Weekly Commentary: 21 March 2022 – 27 March 2022
The stock market rebounded last week due to the rate hike falling within expectations despite lack of positive development in the Ukraine-Russia continued negotiations. On Wednesday, the Fed raised its benchmark interest rate by 0.25 percentage points, ending the near-zero rates of the pandemic era and starting a hiking cycle set to last well into 2023. The size and scope of future hikes remain unclear however. All the major indices reported positive returns after two weeks of loss streak. Growth stocks as loosely represented by the NASDAQ Composite (+8.20%) had the best rebound, while the S&P 500 (+6.19%) and the DJIA (+5.53%) were not far behind comparison. All the S&P 500 sectors also saw positive returns, with the exception of Energy (-0.71%) due to falling oil prices. The defensives such as Utilities (+0.64%) and Consumer Staples (+3.27%) also lagged and made up the bottom three sectors. In the other hand, growth sectors such as Consumer Discretionary (+11.22%), InfoTech (+9.98%), and Communication Services (+7.75%) outperformed. Closer to home, the Hang Seng (-4.18%) edged out the STI (+2.72%) after experiencing significant decline for three consecutive weeks.
The Consumer Price Index published monthly by the U.S. Bureau of Labor Statistics (BLS) indicated that the U.S. inflation rate by the end of February had increased by 0.9% MoM to reach 7.9%. This is the highest we have seen since 1982’s 8.4% and is expected to remain in the high range due to the high energy prices. Strong consumer demand, shortages of supplies such as semiconductors, and supply-chain constraints caused by the sporadic pandemic outbreaks had also elevated inflation for the past year. The high inflation has been the main driver for an increase in interest rate, which has been suppressed to stimulate economic growth during the pandemic for the past two years. Expect a volatile market still moving forward. The upcoming rate hikes from the Federal Reserve will need to be observed as it means slower economic growth and present the possibility that the U.S. economy will fall into a recession if the increased rate is increased too far.
The yield-curve flattened as the 10Y-2Y US Treasury yield spread further fell to 0.21%. Both the U.S. 2-year and 10-year Treasury yields had increased by 16 bp to reach 1.94% and by 12 bp to reach 2.15% respectively. The stock market sentiment had recovered slightly but remained volatile as the global HY-IG spread contracted slightly by 5 bp to 2.43% while the CBOE Volatility Index (VIX) fell by 688 bp to 23.87%.
As can be seen below, weekly performance from the global REIT markets were mostly positive with exception of Hong Kong and Malaysia market. The overall 12-month yield spreads are also positive and favorable towards REIT’s forward total return. Back at home, the iEdge S-REIT Index (+1.79%) and all of the S-REIT sectors reported positive returns overall. The two S-REIT sectors that had performed the best were Diversified (+2.54%) and Office (+2.11 %). The lagging sectors in the other hand, were Healthcare (+1.14%) and Industrial (+1.65%).
In the positive side, the 7-day moving average of total COVID-19 cases further fell to around 11 thousand cases, from 16 thousand the previous week. Overall, there is also no change in the COVID policy stance from the Singapore government that is in favour of reopening. Last week the streamlined COVID-19 measures had begun to take place. However, further development will need to be closely observed in order to identify the right time for a recovery play as Omicron is delaying the pace. The supporting indicators are currently still weak. For example, 57 thousand inbound arrivals to the country in January is still significantly below pre-COVID range of 1.5-1.8 million visitors per month. Furthermore, a new variant called the Deltacron has been identified in France. If the Deltacron carries both the same transmissibility of Omicron and deadliness of Delta, we might see further retightening of travel and gathering restrictions in the future. How Singapore’s healthcare capacity will hold up in the upcoming waves will also be an important factor as Hong Kong had already shown us how quickly the situation will turn with an ill-prepared healthcare system, even with its zero-COVID approach.
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