DAILY MORNING NOTE | 15 January 2024

Trades Initiated in the past week

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Week 3 equity strategy: There were significant shifts in market expectations of inflation this week. The initial narrative was inflation is stuck at current levels and equity markets wobbled. This was after December CPI in the US nudged back up to 3.4% YoY (previously 3.1%), surpassing expectations. The stubborn parts of inflation remain shelter, expanding 6.2% YoY.

Optimism over lower inflation came back on Friday when PPI was better than expected. The direction of lower expected rates was evident in the bond markets. The 2-year government bond yield fell to 4.14%, the lowest since May23. And futures market is now signalling an 80% probability of a rate cut this March.

Our expectations are two rate cuts in 2024. Directionally core inflation is trending down. The pace is slower as goods inflation is heading sideways after the huge decline over the past 12 months. We remain positive on REITs.

On the Taiwan Presidential elections, the reduced popularity vote of the ruling DPP party from 57% in 2020 to the current 40%, has lowered the likelihood of a tail-risk event (or conflict) with China. The weakened position extends to its loss of a majority in the legislature. It will hamper its ability to pass possible policies that may antagonize China. President Biden chimed in by stating the US does not support an independent Taiwan.

Paul Chew
Head Of Research
paulchewkl@phillip.com.sg


Singapore shares capped an unremarkable, albeit choppy week on a low note on Friday (Jan 12). Fresh tensions in the Middle East and latest data showing China’s full-year exports fell for the first time in seven years were enough to put traders off. It fell 9.69 points or 0.3 per cent to 3,191.72. Week on week, Singapore shares gained 7.4 points or 0.2 per cent. This followed Wall Street’s tepid overnight showing, which parsed slightly hotter-than-expected US inflation data with the key indices ending close to the flatline.

Wall Street stocks were mixed at the end of Friday’s (Jan 12) session following better inflation data and mixed corporate earnings. US wholesale prices edged down 0.1 per cent in December, defying expectations for higher prices and countering Thursday’s report that showed an uptick in consumer prices. Meanwhile, leading banks were mostly lower following a deluge of quarterly results, while airlines were hammered after Delta’s forecast disappointed investors. The Dow Jones Industrial Average dipped 0.3 per cent to 37,592.98. The broad-based S&P 500 added 0.1 per cent at 4,783.83, while the tech-rich Nasdaq Composite Index was unchanged at 14,972.76.

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Events Of The Week

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SG

Semiconductor equipment maker AEM Holdings said on Sunday (Jan 14) that it has found a shortfall in the group’s inventories following an internal stock-taking exercise, which it expects to negatively impact the group’s profitability for FY2023. As at end-September last year, the group’s inventories were stated to be worth S$358.6 million. This was shared in an investor update released on Nov 9, 2023. However, a preliminary estimate suggests that the group’s inventories are anticipated to be 5 to 7 per cent lower than this figure, said AEM. It noted that the internal stock-taking exercise is still ongoing, and that it had taken into account “the ordinary and usual course of inventory movement”. Based on an initial investigation into this issue, the group attributed the shortfall to “human error in transactions” with its enterprise resource planning system, which had occurred during the migration of production to the group’s Penang facility from Singapore.

The Singapore High Court has made a decision in favour of a facility manager of Keppel DC Reit, paving the way for a positive outcome for the litigation announced by the data-centre real estate investment trust (Reit) in March 2022. DXC Technology Services Singapore was ruled to be in breach of its Standard Services Agreement (SSA) with Keppel DC Singapore 1, the master lessee and appointed facility manager of a data centre in Serangoon North. DXC had tried to reduce the amount of floor space it leased, but Keppel DC Singapore argued that the SSA did not permit DXC to do so at the time. Keppel is claiming S$3 million from DXC as the sum outstanding from April 2021 to December 2021, as well as all losses it suffered as a result of DXC’s refusal to pay for the space it unilaterally gave up from Apr 1, 2021 to Mar 31, 2025.

Fish vendor Qian Hu has sunk into the red with a net loss of S$9.3 million for the second half of the financial year ended Dec 31, 2023. This is in contrast to a net profit of S$584,299 in the year-ago period, the company said in a bourse filing on Friday (Jan 12). This was largely attributed to a S$7.4 million loss on disposal of a substantial portion of its Asian arowana – also known as dragon fish – broodstock, said Qian Hu, explaining that the group had made a strategic decision to reduce breeding activities of the fish, due to “oversaturation and declining prices” faced by certain mass-market varieties.

Frasers Property issued a statement on Friday (Jan 12) refuting talk of a potential sale of the company or its assets. It was responding to recent news reports speculating that the company’s majority owners could sell the company or some of its assets, as part of a strategic review. “The company has not been informed, and is not aware of, any discussions in relation to the proposed transactions,” said Frasers in its statement.


US

Cathay Pacific Airways slashed the number of flying hours needed to become a captain by 25 per cent, people familiar with the matter said, as a pilot shortage contributes to mass flight cancellations and threatens to undermine the airline’s Covid rebound. Pilots now must have a minimum of 3,000 hours of flying experience and 500 flights to be considered for promotion, according to an operational handbook that was updated on Jan 10. That’s down from 4,000 hours required previously. Candidates still need 1,500 hours on commercial jets, as well as training, and must meet other requirements as well. The move is intended to make the carrier more desirable to pilots and bolster its captains ranks, both gutted by Covid-related job losses. Subsequent pay cuts for the remaining pilots accelerated an exodus of cockpit crews. As a result, the airline has 48 per cent fewer captains and first officers than before the pandemic, according to data from Cathay’s pilots union – a shortage that has triggered the current crisis over flight cancellations.

Citigroup on Friday (Jan 12) reported a US$1.8 billion loss for the fourth quarter as it recorded charges to refill a government deposit insurance fund and carry out a sweeping internal reorganisation. The loss was also fuelled by the bank stockpiling money to cover currency risks in Argentina and Russia. The third-largest US lender by assets posted a loss of US$1.16 per share for the three months ended Dec 31. Revenue slid to US$17.4 billion in the quarter from a year earlier. It was the first time Citigroup broke out earnings for its five businesses – services, markets, banking, US personal banking and wealth, which were previously housed under broader divisions.

Wells Fargo’s fourth-quarter profit jumped as the lender benefited from cost cuts, but it warned that 2024 net interest income could be 7 per cent to 9 per cent lower than a year earlier, sending its shares down 1.8 per cent before the bell. As the Federal Reserve raised interest rates, banks benefited by charging borrowers more on interest. With market participants forecasting rate cuts this year, banks’ interest income could start to erode. Revenue in the fourth quarter rose 2 per cent to US$20.5 billion. Net income rose to US$3.45 billion, or 86 US cents per share, for the three months ended Dec 31, the lender said on Friday (Jan 12). That compares with US$3.16 billion, or 75 US cents per share, a year earlier.

Bank of America’s fourth-quarter profit shrank as the lender took US$3.7 billion in combined charges to refill a government deposit insurance fund and phase out a loan index. The second-largest US lender posted net income of US$3.1 billion, or 35 US cents a share, for the three months ended Dec 31. That compares with US$7.1 billion, or 85 US cents a share, a year earlier. Its net interest income (NII) – the difference between what banks earn from loans and pay to depositors – fell 5 per cent to US$13.9 billion as the company spent more to keep customer deposits while demand for loans stayed subdued amid high interest rates.

Source: SGX Masnet, Bloomberg, Channel NewsAsia, Reuters, CNBC, WSJ, The Business Times, PSR


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