Weekly Commentary: 03 October 2022 – 09 October 2022
The stock market sell-off continued last week, driven by unfavourable economic data release and volatility in the UK financial markets. The Fed’s preferred inflation gauge – the U.S. Personal Consumption Expenditure (PCE), has its headline rate decreased by 0.20 pp to 6.20% YoY in August. However, inflationary pressure persists as core PCE climbed by 0.20 pp to 4.90% YoY, well above the Fed’s target range of 2%. As a result, value stocks as loosely represented by the Dow Jones Industrial Average (-2.89%) fared worst this time, with the S&P 500 (-2.89%) and the NASDAQ Composite Index (-2.68%) trailing closely behind. Other key market indices including the STI (-3.00%) and Hang Seng (-3.96%) continued to be in the negative as well. All eleven S&P 500 sectors reported negative returns with the exception of Energy (+1.83%) as WTI bounced back from its eight-month low. Materials (-0.64%) and Healthcare (-1.37%) have also held up the best relatively. In contrast, Utilities (-8.79%), InfoTech (-4.19%), and Real Estate (-3.84%) were the top underperforming sectors.
Overall market sentiment is still centred around recession and rate hikes worries, especially after the stubbornly elevated inflation data in August. In addition to the core PCE, the U.S. core CPI had also accelerated to 6.3% YoY, from 5.9% in July. Globally, rising energy prices remain a concern as it is the primary driving force behind the rising inflation level. Singapore’s CPI in August has accelerated by 0.5 pp MoM to 7.5% YoY, the highest since the GFC, while MAS core inflation also moved up by 0.3 pp to 5.1% YoY. Nearly four dozen countries have raised interest rates in the past six months as central banks hope to contain it, but the level is also likely to remain high in the second half of 2022 due to lack of resolutions to the current energy supply constraints. Two weeks ago, the U.S. Federal Reserve announced a 75 bps hike on its benchmark interest rate, elevating the target range to 3.00%-3.25%, the highest since March 2008. The market is currently pricing in a more aggressive Fed as its monetary tightening seemed to have yield little effectiveness so far.
The yield-curve continued to be inverted although the 10Y-2Y US Treasury spread has increased by 12 bps to reach -0.41% last week. The U.S 2-year Treasury fell by 9 bps to 4.21% while the 10-year increased by 3 bps to3.79%. The stock market remained risk-off with an uptrend in volatility as the global High Yield (HY) – Investment Grade (IG) spread widened by 27 bps to 3.93% and the CBOE Volatility Index (VIX) continued to climb by 170 bps to 31.62%.
As can be seen below, most of the global REIT markets remained in the negative with the exception of France and Germany. However, the overall 12-month yield spreads also remained positive and favorable towards forward total returns. Back at home, the iEdge S-REIT Index (-5.36%) and all of its subsectors were hit hard as a reaction to the latest rate hike from the Federal Reserve with Industrial (-3.89%) and Healthcare (-4.51%) faring the best. On the other hand, Hospitality (-8.94%), Specialized/Pureplay DCs (-8.24%), and Office (-7.69%) were the worst hit subsectors. The correction was mainly caused by SREITs’ decreasing yield spread and investors pricing in the possibility of reduced distributions from the increased financing costs. With regards to the pandemic, the 7-day moving average of total COVID-19 cases stayed elevated but continued to hover below three thousand cases for the past month.
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