Weekly Commentary: 31 October 2022 – 06 November 2022
Stocks continued to rally last week halfway into the 3Q22 earnings seasons, in hope that the Federal Reserve would slow down its pace and pivot. So far, around 52% of the S&P 500 companies have reported actual results for 3Q22 where around 68% and 71% of them have reported positive Revenue and EPS surprise respectively. Value stocks as loosely represented by the Dow Jones Industrial Average (+5.72%) outperformed the S&P 500 Index (+3.97%) and the NASDAQ Composite Index (+2.25%). Other key market indices including the STI (+3.00%) were also positive except for the Hang Seng Index (-8.32%). The Hong Kong stock market plunged as President Xi’s third term triggered fears for the growth of the Chinese private sector. All eleven S&P 500 sectors reported positive returns with the exception of Communication Services (-2.85%). Consumer Discretionary (+0.71%) and Energy (+2.79%) relatively underperformed as well. Consumer Discretionary companies have been slowed by high inflation and slowing economic growth this year as only slightly over 60% of 3Q22 earnings reported so far are above estimates, the worst in the S&P 500 index so far. Growth mostly lagging as several tech mega-caps and internet stocks – i.e. Microsoft, Amazon, Alphabet, and Meta have reported earnings misses and lowered their outlooks last week. In contrast, Industrial (+6.74%), Utilities (+6.50%), and Financials (+6.23%) were the top performers.
The yield curve continued to be inverted as the 10Y-2Y US Treasury spread further widened by 14 bps to -0.42% last week. Both the U.S 2-year and 10-year Treasury yields fell by 4 bps to 4.49% and by 18 bps to 4.20% respectively. The stock market slightly shifted to more risk-on and less volatile as the U.S. High Yield (HY) – Investment Grade (IG) credit spread continued to contract by 43 bps to 2.97% and the CBOE Volatility Index (VIX) slowing down by 410 bps to 25.75%.
Market focus next will be on next week’s FOMC decision where the Fed is expected to announce another 75 bps rate hike. A less hawkish or aggressive hike will prompt a continued rally in the stock market. There are also the rest of the 3Q22 earnings announcements where 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 centred 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 unchanged at 6.20% YoY in August, but core PCE climbed by 0.20 pp to 5.10% 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 September was unchanged MoM at 7.5% YoY, the highest since the GFC, while MAS core inflation moved up by 0.2 pp to 5.3% YoY.
As can be seen below, most of the global REIT markets delivered positive returns with the exception of Hong Kong and Malaysia. Back at home, the iEdge S-REIT Index (+6.00%) has rebounded and most of its subsectors ended the week higher with the exception of the Diversified SREITs (-1.49%). Healthcare (+4.37%) also relatively lagged the rest. On the other hand, Specialized/Pureplay DCs (+10.36%) and Hospitality (+8.19%) SREITs were the best-performing subsectors. REITs overall have been affected by decreasing yield spread as interest rates surged and investors pricing in the possibility of reduced distributions from the increased financing costs, but we do expect inflows to return to the sector when market sentiment improves due to the attractive valuations and yields. With regards to the pandemic, the 7-day moving average of total COVID-19 cases stayed elevated due to the highly transmissible XBB variant but has been trending down at around five thousand cases. 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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