Weekly Commentary: 28 Aug 2023 – 03 Sep 2023
Returns were mixed last week as investors are still waiting for more data i.e. course of monetary policy. The battle against inflation seems to be losing steam as mortgage rates was at two-decade high last week. The average 30-year fixed mortgage is at 7.23% and was 7.09% just a week ago. Borrowing rates were below 3%, just two years earlier. Federal Reserve Chair Jerome Powell had also signalled that further interest rate increases would be required due to the continued strength of the US economy and that the economy has been growing faster than expected.
UK homebuilders are also facing headwinds due to higher mortgage rates. Homebuilders in UK are also slashing its dividend pay-out and they could be forced to resort to lowering their sale prices. UK’s economic activities were also affected as they fell for the first time since January due to higher borrowing costs hitting demand. The PMI index were 47.9 in August down from 50.8 in July and below the neutral 50 threshold for the first time since the start of the year. UK’s benchmark rate is also at 5.25%, a 15-year high. Marketed implied figures of the swap market is now pricing in benchmark interest rate of 5.8% and it could be lower as the dual signs of weaker activity and easing price pressures eases the need to raise rates.
Turkey has one of the highest inflation of 47.8% and it has just raised its benchmark rate by 7.5%, a higher than expected increase, in a bid to correct years of easy monetary policies. Inflation is expected to be around 60% end 2023, nearly 16% higher a month ago. If they continue to raise rates to match their inflation rate, the Lira would appreciate, as it remains near historic lows.
Stock returns were negative over the week as observed across the following 3 indices, with the Dow Jones Industrial Average (-0.42%), S&P 500 Index (0.84%), NASDAQ Composite Index (2.27%). Other notable key market indices that generated negative returns consist of MSCI World (+0.52%) & Hang Seng Index (+0.06%). All S&P 500 sectors registered mixed returns last week with notable sectors – Consumer Staples (-0.73%), Health Care ( -0.08%) and Energy (-1.37%) 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 widened to -0.85%. driven by U.S 2-year and 10-year Treasury yields rising 13 bps to 5.07% and falling 3 bps to 4.22% respectively. Market sentiment also became more risk-on as the U.S. High Yield (HY) – Investment Grade (IG) credit spread tightened 7 bps to 2.61% while the CBOE Volatility Index (VIX) has fallen 162bps to 15.68%.
This coming week, US GDP and employment figures will be released, and investors will be assessing the Federal Reserve’s possible monetary policies direction. India will be releasing Q1 GDP figures and Brazil will release Q2 GDP figures.
The global REITs market’s return were mostly in the mixed across the numerous benchmarks. Thailand Property Fund & REITs Index (-0.44%), Hang Seng REIT Index (+0.07%) and FTSE EPRA Nareit UK REITs GBP (+1.63%) the notable REITs that generated negative returns over the past week. Closer to home, the iEdge S-REIT Index (+0.18%) and most of its subsectors generated mixed weekly returns with Data Center REITS (+2.62%) and Real Estate Operating Companies REITs (+5.90%), 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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