Investors recalibrate as higher interest rates loom


Read on for a morning round-up of what's going on in markets
Newsfeed17 Jan 2022
    Photo credit: AFP Photo


    US

    Technology companies led a rebound in stocks at the end of a very volatile week (ended 14 January), with investors recalibrating their strategies amid growing calls from prominent voices for higher interest rates.

    The S&P 500 erased losses in the final few minutes of trading, while the Nasdaq 100 rose as dip buyers resurfaced after the tech-heavy gauge dropped to its lowest since October. Treasury yields climbed alongside the dollar.

    Fed Bank of New York President John Williams noted that given the signs of a strong labour market, the central bank is approaching a decision to begin gradually hiking. His Philadelphia peer Patrick Harker said, “three and possibly four increases this year of 25 bps” are “appropriate”.

    US retail sales stumbled at the end of 2021, factory output weakened, and consumer sentiment deteriorated at the start of the new year, illustrating a loss of traction that many analysts view as temporary. The economy will take an early hit in 2022 from the omicron variant of coronavirus – but the damage should not last beyond the first quarter, according to Bloomberg’s latest monthly survey of forecasters.

    Equities offer the best opportunity to outperform inflation, several analysts reported. Cyclical shares – like financials, energy, and resources companies – are especially well-suited to benefit from rising prices, it said. These firms typically excel when the economy is doing well or recovering from a crisis. – Bloomberg News.

    On Friday (14 January), the S&P 500 Index climbed 0.08% to 4,662.85, the Dow Jones Industrial Average slipped 0.56% to 35,911.81, and the Nasdaq Composite Index closed 0.59% higher at 14,893.75.

     

    EUROPE

    After a dismal decade, European banking stocks are finally on a tear, and bulls say the stars are aligned for further gains.

    Lenders are the best-performing industry group this year in the Stoxx Europe 600 Index, up 10%, rising nine straight days to start the year before dropping on Friday (14 January). It was the longest winning streak since 2018 and so far, the best January start on record.

    The catalyst: expectations for tighter monetary policy from the Federal Reserve and other central banks has caused a surge in bond yields, which helps banks lend more profitably. The economy’s recovery from the pandemic also will lead to more borrowing by businesses and consumers.

    It has been a long time coming. Bank stocks underperformed the rest of the market for years because of low to negative bond yields, constant regulatory pressure, money-laundering scandals, and failed turnarounds. The Stoxx 600 Banks Index slumped 45% in the decade through 2020 while the broader index rose by the same amount.

    Investors seemed to have lost all interest in the sector, despite it trading at a record low valuation.

    The turnaround kicked off last year, when European banks set aside less cash for bad loans and buoyant financial markets bolstered their trading profits. Now, interest rates are at last marching higher from the rock-bottom levels they have been mired in since the financial crisis of 2008-2009.

    The visibility of shareholder returns has increased since a dividend and share buyback ban from the European Central Bank expired and banks’ asset quality remained solid despite the pandemic. – Bloomberg News.

    The Stoxx Europe 600 slid 1.01% to 481.16 by the close in London.

     

    JAPAN

    Governor Haruhiko Kuroda starts his last full year at the helm of Bank of Japan (BOJ) amid hints of public discontent over rising prices that could shape the direction of the central bank after he leaves or even as soon as coming months.

    While Japan’s inflation remains weak compared with the United States and other major economies, it appears to have picked up enough speed to trigger a change in optics.

    At a two-day meeting starting Monday (17 January), the central bank is likely to discuss dropping its insistence that downward risks to prices outweigh upward factors for the first time in over seven years, according to people familiar with the matter.

    While almost 80% of economists surveyed by Bloomberg believe it is unlikely the BOJ will take any measures this year to address inflation or a weaker yen that is pushing up import prices, some of them see potential government displeasure in an election year contributing to a tail risk scenario for action.

    For Prime Minister Fumio Kishida, managing public opinion is critical before national elections this summer that he must win convincingly to shore up longer-term support for his administration.

    The yen has been the world’s worst performing major currency in the past 12 months as the BOJ is seen holding stimulus in place while the Federal Reserve and other central banks tighten as they look to curb inflation. – Bloomberg News.

    The Nikkei 225 Index gained 0.91% to 28,379.00 in early-Monday trading, after tumbling 1.28% to 28,124.28 the previous session.

     

    MAINLAND CHINA & HONG KONG

    Some of the biggest Chinese tech firms are seeing investors boost their proportion of Hong Kong-traded shares away from American Depository Receipts (ADRs), as tougher US regulatory oversight and elevated bilateral tensions darken the prospects for such firms on Wall Street.

    Nine Chinese firms that have a US primary listing and either secondary or dual primary-listed status in the Asian financial hub have seen increased proportion of Hong Kong shares in the past year, according to Bloomberg calculations based on exchange data available through January 2021.

    The development adds to the momentum of financial decoupling between the world’s two largest economies, reversing a trend that has helped nurture some of China’s most influential companies and enriched global banks and investors via New York-bound share floats in the last two decades.

    While the so-called “homecoming” of more US-listed Chinese firms and their trading to Hong Kong will help defend its status as a financial centre, the disproportionately thin liquidity in the city’s stock market may pose a challenge for investors.

    Under a law signed by US President Donald Trump a month before he left office, Chinese firms may face delisting starting in 2024 if they refuse to show financial information to American regulators. Converting shares from US to Hong Kong enables investors to minimise that risk.

    For 12 of the 17 dual-listed companies, Hong Kong already hosts over half of their shares outstanding. But turnover in such stocks is generally at least twice as high on the American exchanges, according to several analysts. – Bloomberg News.

    The Shanghai Composite Index dipped 0.96% to 3,521.26 and the Hang Seng Index dropped 0.19% to 24,383.32.

     

    REST OF ASIA

    Singapore’s property managers are accelerating their push abroad as a slow reopening and diminishing returns at home force them to look for growth opportunities elsewhere.

    Foreign acquisitions by real estate investment trusts (REIT) in the city-state jumped to an all-time high of 61 last year, data compiled by Bloomberg show. The total value of such deals also more than doubled from 2020 to USD12.3b.

    Property managers in Singapore – which boasts the most REITs in Asia outside of Japan – have long shown global ambitions, with overseas investments picking up during the pandemic. But a limited reopening coupled with the anticipated omicron surge is adding impetus to this drive, even as investor concerns over a slowing recovery grow.

    “Singapore’s commercial REITs may continue to rely on overseas M&A to achieve income growth in 2022, especially if omicron brings more uncertainty on further easing of social and traveling curbs to boost retail and office leasing demand in the country,” said an analyst. 

    Instead, deep liquidity pools in overseas markets like the UK, US, and Australia, as well as more alluring freehold and longer lease terms will maintain the draw of markets abroad, said analysts. “We expect this trend of overseas acquisitions to continue.” – Bloomberg News.

    Australia’s S&P/ASX 200 Index climbed 0.21% to 7,409.60 on Monday (17 January) morning after closing 1.08% lower at 7,393.90 the previous session.

    South Korea’s Kospi Index dropped 0.70% to 2,901.60 on Monday, following its previous decline of 1.36% to 2,921.92.

    The Taiwan Stock Exchange Weighted Index declined 0.18% to 18,403.33.

     

    COMMODITIES

    Oil posted a fourth straight weekly gain, the longest winning streak since October, on signs that the market is tightening as global consumption withstands the impact of the omicron virus variant.

    West Texas Intermediate (WTI) futures in New York closed up 2.1% on Friday (14 January), posting a 6.2% weekly increase. Oil has made a strong start to the year, underscored by depleting US inventories and product demand at multiyear highs.

    Crude has clawed back most of its losses late last year that were driven by omicron and the White House-led releases from national oil reserves. Although it has proved to be fast spreading, the variant also appears to be milder, particularly in vaccinated people, lessening the impact on energy consumption. Demand in India is poised to weather the latest scare, according to Hindustan Petroleum (HPCL IN) Chairman Mukesh Kumar Surana. The International Energy Agency said earlier last week (ended 14 January) that global oil demand has turned out to be stronger than expected.

    WTI for February delivery rose 2.07% to settle at USD83.82 a barrel in New York. Brent for March settlement rose 1.88% to settle at USD86.06 a barrel.

    Optimism about the demand outlook is reflected in the market’s bullish backwardated pricing structure, with near-term futures above those further out. The spread between WTI’s two nearest December contracts is now well above USD6.00 a barrel, up from less than USD3.00 in early December.

    Despite the broadly positive mood, there are notes of caution. China has maintained its strict approach to the virus, while India and some other Asian countries have introduced partial curbs which has caused a drop in mobility. On Monday, China is likely to confirm its weakest economic growth in more than a year, after reporting a drop in annual crude imports on Friday. – Bloomberg News.

     

    CURRENCIES

    The US Dollar Index rose 0.40% to 95.165.

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