Banks boosted by Yellen's hawkish speech

Monday's column highlighted the fact that the Straits Times Index's fortunes depend heavily on the banks and movement in bank shares were in turn driven by interest rate expectations.

Also discussed was that instead of lower interest rates driving stocks higher, it was expectations of higher rates which were thought to translate to higher bank earnings and through to higher share prices.

Yesterday, the index jumped 24.11 to 3,236.15 driven by large rebounds in the three banks. Their gains accounting for about 17 points.

Heightened activity in the banks and also Mandarin Oriental meant volume amounted to 1.7 billion units worth $1.1 billion, compared with only $890 million the day before.

On Tuesday, US Federal Reserve chair Janet Yellen delivered a speech that many interpreted as hawkish and hinted of a December rate hike, which the market had thought unlikely.

In the federal funds futures market, the implied probability of rates being raised in December rose from 60 per cent to 70 per cent on Tuesday, more than twice what it was a fortnight ago.

Among the banks, DBS Bank rose 37 cents or 1.8 per cent to $20.89 with 4.5 million traded.

Nomura, in a "buy", said although a weak O&M IP index (offshore and marine industrial production) spells trouble in the form of higher provisions for DBS, these problems will fade and the mid-to-long term recovery remains intact.

"The O&M sector headlines have been affecting DBS more negatively relative to its peers..." said Nomura.

"We recommend taking this opportunity to accumulate the stock while scepticism remains. We maintain our Gordon Growth Model-based target price of $25, implying 22 per cent upside. The stock is trading at 1.07x price/book."

Mandarin Oriental's shares caught the eye with 78 US cents (S$1.06) or 28 per cent crash to US$2.01 on volume of 11 million.

The company in the morning announced it was shelving plans to sell The Excelsior Hotel in Hong Kong as the offers it received were below expectations.

Shares of the Singapore Exchange (SGX) added one cent to $7.45 with 6.3 million traded.

Goldman Sachs in a Tuesday report said it had upgraded SGX to "buy" from "neutral" on an improving volume and earnings outlook.

"SGX has underperformed peers and the Singapore index year to date as earnings expectations were revised down. That said, we believe the earnings cuts should come to an end and volume recovery will prompt upward revisions to consensus," said Goldman Sachs, adding that SGX trades at the lowest price-earnings growth multiple among Asian exchanges.

Its 12-month target price for the SGX is $8.60.

State Street Global Exchange announced that its Global Investor Confidence Index (ICI) decreased to 104.4, down 2.4 points from last month's revised reading of 106.8. The decline in sentiment was driven by a 6.3 point drop in the North American ICI to 105.6. By contrast, the European ICI rose by 4.7 points to 93.7 along with the 3.7 increase in the Asian ICI to 102.8.

In the press release, Mr Kenneth Froot, co-developer of the Investor Confidence Index at State Street Associates, said the regional breakdown reveals diverging paths.

"Confidence has strengthened in Europe and Asia on the back of optimistic economic conditions. However, it has weakened in North America with renewed geopolitical concerns and the Federal Open Market Committee's pivotal decision to gradually trim its US$4.5 trillion portfolio."

As for the tensions between the US and North Korea, Rabobank noted that US President Donald Trump stated that he would finally "fix" the North Korean situation and is "totally prepared" to use "devastating" military force to deal with Pyongyang, even if that was "not a preferred option".

"Yet, with Twitter surprisingly announcing it is to expand its 140 character limit to 280, we can now look forward to twice the angry rhetoric stemming from the White House," said Rabobank.

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