“In contrast, China’s bond market has extended its rally, sending the yield on 10-year notes to 2.5%, the lowest since April 2020. Both markets are telling the same story about the macro weakness in China,” the Bloomberg story says.
At current levels, the earnings yield of the Chinese market is 8%, which is 5.7 percentage points above China’s risk-free rate. “Since 2005, the gap has rarely been this big,” Bloomberg says. At this yield spread, equities usually rally. Whether history repeats itself remains to be seen.
The Straits Times index fell below the still declining 200-day index, currently at 3,200, a sign that the market is a tad weaker than it should be at this stage of the corrective move. Week-on-week, the STI lost 56 points to end at 3,184.
Despite this, the rally by the STI following its breakout above 3,150 has not run its course. The retreat during the week of Jan 2-5 took the index to an intra-day low of 3,159, where it found support on the still declining 100-day moving average, although prices fell below the 200-day moving average at 3,201.
See also: Straits Times Index shows signs of decoupling from the US by outperforming
The break above 3,150 and subsequently 3,190 during December 2023 indicates an upside of around 3,330 and this remains valid. Resistance appears at 3,380. This leaves upside on the table for the market.
In the meantime, US equities may remain volatile, albeit termporaily. Yields on the 10-year US treasuries have continued to rebound, ending at 4.01% as at Jan 5. This level coincides with the breahced 200-day moving average which should provide resistance.
Elsewhere, OCBC Credit Research points out that financial institutions and banks should remain operationally stable despite a potential cut in interest rates. “We expect stable fundamentals for the Financial Institutions under our coverage as higher interest rates and benign credit quality should support earnings performance while credit ratios remain comfortably above minimum requirements,” OCBC Credit Research says.
According OCBC Credit Research, the risk is for a non-call of bank capital instruments has increased. Although CapitaLand Ascott Trust , Mapletree Logistics Trust and Lippo Mall Indonesia Retail Trust have not redeemed their perpetual securities, if banks failed to call, eyebrows would be raised.
