Quoteworthy: "I don’t think it’s a good idea to sell Income. It was founded to serve a social purpose and a social need. They remain valid today. I wish to argue that Income and Fairprice should never be sold." –— Tommy Koh, Singapore’s ambassador-at-large
China unexpectedly cuts one-year policy rate by most since 2020
The People’s Bank of China (PBOC) unexpectedly lowered the rate on its one-year policy loans by the most since April 2020 after cutting a key short-term rate in a sign of greater support for the slowing economy.
In a statement released on July 25, the central bank lowered the medium-term lending facility (MLF) rate by 20 basis points to 2.3%, the first reduction in almost a year. The cut followed the PBOC’s seven-day reserve repo rate trim by 10 basis points on July 22. The monetary authority has recently downplayed the MLF rate in favour of the short-term rate to guide markets more similarly to global peers.
“It is a coordinated effort across all the key interest rates to ease monetary policy,” said Lynn Song, Greater China chief economist at ING Bank. “It’s worth highlighting this round of easing kicked off with the seven-day RR, which may signal its future role as the main policy rate.”
China’s bond futures edged higher with the yuan after the cut, though the moves were modest. The PBOC’s string of rate cuts underscores authorities’ growing urgency to support growth, which came in worse than expected in the second quarter as faltering consumer spending more than offset an export boom. The central bank had refrained from cutting rates since last year as it sought to keep the yuan exchange rate stable.
See also: BOK surprises with rate cut as Trump win boosts trade risks
The announcement was unexpected because the PBOC typically conducts MLF operations in the middle of each month and had already drained a net RMB3 billion ($555.7 million) of cash via the funds earlier this month when a batch matured. The PBOC provided RMB 200 billion of MLF on July 24, the biggest net injection since January.
The cut followed China’s largest state banks reducing rates on certain deposit products to relieve pressure on profit margins after previously lowering the benchmark loan prime rates.
Banks have shown little interest in MLF funds recently, preferring cheaper interbank borrowing due to falling market rates. Economists suggest a larger cut to the MLF rate, aligning it with market borrowing costs, could resolve this.
See also: ECB’s Schnabel sees only limited room for further rate cuts
The rate on one-year negotiable certificates of deposit issued by AAA-rated banks, a gauge of short-term interbank borrowing costs, is now 1.9%, cheaper than the MLF funds. “The MLF was done when there is no near-term maturity, showing that PBOC intends to send the easing signal,” said Frances Cheung, a strategist at Oversea-Chinese Banking Corp (OCBC). “The cut in the MLF rate is of a bigger magnitude than the cut in seven-day OMO reverse repo rate, primarily because the MLF rate was at an elevated level to start with.” — Bloomberg
NTUC Enterprise remains ‘fully committed’ to Income Insurance
In a statement issued on July 25, NTUC Enterprise says it remains “fully committed” to supporting Income Insurance. In a separate statement issued the same day, Income Insurance added that NTUC Enterprise will remain a substantial shareholder after the offer closes. It also confirmed that its ongoing commitments, including social initiatives, will continue.
This clarification comes after former diplomat Tommy Koh expressed concerns about the sale of Income, questioning its prudence. “[Income] was founded to serve a social purpose and a social need,” said Koh in a Facebook post dated July 23.
On July 17, Allianz announced that it intends to offer $40.58 per share for at least 51% of the shares in Income Insurance. The offer price represents a 37.3% premium over Income’s NAV of $29.55 per share.
Referring to the pre-conditional offer announcement, Income Insurance notes that Allianz intends to continue participating in national insurance programmes and investing in communities in Singapore, among other things.
Income Insurance will continue to provide affordable and accessible insurance options to underserved and lower-income customers through products such as the LUV and SilverCare policies, says NTUC Enterprise chairman Lim Boon Heng in a statement released on July 25.
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He adds Income Insurance will continue participating in national insurance programmes in partnership with the CPF Board while continuing to price its products “very competitively”. Lim says: “NTUC Enterprise will also continue as an active shareholder of Income Insurance to keep it to its purpose and deliver social commitments to its policyholders.”
NTUC Enterprise adds that minority shareholders can tender all, some, or none of their shares when the offer is launched. The offer is expected to close in the fourth quarter of 2024 or the first quarter of 2025. — Felicia Tan
US yield curve steepens as Fed rate cuts loom
The US yield curve steepened sharply amid growing calls for the Federal Reserve to start cutting interest rates as soon as next week. Yields on policy-sensitive two-year Treasuries slid three basis points on July 24, while those on 10-year bonds were up by about the same amount. That pushed the differential between those yields to about 14 basis points, the smallest margin since October 2023.
That indicates investors see the Fed potentially reducing rates faster and deeper than anticipated. Swaps traders still price in more than two quarter-point cuts this year, with the first move likely in September.
However, with the central bank scheduled to announce its next decision in a week, pressure is rising for lower borrowing costs. In a Bloomberg Opinion column, former New York Fed President William Dudley said policymakers should reduce rates at the July gathering.
“The front end has been rallying on the idea the Fed will cut sooner and more than the market had previously been pricing,” said Zachary Griffiths, a senior fixed-income strategist at CreditSights. Such moves show a revival of the yield curve’s steepening, a favoured wager of investors who expected former US President Donald Trump to win the presidential election in November.
On July 24, the yield on 30-year Treasuries rose as much as 7 basis points to 4.55%, the highest level since July 5. This widened the differential against the five-year note’s yield to as much as 38.7 basis points, marking the steepest level since May 2023.
The steeper yield curve reflected a “combination of 100% market probability of a September cut, equity selloff, and repositioning of election news,” said George Catrambone, head of fixed income at DWS Americas.
After the Fed’s July meeting, he said the focus will turn to a flurry of data reports for evidence of material weakness that “may bring renewed questions about the soft landing and perhaps the Fed falling back behind the curve and missing the opportunity to cut rates in July.”
Economic data released on July 24 showed manufacturing slipped back into contraction territory, and sales of new US homes unexpectedly declined in the US. Hours later, a US$70 billion ($94.1 billion) sale of five-year notes yielded 4.121%, above the 4.110% level at which the when-issued security traded just as auction bidding completed. That was a mediocre result compared to record-setting demand for July 23’s US$69 billion sale of two-year securities.
The moves in long-dated yields led the Treasury to accept no dealer offers in a debt buyback operation on July 24. — Bloomberg
S&P 500 snaps longest streak without a 2% decline since 2007
A steep selloff in high-flying technology stocks sent the S&P 500 Index to its worst day since December 2022, ending its best stretch without a 2% decline since the start of the global financial crisis in 2007.
The US equities benchmark slid 2.3% on July 23, ending 356 sessions through July 23 without a drop of at least 2% — its longest streak in 17 years, based on data compiled by Bloomberg. This comes after the index rose as much as 15% above its 200-day moving average last week — a crucial level that has historically foretold past selloffs.
“All good things must end, but this isn’t the end of the world for the US stock market,” said Jay Woods, chief global strategist at Freedom Capital Markets. “The rotation trade into small caps and value is still on, with volatility picking up as weak seasonal factors come into play ahead of the US election season.”
The losses on July 24 came as Tesla shares fell 12%, the biggest drop since September 2020, after falling short of second-quarter profit estimates.
Google parent Alphabet also saw weakness in its YouTube advertising revenue, knocking the Nasdaq 100 Index about 3.7% lower for its worst day since October 2022. That pushed the S&P 500 4.2% below its all-time closing high.
Wall Street projects that the tech behemoths’ profit growth is poised to slow, so it will be key to see whether the dip-buyers return as more Big Tech companies unveil results in the coming weeks. Investors will continue to get a fresh look at Corporate America’s profit engine, with Apple, Microsoft, Amazon.com and Meta Platforms all set to report next week.
Declines in other corners of the market outside of Big Tech, like small caps, were not as severe as traders grew more confident about the Federal Reserve’s interest-rate cuts in the near future.
The S&P 500 had been on a torrid rally that pushed it above 5,600, notching 38 all-time closing records this year — among its best stretches of records at this point in the year this century, behind 2021, according to data compiled by Bloomberg. The index’s current bull run has added $17 trillion in market value since it touched its nadir in October 2022.
Equities have been locked in a tight range of late, with the S&P 500 spending only 25 out of 141 trading sessions in 2024 moving at least 1% in either direction, as compiled by Bloomberg.
Now, investors are heading into what’s historically been the worst stretch of the year for stocks in August and September.
“This is more about a heavyweight tech unwind influencing the benchmarks,” said Todd Sohn, managing director of ETF and technical strategy at Strategas Securities. “It’s painful, but good for the overall market beyond growth stocks since non-tech stocks are still hanging in there.” — Bloomberg
