US risk-free rates continue to rise, indicating increasingly that Donald Trump is likely to win the US presidential election. The 10-year US treasury yield is at 4.317% as at Nov 1. The next Federal Market Open Committee meeting is on Nov 6-7, after the election.
Since US treasury yields have surged, this suggest that investors are expecting an inflationary year in 2025.
The UBS Economics & Strategy Team has modeled five scenarios that could shape the global outlook: (i) a US election Red Sweep; (ii) a Blue Sweep; (iii) a significant increase in global tariffs; (iv) a US recession; and (v) a 'no landing' scenario where central banks globally have eased prematurely.
A US election Red Sweep would herald a somewhat volatile period for the Singapore market - and arguably - global markets. Here’s the thing. A significant increase in tariffs “would be likely to push down Singapore's economic growth and its economic drivers”. UBS sees a US recession as presenting the most downside risk for Singapore's 2025 economic growth, while higher tariffs and a Red sweep would likely be more impactful in 2026, the UBS report dated Oct 30 says.
UBS says year-to-date, the banks are up a fair bit, “driven by multiple expansion (via lower equity risk premium) and solid asset quality”.
See also: STI steadies despite overbought US markets and rising US risk-free rates
“While earnings growth for the sector this year has been solid (+6.3% y-o-y), for next year UBS is baking in a 4% contraction (compared to a flat consensus estimate) due to lower Fed Funds Rate (UBS assumes 250bp cut by the end of 2025) which would lower net interest margin (NIM),” the UBS report says. UBS is neutral on the local banks.
Interestingly, if Trump wins, and tariffs are imposed on imported goods, this is likely to have a similar impact to a sales tax, fuelling inflation. Additionally, more Trump tax cuts are likely to feed the US deficit. Instead of a declining rate cycle, the opposite could happen should the still independend Federal Reserve decide to stick to its 2% inflation target and raise the Federal Funds Rate to achieve lower inflation.
Singapore is a price taker as far as interest rates are concerned, and rates could start to rise again in 2025.
See also: Trumpian future of higher deficits, tariffs, point to inflation and higher interest rates
In an earlier report, highlighted by Right Timing, Vasu Menon, managing director, investment strategy, OCBC, was quoted as saying “If Trump wins the Presidential election, markets are worried that his fiscal and tax policies could fuel inflation. For one, Trump has talked about imposing hefty tariffs on US imports with the hope of using the revenue from the tariffs to fund significant tax cuts.”
In a report dated Nov 1, DBS expects that banks will likely remain resilient. High long-end yields continue to bode well for banks. While there are previous concerns that a declining rates environment will impact banks’ earnings, Singapore banks’ sensitivity to interest rate cuts has been reduced by more than 40% compared to the previous cycle,” the DBS Group Research report says.
Further, as the Fed continues to frontload easing, risks of a US hard landing diminish significantly. With high 10-year treasury yields, which are above 4%, reflecting a soft-landing narrative, this continues to support banks’ share prices, it adds.
The DBS analysts have a preference for United Overseas Bank U11 “in 3Q2024, with active NIM management”. DBS Group Holdings’ 2Q2024 NIM saw no change q-o-q, while Oversea-Chinese Banking Corp’s declined 7bps q-o-q and UOB continued to post an NIM improvement of +3bps q-o-q, the DBS report points out and believes the Sept Fed rate cut should have minimal impact on Singapore banks’ 3Q2024 NIMs.
UBS reckons that the most benign scenarios for Singapore are the Blue Sweep and Central Banks Eased Too Early scenarios, which would be supportive of upide scenarios.
Locally, the Straits Times Index fell by a further 38 points week-on-week to end 3,555 on Nov 1. The index has broken below 3,570, a minor support, and that is likely to be negative. If rates remain elevated in 2025, that will be negative for developers, real estate investment managers, alternatives investment managers, and REITs.
