US interest rate and bank worries drag market lower

Date: March 13, 2023

  • The STI lost 55 points or 1.7% over the week at 3,177.43.
  • US Fed chief Jerome Powell’s testimony to Congress started the selling.
  • Collapse of Silicon Valley Bank raised contagion concerns.
  • US 2-year Treasury yield rose above 5%, first time since 2007.
  • US Treasury yield curve remains inverted, signalling recession.
  • February’s job’s report provided silver lining.
  • Odd of 50-basis points rate hike later this month down from 60% to 40%
  • CapitaLand China Trust and Sasseur Reit have outperformed due to China’s reopening: BT report.
  • Private sector economists’ survey: growth and inflation forecasts remain largely unchanged
  • SIAS met with Golden Energy management, asks for exit offer to be “raised considerably’’.


The STI lost 55 points or 1.7% at 3,177.48 on a confluence of negative developments

Stocks sustained a battering last week after US Federal Reserve chairman Jerome Powell’s testimony on Tuesday to Congress, at which he made it clear that the Fed is not done with raising interest rates and would be prepared to accelerate the pace of monetary tightening if required.

Silicon Valley Bank’s collapse has raised contagion worries

Also adding to the market’s woes later in the week was news of the collapse of Silicon Valley Bank (SVB). Banking stocks were sold off when on Friday, SVB was closed by the authorities to protect insured depositors. SVB’s demise is the largest since the US sub-prime crisis of 2008.

Not surprisingly, Wall St’s stocks and bonds caved in on the back of these negative developments. On Tuesday after Powell’s testimony, the three major equity indices lost between 1.25% and 1.72%, whilst the 2-year Treasury yield, which is the most sensitive to expectations about short-term interest rates, rose above 5%, a level not seen since 2007.

It had on 2 Feb sunk to a 2023 low of 4.1% on hopes that the Fed would soon scale back its rate hikes, hopes that have now been dashed not just by Mr Powell’s comments but also recent economic data.

In the face of relentless weakness on Wall St, the Straits Times Index recorded a net loss of 55 points or 1.7% over the week at 3,177.43. The STI is now down 74 points or 2.3% for the year. Average daily volume amounted to S$1.03b, versus S$1.3b the week before.

Powell’s testimony started the selling

In his Congressional testimony Mr Powell said “If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes. Restoring price stability will likely require that we maintain a restrictive stance of monetary policy for some time,” Powell said Tuesday in his opening remarks.

“Powell reset the market expectations,” wrote NatAlliance Securities’ Andrew Brenner, referring to prior hopes that the Fed would soon be switching to a more dovish stance.

US Treasury yield curve inversion continues to signal a recession

Two-year Treasury notes are on track to trade at the widest closing yield differential above 10-year securities in more than four decades, a clear indication that fixed-income investors expect a recession.

During early afternoon trading on Tuesday, the two-year Treasury’s yield was at 5%, far above the 3.96% yield for the 10-year Treasury. That differential, or inversion, is on pace for its widest closing level since Sept. 22, 1981.

In normal times, longer-dated bonds typically yield more than shorter-dated issues, partly owing to the risk associated with holding bonds over a longer period.

But two-year Treasuries have been trading at higher yields than 10-year debt since July last year, signalling that the bond market believes the economy will weaken and begin to shrink, forcing the Federal Reserve to cut interest rates.

Those expectations send yields on longer-dated debt lower, while those on two-year debt remain high because the Fed is still raising rates in its fight against inflation. The two-year yield is at its highest level since 2007.

Friday’s jobs report provided a silver lining

The U.S. economy added 311,000 jobs in February, above expectations for 215,000 but down from January’s result which revised down to 504,000 jobs. The unemployment rate rose to 3.6%, and wages grew 4.6% year over year.

The hint of a slowdown in the labour market was enough for the fixed-income markets to reflect a slightly reduced probability that the Fed will lift the federal funds rate by half a percentage point, rather than by a quarter point, this month. The fed funds futures market is reflecting a 40% chance that the Fed hikes by half a point, down from about 60% before the jobs report.

The two-year Treasury yield, a barometer for expectations about the fed funds rate, was down to just below 4.6% from over 4.8% before the report.

That dragged the 10-year yield, which has recently been trading in line with the two-year yield, down to below 3.7% from about 3.85% earlier.

CapitaLand China Trust and Sasseur Reit have outperformed due to China’s reopening

The Business Times on Tuesday reported that CapitaLand China Trust (CLCT) and Sasseur Reit, the two largest among the five Singapore-listed real estate investment trusts (Reits) with purely China-based assets, currently rank among the top five performers when compared with the rest of the Reits and business trusts.

“CLCT has generated six-month total returns of 11.4% as at 6 March, assuming dividends were reinvested in the security. This is significantly better than the negative 8.6% average total returns from its peers and makes it the top performer among S-Reits over this period’’ said BT, adding that Sasseur’s total return over the same period was 5.3%.

Vijay Natarajan, an analyst at RHB Group, was quoted saying “These two Reits are predominately retail sector-focused and thus among the major beneficiaries of removal of Covid-related restrictions’’.

CGC-CIMB, which has an “add’’ rating on Sasseur with a target price of S$1, said it thinks the post-Covid normalisation would continue to provide Sasseur with tailwinds in the form of improved shopper traffic and tenant sales. DBS Group Research has “buy’’ calls on CLCT and Sasseur with target prices of S$1.45 and S$1.05 respectively. CLCT ended the week at S$1.12 while Sasseur closed at S$0.76.

Singapore’s growth and inflation forecasts remain largely unchanged

The latest quarterly survey of private sector economists conducted by the Monetary Authority of Singapore has shown that forecasts for Singapore’s full-year growth is 1.9%, barely changed from 1.8% in the previous survey. Core inflation is forecast to be 4.1% from 4% before, while headline inflation is forecast at 5% from 5.2% previously.

The updated expectations remain within official forecast ranges of 0.5-2.5% for growth, and 3.5-4.5% for core inflation.

SIAS met Golden Energy management, asks for exit offer to be “raised considerably’’

The Securities Investors Association (Singapore) or SIAS last week met with the senior management of Golden Energy and Resources (GEAR) and told them that the exit offer for GEAR must be raised considerably for progress to be made on the deal, echoing a call made originally in a 28 Feb letter to GEAR’s Board.

At the meeting, GEAR officials outlined the challenges the company is facing, including limited financing options. They also explained conditions that must be satisfied such as regulatory approvals in Indonesia and Singapore, as well as approvals from independent shareholders of GEAR’s Indonesian-listed majority shareholder Dian Swastatika Sentosa.

However, SIAS’s president and CEO David Gerald noted in a press statement that “The fact that GEAR have to go through their due process to seek approval on the conditions has nothing to do with the settlement of a fair and reasonable price’’.

In particular, Mr Gerald said GEAR shareholders strongly maintain their view that the current exit offer price of S$0.16 per share is too low because it significantly undervalues GEAR’s stake in Australia-listed Stanmore Resources.

SIAS will be organising a dialogue session between GEAR’s Board and senior management with shareholders once the offer circular is despatched.

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