Date: March 9, 2020
- The STI fell 50.1 points or 1.7% to 2,960.98 over a volatile week;
- Markets were driven by worries over the spread of the Covid-19 virus on one hand;
- On the other, prices were supported by hopes of IMF, central bank stimulus;
- US 10-year Treasury yield dropped below 1% for first time in history;
- US 30-year Treasury yield dropped below 1.5% for the first time in history;
- Local banks were downgraded by analysts;
- Share buybacks rose in Feb
The escalating number of people infected worldwide by Covid-19 and the sudden 50-basis points interest rate cut by the US Federal Reserve were the main features in week where the Straits Times Index lost 50.1 points or 1.7% at 2,960.98, most of this loss coming on Friday when the index fell 57 points. It was the first time since Oct 2018 that the STI closed below 3,000.
From the way Wall Street reacted to the rate cut, it looks like the market is unsure of the effectiveness of central bank intervention – prices gyrated wildly throughout the week, the upward spike in volatility giving day traders and short sellers plenty of tradeable opportunities.
Fed made emergency rate cut of 50 points
The US Federal Reserve slashed interest rates on Tuesday as policymakers unanimously approved their biggest one-time cut — and first emergency rate move — since the depths of the 2008 financial crisis.
Interest rates are now set in a 1 percent to 1.25 percent range, and Jerome H. Powell, the Fed chair, signalled that further moves were possible.
“The virus and the measures that are being taken to contain it will surely weigh on economic activity, both here and abroad, for some time,” Mr. Powell said at a news conference, adding the Fed was prepared to use its tools “and act appropriately, depending on the flow of events.”
Wall Street however, did not take the news positively, at least at the start. After an early bounce, prices plunged – the Dow Jones Industrial Average on Tuesday closed almost 3% lower at 25,917. According to observers, the market’s reaction reflected the thinking that lower rates might provide some stimulus but it won’t stem the spread of the virus.
California on Wednesday declared a state of emergency after a death from the virus, one that brought the total for the US so far to 11. There are more than 150 cases in the country, spread over 16 states.
Ten of the 11 US deaths were in Washington state, but the outbreak has also flared up in Texas and Nebraska.
Investors sought the safety of bonds, the 10-year US Treasury yield dropped below 1% for the first time in history
The 10-year Treasury bond yield dropped below 1% for the first time in history on Tuesday, as investors grew increasingly worried about the novel coronavirus outbreak.
The 30-year yield in the meantime, followed suit, falling below 1.5% for the first time ever. Analysts were quoted as describing the bond market as “insane’’ as investors “redefine the idea of risk distribution’’. They also said the market is discounting a return to “quantitative easing’’ by the Fed and other central banks.
US government bond yields have been falling since the start of the year, but their fall accelerated as US financial markets reacted strongly over the past couple weeks to the potential economic damage from the spreading disease.
IMF announced US$50b aid package
The International Monetary Fund on Wednesday announced US$50b of support for countries hit by the coronavirus, to help poor and middle-income countries with weak health systems respond to the epidemic.
At the same time the fund said the spread of the coronavirus has erased expectations of stronger economic growth this year, and will push 2020 global output gains to their slowest rate since the financial crisis in 2008.
But IMF managing director Kristalina Georgieva warned that it is hard to forecast just how big the effect will be: “Global growth in 2020 will dip below last year’s levels, but how far it will fall and how long the impact will be is still difficult to predict”.
Analysts downgrade Singapore banks after Fed rate cut
Singapore banks came under scrutiny in the immediate aftermath of the Fed’s surprise rate cut, with the market’s consensus being that bank margins will be compressed. As a result, most analysts downgraded the banks.
CIMB for example, downgraded the sector from “overweight’’ to “neutral’’ as its analysts expect a net interest margin (NIM) compression of 10-12 basis points. They also factored in a “highly probable’’ further rate cut at the 17-18th Federal Open Markets Committee meeting. “The resilience in Singapore dollar rates may falter’’ said CIMB.
DBS Group in the meantime, is forecasting a 6-9 basis points NIM decline across the banks. “Following the Fed’s move, as well as Hong Kong’s rate cut in tandem, we believe there is further SIBOR/SOR (Singapore Interbank Offered Rate/ Swap Offer Rate) said DBS.
Local share buybacks rise in February
The Singapore Exchange reported that 17 companies performed share buybacks totalling $68m in February, compared to $30m in January and 2019’s average of $49m.
DBS, Keppel Corp and Silverlake Axis accounted for most of the activity. DBS’s buybacks alone amounted to $43m, or about 63% of the total. The Straits Times Index recorded a 4.5% loss in Feb.
