SINGAPORE (July 17): Global stocks rallied and US equities reached record highs after US Federal Reserve chair Janet Yellen said the Federal Reserve would be mindful of economic data as it raises interest rates and shrinks its balance sheet. The Standard & Poor’s 500 index rose 0.7% to 2,443.25 points on July 12, with the real estate and IT sectors taking the lead. The Dow Jones Industrial Average reached an intraday record high of 21,580.79 points, before ending the day 0.6% higher at 21,532.14 points. Meanwhile, the Nasdaq Composite Index rose 1.1% to 6,261.17 points.
In Hong Kong, the Hang Seng Index gained 1.16% on July 13 to reach its highest level in two years. South Korea’s Kospi and Australia’s S&P/ASX 200 both climbed 1.1%.
In her testimony before the House Financial Services Committee, Yellen said rates are close to a “neutral” level — a point at which they do not hasten or hold back the economy. The neutral level, Yellen says, is now quite low by historical standards. So, the interest rate would not have to climb much further to reach the neutral point.
The Fed has an inflation target of about 2%. The inflation rate was at 1.4% in May. Weak inflation is one reason some market watchers think the Fed should delay raising the federal funds rate. Some are now betting that the next rate hike will take place in December rather than September.
“We think that the Fed is in a position in which it clearly can execute a September decision on initiating balance-sheet reduction and this process should be viewed as unwavering until the balance sheet is closer to something like US$3 trillion [$4.13 trillion]. That also allows the Fed a good deal more time to decide on a December rate hike after having begun its balance sheet reduction,” says Rick Rieder, BlackRock’s chief investment officer of global fixed income, in a July 13 note. He adds that it is likely that there will be three rate hikes in 2018.
“We think that longer-term interest rates now pivot more off of international rate policy, such as that stemming from the European Central Bank and the Bank of Japan, and not solely on what the Fed is doing,” Rieder adds.
The rally on July 12 followed a dip on July 11, after US President Donald Trump’s eldest son released images of emails that seemed to strengthen arguments that the Trump campaign had ties with Russia. In the email exchange, Donald Trump Jr sets up a meeting with a Russian lawyer who was preparing to offer incriminating evidence against Hillary Clinton to help the Trump campaign.
US Treasury yields decline
Meanwhile, yields on 10-year US Treasury bonds fell four basis points to 2.32% after Yellen’s testimony to hit a one-week low.
The Federal Open Market Committee’s intention to unwind its balance sheet later this year, following similar rhetoric from other central banks, has triggered a relook at global bond market valuations, say Selena Ling, head of OCBC’s treasury research and strategy, in a July 13 note.
“This is likely to herald greater market volatility in 2H2017, whether across currencies or fixed income asset classes,” she says. “Upcoming potential risk events to watch for include the German elections, ongoing North Korean tensions, China’s policy risks ahead of the 19th Party Congress, Malaysia’s general election and a synchronised withdrawal of monetary policy accommodation by major central banks.”
Snap falls after Morgan Stanley downgrade
Shares of Snap, the hottest US technology IPO in years, sank below their IPO price for the first time on July 10. Morgan Stanley, the lead underwriter of the IPO, downgraded the stock, citing concerns that the company may not grow as fast as projected as well as competition from Instagram.
Snap owns Snapchat, an app that allows users to post short temporary videos. The latter is having trouble growing its ad revenue. Morgan Stanley has cut its 2017 and 2018 revenue forecasts by 7% to 13%, and its price target to US$16 from US$28.
The stock closed on July 10 at US$16.99, below its IPO price of US$17. It continued to fall to US$15.24 on July 12. On its first day of trading on March 2, the stock had climbed 44%. The following day, it gained another 11% to hit an all-time high of US$27.09.
But the momentum did not last. The counter fell 26% after 1Q results showed low growth. Snap has been the most-shorted stock among the 14 stocks that went public this year, according to Bloomberg. Other tech stocks are facing similar declines as analysts sound the alarm on some of their high valuations.
Goldilocks raises stake in Noble
Shares in Noble Group climbed 15% this past week to 66 cents on July 13, after a major shareholder increased its stake in the embattled commodity trader. Goldilocks Investments raised its stake in Noble to 8.19% from 5.03%. The Abu Dhabi-based fund bought 41.6 million shares for $23.2 million on July 6, according to a filing with the Singapore Exchange on July 10.
Goldilocks is now the fifth-largest shareholder of the company and has an almost equal amount of equity as China’s sovereign wealth fund CIC.
The new investment comes as a reprieve after Fitch Ratings slashed Noble’s credit rating on June 27, its third downgrade since May, amid uncertainty over the commodity supplier’s profitability and its ability to pay back its debt.
On June 26, Noble said it had sold three subsidiaries for US$4.7 million. On June 20, Noble struck a deal with its banks to extend a US$2 billion credit facility for 120 days. Goldilocks, which is controlled by investor Jassim Alseddiqi’s Abu Dhabi Financial Group, had acquired 15.5 million shares of Noble on June 19 and another 50.5 million shares on June 20.
GLP requests trading halt
Warehouse operator Global Logistic Properties requested for a trading halt on July 13. The company is in talks with various parties on a possible buyout offer. On July 11, shares in GLP fell 6% to $2.70 after a Financial Times report claimed several private equity groups had backed out.
The July 11 report said just two bidders had submitted offers for GLP. One of them, a consortium led by private equity firm Warburg Pincus, submitted a non-binding bid. The FT quoted three people briefed on the offer as saying that Warburg Pincus’ bid could be withdrawn if concerns were not allayed over the future control of GLP’s China assets. Warburg Pincus is said to be worried about provisions in a 2014 agreement that would limit the powers of GLP’s new owner when it comes to decisions about these Chinese assets.
According to the report, the only other bidder was a Chinese consortium led by GLP CEO Ming Z Mei and including private equity firms Hillhouse Capital Management and Hopu Investment Management.
On July 13, the FT reported that Ming’s consortium had been named as the preferred bidder. It cited a person involved, who also said the winning group’s bid was above analysts’ full-value estimate of US$3.06 a share. The Warburg Pincus-led consortium’s bid is said to have consisted of a range, with US$3.50 at the upper end.
What to look out for
The corporate earnings season is well underway. On July 17, Keppel DC REIT and Keppel REIT will report 2QFY2017 results. The next day, M1 will release its 2Q results. Keppel Telecommunications & Transportation is due to release its results on July 19. On July 20, Ascott REIT and Keppel Corp will report. CapitaLand Mall Trust and SATS report 2QFY2017 and 1QFY2018 results, respectively, on July 21.
July 17 is the US Trade Representative’s deadline to publish the objectives for its North American Free Trade Association negotiation. On the same day, India holds its presidential election. Votes will be counted on July 20. On July 18, the UK will report its Consumer Price Index for June. Rate hikes are unlikely until 2018, say analysts.
