Weekly Commentary: 21 Aug 2023 – 27 Aug 2023
Markets ended lower as investors grapples with a sharp increase in long-term yields and fears of a sharp slowdown in China. The UK released their inflation figures last week and Headline CPI fell from 7.9% to 6.8%, the lowest rate of increase since February last year. However, core inflation remained unchanged at 6.9%. The annual rate for services, increased, from 7.2% to 7.4%. Wage growth is contributing to the stickiness of inflation as it was further fuelled by labour market released last week that showed record wage growth of 8.2% in the 3 months to June. Home rental prices in July also rose at their fastest rate ever, and mortgage rates are expected to stay high for some time.
The US showed no signs of slowing down as its economy remains resilient. Retail sales – a measure of spending at stores, online, and in restaurants, rose a seasonally adjusted 0.7% in July from the prior month, an acceleration from June’s 0.3% gain. The retail sales gain was also higher than the 0.2% in consumer prices last month, a sign that its spending is outpacing inflation.
China is expected to make the biggest cuts to its core lending rates in a bid to reverse the slowing of its economy and revive demand in the country. It made a cut to its medium-term financing rate last week and is set to announce cuts to both 1-year and 5-year loan prime rates. A slew of reforms is also due to be delivered as the China Securities Regulatory Commission was considering extending trading hours for the stock and bond markets, cutting transaction fees for brokers, and would encourage share buybacks to help stabilise stock prices.
Stock returns were negative over the week as observed across the following 3 indices, with the Dow Jones Industrial Average (-2.10%), S&P 500 Index (-2.05%), and NASDAQ Composite Index (-2.55%). Other notable key market indices that generated negative returns consist of MSCI World (-2.47%) & Hang Seng Index (-5.89%). All S&P 500 sectors registered mixed returns last week with notable sectors – Financials (-2.79%), Consumer Discretionary ( -4.09%), and Real Estate ( -3.21%) falling more than the rest of the sector. For 2022, index returns were negative for the Dow Jones Industrial Average (-8.78%), S&P 500 (-19.44%), and the NASDAQ Composite (-33.10%).
The yield-curve remains inverted as the 10Y-2Y US Treasury spread tightened to -0.67%. driven by U.S 2-year and 10-year Treasury yields rising 19 bps to 4.95% and rising 45 bps to 4.28% respectively. Market sentiment also became more risk-off as the U.S. High Yield (HY) – Investment Grade (IG) credit spread widened 13 bps to 2.68% while the CBOE Volatility Index (VIX) rose 396bps to 17.30%.
This coming week, earnings season is upon us as Zoom, BHP, Baidu and NVIDIA will be releasing their second-quarter earnings. Singapore will be releasing the CPI for July.
The global REITs market’s return was mostly in the mix across the numerous benchmarks. Thailand Property Fund & REITs Index (-0.32%), Hang Seng REIT Index (-6.02%), and FTSE EPRA Nareit UK REITs GBP (-4.50%) the notable REITs that generated negative returns over the past week. Closer to home, the iEdge S-REIT Index (-1.71%) and most of its subsectors generated negative weekly returns with Health Care REITs (+1.33%) and Real Estate Operating Companies REITs (+1.82%), the notable sector that outperformed the rest last week. REITs generally have been affected by decreasing yield spread as interest rates surged and investors price in the possibility of reduced distributions stemming from higher financing costs. However, we do expect inflows to return to the sector given the existing attractive valuations on offer and resilience offered by the REIT asset class in light of the waning global growth outlook.
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