Weekly Commentary: 18 July 2022 – 24 July 2022
The stock market has retracted again last week as the newly released U.S. June inflation data came hotter than expected. Value as loosely represented by the Dow Jones Industrial Average (-0.16%) held up the best while the S&P 500 (-0.91%) and NASDAQ Composite (-1.57%) fared worst in comparison. The other key market indices were in the red as well including the STI (-1.03%) and the Hang Seng (-6.57%). Overall, we saw negative returns from all S&P 500 sectors with the exception of Consumer Staples (+0.11%). Utilities (-0.10%) and InfoTech (-0.32%) also formed the top three sectors. The defensives outperformed due to mounting recession fear while InfoTech was driven by strong gains from Apple (AAPL) as investors bought into the attractive valuation, ahead of the release of its 28th July earnings result. In contrast, Communication Services (-3.26%), Energy (-3.04%), and Materials (-1.29%) underperformed due to growth underperformance and falling crude price.
The U.S. consumer price index (CPI) has accelerated by 0.5 pp to 9.1% YoY in June, currently the highest in the trailing 40-year period. On the positive side, the Federal Reserve’s preferred gauge – core inflation, fell by 0.1 pp to 5.9% YoY. The U.S. five-year inflation expectations had also declined sharply in early July to 2.8%, the lowest in over a year (University of Michigan, July 2022). Thus, market sentiment turned slightly positive by the end of the week as it is seemed more likely that the next rate hike will stay at what has been priced in at 75 bps. Inflation remained elevated globally and has reached our shores as Singapore’s CPI in May increased by 0.2 pp MoM to 5.6% YoY, the highest since the GFC, while core inflation also moved up by 0.3 pp to 3.6% YoY. Nearly four dozen countries have raised interest rates in the past six months as central banks hope to contain inflation by increasing borrowing costs and slowing down growth on the demand side, at the risk of driving the global economy into a recession. Inflation is also likely to remain high in the second half of 2022 due to lack of resolutions to the current energy and commodity supply constraints, propagated by the Ukraine-Russia conflict that could last for years according to the NATO head a month ago.
The yield-curve continued to be in inversion last week as the 10Y-2Y US Treasury further fell by 14 bps to -0.20%. The U.S 2-year treasury yield has increased by 9 bps to 3.12% while 10-year fell by 4 bps to 2.92%. The overall stock market sentiment remained largely risk-off and highly volatile, but continued to improve slightly last week as the global High Yield (HY) – Investment Grade (IG) spread contracted by 2 bps to 3.79 % and the CBOE Volatility Index (VIX) fell by 194 bps to 24.23%.
As can be seen below, the performance from the global REIT markets were mixed again last week but the overall 12-month yield spreads remained mostly positive and favorable towards the forward total returns. Back at home, the iEdge S-REIT Index (-1.01%) and all of the S-REIT subsectors reported negative performance with Retail (-0.01%) and Hospitality (-0.27%) holding up better than the rest. In contrast, Healthcare (-2.86%) and Industrial (-1.74%) underperformed. With regards to the pandemic, Singapore is experiencing a new wave of infections as the 7-day moving average of total COVID-19 cases stayed elevated at around nine thousand cases. There are no changes in the COVID measures for now but it was stated by the Singapore government that future tightening has yet to be ruled out.
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