Markets spooked by ghost of the higher-for-longer rates

SINGAPORE – Wall Street confounded observers by rallying last Friday following unexpectedly strong United States jobs data. But it may be premature to break out the bubbly.

Despite last Friday’s uptick, the fact remains that global equity markets have had one of their most turbulent weeks since the first quarter of 2023, spooked by rising US bond yields, a rampant dollar, tightening financial conditions and deepening growth fears.

Then came the latest US non-farm employment data which showed that 336,000 jobs were added in August, almost double the 170,000 jobs expected by the market.

All bets are on the Federal Reserve hiking rates again in the foreseeable future.

While September is traditionally a rough month for stocks, October has not started out well. Many insiders are writing off the Friday stock bounce as a relief rally by an oversold market following a slight pullback by Treasury yields. Some attributed it to modest wage growth numbers.

Apprehension remains about the immediate direction of the financial markets as yields on 10-year Treasuries remain just a whisker away from 5 per cent on the back of a higher-for-longer hawkish Fed tone recently. Meanwhile, yields on 30-year Treasuries hit their highest level since 2007.

Wall Street equity benchmarks are almost 8 per cent down from July highs.

In spite of Friday’s 0.9 per cent rally, the Dow Jones Industrial index is still 0.3 per cent off for the week and is at its lowest levels since June. The S&P 500 put on an impressive 1.2 per cent bounce on Friday, and is 0.5 per cent up for the week. But the tech-heavy Nasdaq is up 1.6 per cent for the week as the enthusiasm (or hope) for artificial intelligence-driven plays remains strong.

The Straits Times Index ended the week down 1.3 per cent at 3,174.39. The benchmark index’s trading range more than doubled the preceding week’s range, and in mid-week it tested the 3,130 levels last seen in early July.

One segment of the market which was badly bashed down was S-Reits, many of which hit 52-week lows on concerns that their earnings will be hit by higher-for-longer rates.

Top-tier names like CapitaLand Ascott Trust, ESR-Logos Reit, Frasers Logistics & Commercial Trust, CapitaLand Integrated Commercial Trust (CICT) and CapitaLand Ascendas Reit have been hammered down to their lowest levels in 2023 as investors run for cover.

As much as 60 per cent of the 20 stocks that saw the most net institutional fund outflows for the first four sessions of the week represented the S-Reit sector including CapLand Ascott, Lendlease Reit, Frasers Centrepoint Trust, CapLand Ascendas, Mapletree Logistics Trust, Keppel Reit, Mapletree Industrial Trust, CICT, Mapletree Pan Asia Commercial Trust, ESR-Logos, Suntec Reit and CDL H Trust.

The sharp increase in bond yields is bad news for investors and consumers because the 10-year yield influences everything from corporate financing to mortgage rates and currency valuations.

Investors are growing increasingly concerned about the amount of corporate debt that needs to be rolled over at higher rates as the Fed’s tightening cycle has pushed up the marginal funding costs for businesses over the past few years. If interest rates remain high, companies must devote a bigger share of their revenue to cover higher interest expenses as they refinance their debt at higher rates. This is bad for earnings.