Banks continue boosting STI

A quiet session yesterday ended with the Straits Times Index (STI) rising 10.6 points to 3,348.8, thanks mainly to rises in all three banks.

Reaction to Wall Street's fresh all-time high on Tuesday was relatively muted, though this was to be expected since stocks here had already risen on Tuesday in anticipation of the US market rallying that day.

Turnover amounted to a healthy two billion units worth $1.4 billion. Excluding warrants, there were 245 rises versus 204 falls, so trading was more mixed than the index's reading would suggest.

Brokers described sentiment as cautious but generally firm, given that US stocks have been rising while the VIX Index, which measures expectations of future volatility, has remained very low.

DBS led the gains in banks when it jumped $0.24 to $22.19 on volume of 5.5 million. OCBC caught the eye with a $0.04 rise to $11.43 that came in heavy volume of 13.4 million.

All told, trading in the three banks came to $337.4 million, or almost a quarter of the entire market's dollar business.

Macquarie Warrants (MW) in its daily newsletter pointed out that the three banks last month had rallied to new highs.

"OCBC, after skyrocketing 27.4 per cent this year, closed at a new record high of $11.49 last week; DBS, up 26.99 per cent year-to-date, is at its highest since 1999, while UOB - up 18.8 per cent year-to-date - is at a two-year high," said MW.

"The bank rally is propelled by the prospects of rising interest rates, which they will stand to benefit from, and recent company results that demonstrated strong earnings.

"(Tuesday's) newly released MAS report on Singapore's June 2017 loan and deposit data also suggested positive trends for the local banking sector."

Phillip Capital in a Monday report on UOB maintained a "reduce" recommendation, albeit with a higher target price of $20.10 versus $19.20 previously.

Its valuation was based on a Gordon Growth Model approach, using a risk-free rate of 2 per cent, an equity risk premium of 7 per cent, a beta of 1.065, a cost of equity of 9.5 per cent, a return on equity of 9.5 per cent and a terminal growth rate of 2 per cent.

In the technology sector, shares of Venture Corporation jumped $0.62, or 4.7 per cent, to $13.83 on volume of 2.2 million, drawing a query from the Singapore Exchange.

On the US interest rate outlook, Bank of Singapore's chief investment officer Johan Jooste said the base case is for one more US rate hike this year and then one per quarter next year.

"The yield curve has steepened quite noticeably over the past month, despite the continued conspicuous absence of actual inflation in the underlying economy," said Mr Jooste.

Goldman Sachs Asset Management noted that the US Federal Reserve kept rates unchanged last week and that the post-meeting statement included an upgrade to the Federal Open Market Committee's assessment of job growth and acknowledged inflation is "below" target.

"We think the Fed will announce its strategy for scaling down its balance sheet holdings in September and we expect a rate hike in December," it said.

Rabobank said that if the world's central banks are to be believed, the era of easy money is over.

"But make no mistake about it. Following years of extremely easy monetary policies, we live in a high-debt, asset-based global economy in which raising rates is going to be no easy task," said the bank.

"Should central banks' winning streak end with botched policy normalisation, triggering a new financial and economic crisis, their fragile credibility would crumble.

"Over the past decade, the unorthodox and unthinkable have already become mainstream: Central banks are now habitually buying a wide range of asset classes in what previously would have been shunned as monetary financing."

This article appears in The Business Times today. For full listings of SGX prices, go to btd.sg/BTmkts