


Weakness in STI continued with 1.3% loss despite news of US debt deal

As far as Wall Street and most markets were concerned, the main worry for the past month was whether US politicians would raise the government’s borrowing limit.

On Wednesday, the House of Representatives passed the deal to lift the debt ceiling, narrowly ahead of the 5 June date after which the government runs out of money, which meant investors can now safely worry about other things.

Investors didn’t really believe that the government would voluntarily default on its obligations as debt ceiling brinksmanship is a familiar sight that had been seen many times in the past and markets knew that the problem would be satisfactorily resolved.

As far as the local market was concerned, the Straits Times Index fell for the first three days during which it lost a total of 48 points or 1.5% before rising on Thursday ahead of Friday’s Vesak Day public holiday.

The net loss was 41 points or 1.3% at 3,166.3, with most of this coming on Wednesday, 31 May when the index plunged 29 points in high volume of 2.74b units worth S$2.82b.

Boosted by what was likely month-end “portfolio rebalancing’’ on Wed, average daily volume jumped to S$1.43b compared to S$926m the week before.

Wall St surged on Friday after release of strong jobs report

On Friday, Wall St rallied strongly after news that the US economy created 339,000 jobs in May, marking a surprise jump from April and highlighting continued strength in the job market despite rising interest rates and heightened recession fears.

Although the strong headline numbers point to a rate hike this month, reports said the rally came because wage gains were modest and therefore less inflationary than might be expected.

Seatrium under investigation for alleged corruption in Brazil

The Corrupt Practices Investigation Bureau last week said it was “acting on information received” when it began investigations against Seatrium and individuals in the offshore and marine engineering company, in a statement on Wednesday evening.

Seatrium was formed by the merger of Sembcorp Marine and Keppel Offshore & Marine earlier this year. The combined group, described as one of the world’s largest offshore and marine energy engineering companies with a total order book of almost S$20 billion, was renamed in early April.

The company later said it believes the investigation relates to events that occurred prior to 2015 and to the Sembcorp Marine group, as Seatrium was known at the time.

Seatrium shares fell on the news, retreating as much 3.3 per cent to S$0.119 cents after trading in the counter resumed on Thursday after a trading halt, before paring losses to end S$0.002 or 1.6 per cent down at S$0.121 cents.

The counter was the most heavily traded stock, with 458.19 million shares changing hands, compared with its average three-month volume of 8.66 million shares.

In a report released on Thursday, CGS-CIMB analysts Lim Siew Khee and Izabella Tan maintained their “buy” calls on Seatrium, with a target price of S$0.19.

The analysts said this was based on the company’s strong order book, which they estimated to be at $23.6 billion as at May 23, and a new management team that was appointed earlier in March. Some downside risks, however, would be severe cost overruns and shareholder Keppel Corp significantly reducing its stake in Seatrium, they added.

SIAS recommended GEAR shareholders reject exit offer, IFA defended its approach

The Securities and Investors Association Singapore or SIAS recommended that minority shareholders of Golden Energy and Resources or GEAR reject the exit offer by the company’s controlling shareholders that involved distribution of GEAR’s stake in Indonesia-listed Golden Energy Mines (GEMS) either in cash or in shares, and cash of S$0.181 per share.

SIAS’s position was that the two should not be conflated. It also took issue with the IFA’s valuation of the GEMS distribution.

The IFA, W Capital, subsequently replied, defending its methodology whilst pointing out that the Singapore Exchange required W Capital’s opinion to state whether the distribution and exit offer, when taken together as a single transaction, were fair and reasonable.

Separately, GEAR clarified that shareholders will have to vote on two resolutions – the distribution of GEMS shares and the delisting of GEAR. It said both are inter-conditional on each other and that if either is not approved at the extraordinary general meeting (EGM), shareholders will not be able to receive either GEMS shares in cash, or GEMS shares and the exit offer price.

It also reminded shareholders that the exit offer is not a resolution to be voted on at the EGM.

“If both the Distribution Resolution and the Delisting Resolution are approved, Shareholders will have up to four options available to them, which are summarised in the explanatory notes to the upcoming corporate actions found in the first 16 pages of the Circular, in particular, on page (vii)’’ said GEAR.

“These options allow Shareholders to elect to receive the Revised GEMS Cash Consideration or GEMS Shares Consideration and accept or reject the Revised Exit Offer Price’’.

The company also reminded shareholders that even if both resolutions are approved and they become entitled to receive the GEMS distribution in cash or in shares, they can still choose to reject the exit offer but if they opt for this, they will become shareholders of an unlisted entity.

DBS: STI should hold at 3,180

DBS analysts said in a note on Wed that they expect the STI to hold at the 3,180 level for the next 1-2 months.

“The STI’s seasonal trend supports a June base post the May correction, with a tradeable rebound starting in either June or July’’ said DBS, adding that two possible triggers for a rebound would be a Fed rate hike pause or a raised US debt ceiling with no default.

Markets now turn their attention to the inflation/interest rate outlook

Now that the US debt ceiling issue has been settled, investors are expected to turn their attention to the broader economic outlook and whether the Federal Reserve will pause its aggressive campaign of interest-rate increases at the June meeting.

On Wed, Philadelphia Federal Reserve President Patrick Harker said he supported skipping an interest rate increase at the Fed’s June meeting. He was speaking at the OMFIF Economic and Monetary Policy Institute when he said he supported the Fed holding its interest rate steady, for now.

“I am in the camp increasingly coming into this meeting thinking that we really should skip, not pause, but skip an increase,” Harker said.

After release of Friday’s April jobs report, bond yields rose – with the 2-year U.S. Treasury yield ticking to 4.501%, while the 10-year yield was up to 3.691%.

Traders reacted immediately. They priced in a 72.5% chance the Fed holds the headline interest rate steady at its June 13-14 meeting. That was up from 33.4% on Tuesday. The odds of a 25-basis point increase dropped to 27.5% from 66.6%. These figures held steady as of Friday.

Investing with Insight: Watch this Week’s Technical Outlook