Markets grind higher despite volatility and risks

SINGAPORE – There is an old saying in the market that as January goes, so does the rest of the year.

So far, January has turned out to be a rather good month for the markets, despite some scattered turbulence. Most markets have clambered their way to higher ground.

Wall Street, the home to the world’s most influential market, has shown remarkable resilience despite concerns over an economic slowdown, elevated inflation, high interest rates and geopolitical jitters.

Last Friday’s

closing at 38,109.43 points for the Dow Jones Industrial

Index

marked a 0.65 per cent weekly gain and a rise of 1.11 per cent for the month of January to-date.

Despite sliding on Jan 26 amid concerns about Intel’s earnings, the S&P 500, seen as a more representative gauge of Wall Street stocks, rose 1.06 per cent last week to 4,890.97. This marked a solid 2.54 per cent gain for the month.

The tech-heavy Nasdaq gained another 0.94 per cent for the week to 15,455.36 points, adding up its monthly gain to an impressive 2.96 per cent.

In Singapore,

the Straits Times Index ended at 3,159.53 on Jan 26,

7.24 points up from Jan 19’s close at 3,152.29 points as the month saw over $122 million of net institutional outflow. There has been some noticeable weakness by the ST Index’s component stocks like DBS, OCBC and UOB.

Interestingly enough, activity on the Singapore bourse appears to be turning to selected second-liners, many of which are seen as trading at attractive price-earnings multiples. Notable names included Yangzijiang Shipbuilding, Sats, ST Engineering and ComfortDelGro.

So what is next?

As this column suggested at the start of 2024, the outlook for the market for the year appears benign. Much of the risks from the previous year which also flowed into 2024 – inflation, interest rates, supply chain issues – have already been priced in.

In short, investors face “known knowns” (borrowing the words of the late Donald Rumsfeld), and are adjusting their strategies accordingly.

Meanwhile, some data is also turning market friendly.

On Jan 26, the closely watched US December inflation data suggested that price rises are drifting closer to the Federal Reserve’s target, while consumer spending remained sturdy despite weakening personal income growth and falling savings. The Fed’s preferred inflation gauge, the personal consumption expenditure

rose just 0.2 per cent in December, and 2.9 per cent from a year ago.

The 12-month inflation rate is the lowest since March 2021.

That said, according to CME FedWatch tool, traders are pricing in a more than 97 per cent likelihood that the Fed leaves interest rates unchanged at its policy meeting this week.

This view was underscored by “FedSpeak” last week.

Bank of Atlanta president Raphael Bostic reiterated that he does not see the US central bank cutting rates until the third quarter. His Philadelphia counterpart, Mr Patrick Harker, said his expectation remains that inflation will continue to ebb towards the 2 per cent target.

Well-respected Federal Reserve governor Christopher Waller warned that the US central bank should take a cautious and systematic approach when it begins cutting interest rates,

a process that can start in 2024 in the absence of a rebound in inflation.

“As long as inflation doesn’t rebound and stay elevated, I believe the FOMC (Federal Open Market Committee) will be able to lower the target range for the federal funds rate this year,” Mr Waller said at a virtual event hosted by the Brookings Institution on Jan 16.

Investors are slowly coming to terms with reality and the possibility that the Fed may not cut rates during the January-June period.

This recalibration will cause some market volatility in the short term, but will not derail markets in the medium term if the economy slows down but avoids a hard landing, inflation cools further, and the Fed cuts rates starting during the third quarter and continues to do so progressively over the next three years.

In Singapore, one sector to watch is the S-Reits, whose earnings reporting season begins soon.

While the upcoming earnings reports will see the flow-through of higher interest rates, a potential cut in rates in 2024 could be a catalyst for this segment, according to Mr Krishna Guha of Maybank Securities.

He reckons that Suntec Reit, CDL Hospitality Reit and Far East Hospitality Trust would have the highest distribution per unit (DPU) rises if rates fall. He is also upbeat on CapitaLand Integrated Commercial Trust, CapitaLand Ascendas, Fraser Logistics and Commercial Trust and Lendlease Global Commercial Reit.

Overall, while the outlook for the market remains generally positive, expect volatility, says Mr Vasu Menon, managing director of investment strategy at OCBC Bank.

“Market probability of a March Fed rate cut has fallen sharply from nearly 90 per cent at the start of January to below 60 per cent now,” he pointed out.

But going further down the year, one “known unknown” is geopolitics.

BCA Research reckons that the upcoming US elections and commodity volatility will be factors to watch.

“The US is on the brink of a major election, the outcome of which could reduce its willingness to engage with the outside world. So, states seeking to carve out their own spheres of influence are incentivised to raise the economic costs to the US and discourage its influence in their regions.

“These states can do this by interfering in key trading routes in their regions. As a result, geopolitical threats to maritime choke points are a structural as well as cyclical problem and will persist due to the revival of superpower competition,” BCA Research noted.

The week ahead is going to be a packed one for market watchers.

Besides the Fed gathering on Jan 31, there are earnings reports and the US employment report.

The consensus forecast by Bloomberg projects that US payrolls rose by 185,000 in January following a December gain of 216,000, while the unemployment rate and wage growth are expected to remain unchanged at 3.7 per cent and 4.1 per cent respectively. Such figures, which show a resilient US labour market, could go further into pushing back on expectations for early Fed rate cuts.

China’s purchasing managers’ index (PMI) is due on Jan 31, and may paint a slightly less bleak picture ahead of the Chinese New Year holiday.

The economic agenda for this week includes preliminary fourth-quarter GDP growth estimates for both the euro zone and Germany, the European Commission’s sentiment indices and the US Conference Board consumer conference index on Jan 30 and manufacturing PMIs on Jan 31 and Feb 1.

Barring a major shock, the market is likely to continue grinding higher through February amid continuing news and data flows.