Market watchers can’t have missed the market’s reaction to the local banks’ 1QFY2024 ended March 31 results. When DBS Group Holdings’ results were announced on May 2, it lifted the banks and the Straits Times Index (STI) rose to an intra-day high of 3,305. The opposite occurred when United Overseas Bank U11 (UOB) reported its results for the same quarter on May 8.
For the STI, the upmove from the break initially above 3,150 and subsequently the thrice-tested 3,250, had indicated an upside of 3,350 to 3,360. By all accounts, the upmove remains intact despite a sharp retreat. Technically, DBS is clearly the stock with the greater relative strength comparative when measured against the STI and its peers. However, based on the chart pattern, the share price is on an accelerated uptrend which is not sustainable.
Against this background, there is likely to be some form of correction and retreat. While there is minor congestion and hence support at $34.40, DBS is still a long way away from important support-yield-ing moving averages. Its 50-day moving average is currently at $32.42 and prices are a sig-nificant distance away from its 200- day moving average at $29.95. The 200-day moving average position suggests that DBS’s share price is overbought. Technically, the detrend indicator is based on the spread be-tween the share price and the 200- day moving average, and for DBS this is overextended currently, suggesting that a retreat is likely to materialise sooner rather than later.
UOB’s share price has underperformed DBS’s. On May 8, it retreated sharply but should find support at the congestion area around $28.60, which is near the 50-day moving average’s current level of $28.76. The intra-day low on May 8 was $29.59, and the close was at $29.88, areas that may turn out to be minor sup-port levels. Financial conglomerate Oversea-Chinese Banking Corp (OCBC) reports its first-quarter results on May 10.
Interest rate cut expectations moderated
Banks, like REITs, are stocks sensitive to interest rates but at different ends of the interest rate trend. According to strategists at DBS Economics and Research, the theme since the start of the year has been “a steepening of curves as pessimism gets faded”. Based on the spread between yields on three-month and 10-year treasuries, “the repricing is the greatest in the US, followed closely by Europe, Canada and the UK,” according to the DBS report. “Some of this comes from the fading of easing expectations while the remainder can be chalked up to sticky inflation worries and/or increasing term premium. Even after these adjustments, we note that many of the developed market curves remain in deep inversion, signalling significant lingering worries about the state of their respective economies,” the DBS report says.
See also: STI steadies despite overbought US markets and rising US risk-free rates
“The Federal Reserve has signalled a moderation, not a cessation, of its rate cut plans, while the Bank of Japan has hinted at a second hike this year. This shift in the narrative of US exceptionalism, which had been supporting the USD, has been further weakened by the lower-than-expected US GDP growth and nonfarm payrolls. A lower US CPI reading next week could potentially reinforce this trend by undermining the sticky inflation narrative, thereby impacting the USD and JPY exchange rates,” the DBS report elaborates. Hence, rate cuts are still on the cards, and UOB’s economists are expecting two rate cuts, as messaged by UOB’s management during its results briefing on May 8.
