Business

STI slips after DBS and OCBC fall

Banks, and by extension the STI, face upward resistance after run-ups this year

Despite a rise in the Dow futures, the Straits Times Index (STI) drifted to a 5.85-point loss at 3,320.67 yesterday, weighed down by falls in DBS Group and OCBC Bank. Turnover at 1.7 billion units worth $1.06 billion was below last week's average of around $1.3 billion and, excluding warrants, there were 171 rises versus 297 falls.

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Brokers spoke of the banks, and by extension the index, encountering upward resistance after their run-ups this year.

"Banks shot up on expectations of robust earnings and now that those expectations have been met, maybe it's time to sell," said a dealer.

DBS led the way down with a $0.34 or 1.6 per cent drop to $21.15 on volume of 7.5 million. Maybank Kim Eng in its report described DBS' first-half earnings per share as being slightly below expectations.

"We lowered FY17E EPS by about 2 per cent but raised FY18-19E EPS by about 1 per cent on higher income. Given sanguine economic prospects, we raise our FY17-18E loan growth assumption to 6 per cent to 8 per cent (from 6 per cent)," said the broker.

"DBS should be a key beneficiary of rising rates, but yield compression and stubbornly high O&G (oil and gas) provisions remain a drag. Our target price is raised to $21.50 after rolling forward valuations to FY18 and pegging to an unchanged 1.1x FY18E P/BV. Maintain hold, as upside is limited at this point."

OCBC, in the meantime, fell $0.10 to $11.11 with 3.3 million shares traded.

The average value per unit traded was $0.62, pointing to heightened activity in the penny segment and this was borne out by a look at the top 20 actives - 16 were priced below $0.20.

Top of the list was Rowsley, which is set to benefit from an injection of healthcare assets and has been active since the announcement was made to that effect. The counter ended $0.004 lower at $0.108 with 92.8 million shares traded.

On the topic of Wall Street, CMC Markets said the robust earnings season remains a key driver of the stock markets these days.

"So far, 420 of the S&P 500 companies have announced quarterly earnings, and nearly 80 per cent of their profits have beaten analysts' forecasts," said CMC.

"Improving earnings helped to justify the relatively high valuation of the stock markets. A weaker US dollar also painted a brighter picture of US exports and MNCs' earnings in the months to come."

Mr Rick Rieder, BlackRock's chief investment officer for global fixed income, discussed the US' strong jobs report last Friday and said he thinks interest rates could well move higher in the back half of the year, particularly as markets price in the improving economy, the Federal Reserve's commitment to policy normalisation, the potential for some positive fiscal developments (which the markets had written off last Friday), and the fact that inflation may not be quite as weak as previously believed.

"We do not believe rates are headed meaningfully higher, as higher yield levels will continue to draw tremendous demand from yield-starved investors across the globe, but rather that we are likely to be modestly stair-stepping higher to a new range for rates," said Mr Rieder.

Bank of Singapore's chief economist Richard Jerram said he expects the Fed to continue on a path of "gradual policy normalisation", announcing a balance sheet reduction in September and a rate hike in December, though he added that the outlook for next year is less clear.

DBS's chief investment office said the sustainability of the US equity rally will also hinge on developments in Capitol Hill as investigations into the alleged Russian interference in the US presidential election intensifies.

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