US rate expectations, North Korea to drive STI
In Friday's market report, the possibility was raised that the Straits Times Index's best days for 2017 have already passed and that the 16 per cent run that took it from 2,880 at the start of the year to 3,354 on July 27 raises the possibility that there may not be much to look forward to for the rest of the year.
This thesis was partly based on a comment in Macquarie Warrants' (MW's) Sept 20 daily newsletter in which it said the Singapore market did not screen well in Macquarie Equities Research's (MQ's) recent Asean conference investor survey possibly because of a strong performance year to date that had made it Asean's best performer.
In other words, unlike Wall Street, which continues to rise because it is probably seen as a safe haven that will always be rescued by a generous central bank, projecting more gains for the STI based on recent upward momentum may not be possible.
Despite this, MQ raised its STI target to 3,400 "in view of the improvements in overall economic backdrop and better price target upgrades for component stocks from the MQ team".
As most readers would know, how the STI performs depends very much on the banks.
Yes, the Jardine group also wields considerable influence, especially Jardine Matheson, Jardine Strategic and Hongkong Land but it was the stunning gains in the banks which drove the index to consecutive two-year highs in July and it is the loss in momentum in the banks that has led to the index's sideways/downward drift since then.
The reason for the market going suddenly cold on the banks is uncertainty over the timing of US interest rate hikes.
If you assume that higher US rates pushes up rates here, and if you assume further that higher rates means higher bank profits because of a wider net interest margin, and if you further accept this was what the market was banking on when it bought DBS, UOB and OCBC over the past 18 months, then signs that the US Federal Reserve may not hike rates as aggressively as thought would logically explain the brakes being applied.
As things stand now, there appears to be some doubt as to whether there will be a rate hike in December.
The Fed's "dot plot", which shows the projections of the 16 Federal Open Markets Committee (FOMC) members, suggests there will be three hikes by the end of 2018, which in turn can be interpreted as one in 2017 and two next year.
Some have interpreted this as a "hawkish" dot plot, that is, aggressive in terms of tightening. The market, however, has adopted a benign view, the consensus being that two hikes in 2018 isn't a big deal.
To cut a long story short, the STI finds itself in a somewhat perverse position where expectations of higher interest rates, instead of depressing it, should push it higher because of anticipation of higher bank earnings.
The fact that the market now thinks rates will be hiked later rather than sooner is probably a big reason why the STI's rise this year has stalled - plus of course, the fact that it had already gained almost 20 per cent, which is perhaps good enough for many players to start finding reasons to switch to other markets.
This week promises to be interesting as several Fed officials are due to deliver speeches and the Trump administration is set to reveal some details of its tax plan.
Then of course there's North Korea, whose leader has upped the verbal ante and continues to taunt US President Donald Trump.
Despite the inflammatory rhetoric, the market still seems to believe that it's all talk and no action - at least on the nuclear front.
Assuming that this is really the case, then any renewed gains for the STI would depend heavily on whether confirmation comes that US rates will be raised in December.
This article appears in The Business Times today. For full listings of SGX prices, go to http://btd.sg/BTmkts