Market Watch
Fear and uncertainty overhang the markets
Sign up now: Get ST's newsletters delivered to your inbox
Financial markets currently face uncertainties on multiple fronts.
PHOTO: REUTERS
Follow topic:
SINGAPORE – Any hopes of a near-term market recovery were snuffed out by Federal Reserve chairman Jerome Powell last week when he said that the US economy’s strength and continued tight labour market could warrant further Fed interest rate increases.
“Additional evidence of persistently above-trend growth, or that tightness in the labour market is no longer easing, could put further progress on inflation at risk and could warrant further tightening of monetary policy,” Mr Powell said in remarks to the Economic Club of New York.
Mr Powell’s utterance on Thursday appeared to push back against market expectations that the United States central bank’s rate hikes had reached an end.
If that were not enough, overhanging the market are fresh geopolitical concerns about the impact of an extended Middle East war, added on to the conflict in Ukraine,
Oil is already at its highest levels in 2023, as is gold – a sought-after asset during times of crisis and uncertainty.
As the 10-year Treasury surged past the 5 per cent levels for the first time in 16 years,
The broader S&P 500 broke below its key 200-day moving average for the first time in six months to close at 4,224.16 points, marking a 2.39 per cent fall for the week.
With the prospect of higher-for-longer rates, the tech-heavy and rate-sensitive Nasdaq slumped 3.16 per cent last week to 12,983.81 points.
In Singapore, the Straits Times Index fell 3.4 per cent last week to 3,076.69 points on Friday, setting a new low for 2023. This brings the decline in total return for 2023 year to date (YTD) to 1.2 per cent.
There was nowhere to hide and traditional safe havens like the trio of banks averaged 1.9 per cent declines, trimming their average YTD total return to 3.9 per cent.
UOB is set to provide a business update this coming Thursday, while OCBC Bank, which has gained 12 per cent in total returns in 2023, has seen the most net institutional inflow across the Singapore stock market over the past two weeks.
Both DBS Bank and OCBC ended Friday 13 per cent below their Refinitiv consensus estimate target price, while UOB ended Friday 16 per cent below target.
So what is next?
While much of the focus has been on rates and the Middle East, there is another factor that the market has to take into account in November.
The gridlock at Capitol Hill, where the Republicans have yet to pick a House Speaker, will have implications on the upcoming debt-ceiling debate outcome in November.
It could be a bruising and nerve-racking exercise, not just for lawmakers, but for markets as well.
This comes as the US government on Friday posted a US$1.695 trillion (S$2.33 trillion) budget deficit in fiscal year 2023, a 23 per cent jump from the prior year as revenues fell and outlays for Social Security, Medicare and record-high interest costs on the federal debt rose.
As Mr Vasu Menon, managing director for investment strategy at OCBC, pointed out, given the current circumstances, the market outlook is unlikely to change materially in the near term.
“Expect a more challenging market environment in the next six to nine months, as a confluence of global economic and geopolitical uncertainties make for a cloudy outlook and cause greater volatility,” he said.
“The prospect of higher-for-longer US interest rates, given elevated inflation figures, continues to keep markets on edge. Fed chair Jerome Powell’s pronouncement last week that inflation is still too high and lower economic growth is needed to bring it down keeps open the possibility of more rate hikes in future.”
Despite this, analysts point out that the futures market does not expect the Fed to move on rates in the coming months, although this could change if data in the coming weeks shows a resilient US economy and strong consumer spending.
Rate expectations now are in fact more dovish than they were a week ago, with around 25 per cent expectation now that there could be a 25 basis-point hike before 2024, which, if it happens, could be at the Dec 13 Fed gathering, rather than the Federal Open Market Committee meeting next Wednesday.
“The situation is very fluid and central banks, which have already done a great deal so far, are between a rock and a hard place as they try desperately to cool the economy and tame inflation,” added Mr Menon.
A great deal now hinges on how the economy and inflation fare, and, in that respect, data this week showing how the US economy performed in the third quarter, along with personal income and spending figures and the Personal Consumption Expenditures inflation data for September, will be closely watched by the markets for clues on what the Fed might do next.
The Fed has already raised interest rates sharply, and it continues to tighten monetary policy through quantitative tightening, sucking away liquidity to the tune of US$95 billion a month from the financial system.
Meanwhile, fiscal policy which has been propelling the US economy is set to fade in the coming months.
The fear remains that along with the tighter monetary policy, high oil prices and rising bond yields will weigh on the US economy in 2024 and could cause a recession and corporate earnings downgrades.
The other concern is China, whose economy continues to face challenges despite the government rolling out a series of support measures.
But on a positive note, China’s economy grew 4.9 per cent in the third quarter, beating market expectations.
Beijing’s continuous injection of additional liquidity will be critical to sustain the country’s economic growth.
Investors have no choice but to hang on tight for a volatile ride in the coming months.
But, as with all previous crises and market downturns, there will come a point when an oversold market will hit an inflexion point.
That is when some of the US$6.5 trillion of funds sitting on the sidelines or in money markets will be diverted back to equities. The billion-dollar question is: When?
