Much also depends on the performance of the other two banks, United Overseas Bank(UOB) and Oversea-Chinese Banking Corp (OCBC). Both rebounded as a result of DBS’s 1QFY2024 performance, raising prospects that these two banks could also perform better than expectations.
Part of the reason for the exuberance for local banks is possibly the Federal Reserve chairman’s comments about the outlook for interest rates. Although the Federal Open Market Committee (FOMC) on May 1 voted to leave the Federal funds rate unchanged with a target range of 5.25%–5.50%, the statement had two additional comments. First off, the committee does not anticipate rate cuts until it is confident inflation is headed towards 2%, postponing the likelihood of a cut in June.
Elsewhere, the FOMC statement also noted that the Fed will slow the pace of quantitative tightening (QT) beginning in June by reducing the monthly redemption cap on Treasury securities from US$60 billion ($81.6 billion) to US$25 billion and maintaining the US$35 billion cap on agency mortgage-backed securities (MBS). On the other hand, the FOMC statement did not state when QT would end but added it would reinvest securities maturing over these caps into US Treasuries.
“For investors, as long as the Fed remains biased to cut rates at some stage, we think risk assets can remain supported, particularly if consumption growth remains strong as tight US labour markets and strong wage inflation support incomes. Indeed, it appears the committee continues to believe the current level of policy rates is restrictive as evidenced by the cooling in labour demand. Moreover, bond markets have done a lot of the repricing already given current expectations for just one full rate cut this year, which looks more reasonable to us,” says Tai Hui, Asia Pacific chief market strategist, JP Morgan Asset Management.
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“Investors should remain appropriately balanced across US and global equities and begin increasing duration exposure as restrictive policy guides the economy into a soft landing later this year and into the next,” he adds.
Against this backdrop, and weakening technical indicators, the SPDR S&P500 ETF will continue to consolidate. It had broken an accelerated uptrend in early April and appears to be building a top formation although this has not quite formed yet. Support is at the confluence of the 100-day moving average and the neckline of the top at US$35.50. A break below this level would be quite negative and indicate a significant downside.
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