Weekly Commentary: 24 October 2022 – 30 October 2022
Stocks mostly ended higher last week as 3Q22 earnings results so far were not as bad as what was expected. So far, around 20% of the S&P 500 companies have reported actual results for the third quarter where over two-thirds of them have reported actual EPS above estimates. Value stocks as loosely represented by the Dow Jones Industrial Average (+4.40%) were leading in front of the S&P 500 Index (+3.26%) and the NASDAQ Composite Index (+2.59%). Other key market indices were also positive except for the STI (-2.29%) and Hang Seng Index (-6.50%). Yesterday, the Hong Kong stock market had its worst day since the Global Financial Crisis as investors were spooked by the Communist Party’s leadership reshuffle that saw President Xi securing his third term. All eleven S&P 500 sectors reported positive returns with the exception of Real Estate (-1.14%). Utilities (+0.61%) and Consumer Discretionary (+1.86%) both make up the bottom three sectors. Consumer Discretionary companies have been slowed by high inflation and slowing economic growth this year as around 50% of 3Q22 earnings reported so far are below estimates, the worst in the S&P 500 index so far. In contrast, Energy (+7.28%) and growth sectors such as InfoTech (+4.72%) and Industrial (+3.76%) were the top performers. WTI crude didn’t really move down despite the extra supply announced by the U.S. strategic petroleum reserve.
The yield curve continued to be inverted although the 10Y-2Y US Treasury spread contracted by 19 bps to -0.29% last week. The U.S 2-year Treasury yield slightly moved by 1 bps to 4.49%, but the 10-year surged by 20 bps to 4.20%. The stock market still remained largely risk-off and volatile although the U.S. High Yield (HY) – Investment Grade (IG) credit spread contracted by 18 bps to 3.40% and the CBOE Volatility Index (VIX) cooled down by 217 bps to 29.85%.
Market focus will continue to be on the 3Q22 earnings announcements where several mega caps with a large weighting in the S&P 500 and NASDAQ are scheduled to report this week – i.e. Alphabet (GOOGL), Microsoft (MSFT), Meta Platforms (META), Apple (AAPL), and Amazon (AMZN). We can expect a more positive market sentiment if the outlook of corporate earnings remained bright enough to offset the aftereffects of the Fed’s policy tightening. The overall sentiment so far is still largely centered around recession and rate hike expectations, especially after the stubbornly elevated inflation data in August. The U.S. core CPI accelerated faster by 0.3 pp to 6.6% YoY, above market expectation, while headline CPI slowed down by 0.1 pp to 8.2% YoY, although the figure is expected to stay elevated moving forward due to rising energy prices in October. 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, but core PCE climbed by 0.20 pp to 4.90% YoY, well above the Fed’s target range of 2%. Globally, rising energy prices remained 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. Three 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.
As can be seen below, most of the global REIT markets delivered negative returns with the exception of France, Germany, and Australia. Back at home, the iEdge S-REIT Index’s (-5.05%) subsectors ended the week lower again with Healthcare (-7.46%) and Specialized/pureplay DC (-6.92%) SREITs faring the worst. In contrast, Hospitality (-3.04%) and Office (-4.28%) were the ones that were holding up the best. The REIT sector overall continued to be affected by decreasing yield spread as interest rates surged 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 at 8000 cases last week due to the highly transmissible XBB variant. However, there were no further announced changes to the current COVID-19 measures although Health Minister Ong Ye Kung had stated that Singapore “cannot rule out” measure retightening such as the wearing of face masks indoors in the coming weeks.
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