Market Watch
Market runs up on hope, a prayer and positive data flows
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While Fed chair Jerome Powell’s dovish remarks prompted rallies across multiple asset markets, the biggest impact appears to be on bond yields.
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SINGAPORE – The biggest weekly rally in almost a year in equity markets triggered by a technical rebound from oversold positions has injected a huge dose of optimism and primed “risk-on” attitudes among traders.
What started with dovish comments by the US Federal Reserve
The Dow Jones Industrial index had its best week since October 2022
Meanwhile, the tech-heavy Nasdaq was even more impressive as it shot up by more than 6.6 per cent to 13,478.28 points for the week.
In Singapore, the Straits Times Index had one of its best sessions in recent memory
So what gives?
While Fed chairman Jerome Powell’s dovish remarks prompted rallies across multiple asset markets, the biggest impact appears to be on bond yields.
The closely watched US 10-year Treasury yields pulled back by almost 0.4 per cent between Wednesday and Friday to settle at under 4.6 per cent, erasing all its gains of the past months and signalling a potential plateauing in interest rates.
Meanwhile, the latest labour market data also suggested that the tightness which had played a huge part in the Fed’s rate-making decision was easing.
The latest payrolls report revealed a smaller job addition than expected, with 150,000 non-farm payrolls, while the unemployment rate rose by 10 basis points to 3.9 per cent – the highest since January 2022.
Unit labour costs, representing compensation relative to output, declined by 0.8 per cent. The year-on-year rate of unit labour cost decreased by 1.8 percentage points.
On the inflation front, the core personal consumption expenditure (PCE) price index, which the Fed uses to measure inflation, rose 0.3 per cent in October.
On a year-on-year basis, the headline PCE was up 3.44 per cent, unchanged from the previous month.
Adding to this was the decline in the Institute for Supply Management’s manufacturing index, which unexpectedly fell to 46.7 from 49 the previous month, reversing three consecutive months of sentiment improvement.
This suggested the feverish activity driving up costs was easing up somewhat.
Just a week earlier, the Commerce Department’s economic indicators showed that the US economy remains robust and resilient to a recession.
Gross domestic product rose at a seasonally adjusted annualised rate of 4.9 per cent during the July to September quarter as consumer spending remained intact.
And despite the conflict in the Middle East, there has not been any substantial surge in oil prices. Yet.
With the CBOE Volatility Index – known as the fear index – pulling back some 5 per cent last week to its lowest levels since September, it looks like the market is back to “risk-on” mode.
Are we hearing Goldilocks knocking at the door and heralding a potential year-end Santa rally?
We live in hope.
SPI Asset Management managing partner Stephen Innes noted last week that investors have been reacting to a favourable mix of Goldilocks growth data and a Fed policy pivot, as well as a generally constructive third week of earnings season.
“The absence of a substantial surge in oil prices into triple digits suggests that global oil markets are not experiencing a significant supply shock,” he said.
“This, in turn, could be seen as a positive sign for the global economy, as it means oil prices remain stable. The fact that longer-term US yields are failing to maintain levels above 5 per cent, even for longer-dated bonds like the 20-year Treasury, is a potential opportunity for a tactical trade.
“In other words, if long-term yields remain subdued, it could create an environment where investors seek alternatives, potentially favouring equities,” he added.
That said, Mr Vasu Menon, managing director for investment strategy at OCBC Bank, urges caution.
“The long end of the US Treasury market is still susceptible to yield spikes if we see stronger US data in the coming weeks – especially on the economy, labour market and inflation fronts,” he said.
“If the data continues to show resiliency, long bond yields could rebound and even retest this year’s highs.”
Also, while the US government reduced its borrowing targets for the current quarter last week, they are still high and could remain so given the sizeable US fiscal deficit which has risen sharply in the past few years.
The US$776 billion (S$1.05 trillion) of debt that the US Treasury plans to issue in the fourth quarter is a significant fall from the huge US$1 trillion figure for the third quarter (which contributed to the surge in US Treasury yields in the past three months since it was announced at the end of July).
But it is still the highest fourth-quarter figure on record, and it is expected to rise to US$816 billion in the first quarter of 2024.
Also, after more than a year of rising rates, credit conditions for households and corporates remain tight.
If banks stick to tighter lending standards amid the Fed’s ongoing US$60 billion a month tightening, there will be an impact on household spending, corporate earnings and, ultimately, the real economy.
In addition, geopolitical conditions remain uncertain.
The conflict in the Middle East, the war in Europe and the US-China trade tension remain very much in the fore.
How things turn out on any of these fronts will have a bearing on commodity prices, inflation and global supply chains.
“All in, investors ought to be careful at this juncture and not let their guard down as several macroeconomic and geopolitical headwinds continue to pose challenges for the markets,” Mr Menon said.
“Nevertheless, it is interesting to note that from a seasonal perspective, November has traditionally been the second-strongest month for US stocks behind April.
“Over the past three decades, the S&P 500 index has averaged a gain of almost 2 per cent in November. However, it is unclear if this seasonal pattern will play out this time around, given the myriad of uncertainties hovering over the markets,” he added.
But if, as many market experts calculate, the Fed is largely done with rate hikes and could pivot some time in 2024, there is a potential that much of the funds now parked in high-yielding money markets could also pivot back to equities. In the United States alone, there is almost US$6.7 trillion parked on the sidelines, earning risk-free returns.
Back home, the Singapore market looks attractive, especially from a yield perspective.
The beaten down S-Reits sector, for example, is now offering 8.5 per cent yield on a trailing basis.
If one believes that the worst is over in terms of inflation and interest rates, and that geopolitics cannot get any worse, this may be a time to selectively bottom fish for a market recovery in 2024.
And, who knows, Santa may be around the corner.
