It appears increasingly likely that yields on 10-year government bonds — be they US treasuries or Singapore Government Securities (SGS) — are in easing mode. The decline of the yield on 10-year SGS, which is currently at 3.055% as at Nov 24, looks more pronounced than that of yields on 10-year US treasuries. Yields on longer-dated SGS such as 30-year SGS have also fallen below 3%.
These trends are in the wake of a Bloomberg report stating that several US Federal Reserve officials backed the need to moderate the pace of rate hikes, citing the Fed’s Nov 1–2 meeting minutes. “Since the Fed’s latest meeting, investors have parsed a bevy of economic data that somewhat eased inflation concerns, further strengthening the case for smaller rate hikes,” Bloomberg reports. Some members are signalling they are leaning toward downshifting to a 50 bps hike in December,” Bloomberg adds.
The Federal Open Market Committee (FOMC) meets on Dec 13–14. “The FOMC minutes reveal a surprisingly strong dovish tendency on the committee and at the staff level. There is widespread agreement within the committee to slow the pace of rate hikes – a view championed by vice-chairwoman Lael Brainard, in our view — but little conviction on how high rates should go,” notes Anna Wong, chief US economist at Bloomberg.
No surprise then that risk-free rates have continued to ease. The yield on the 10-year US treasuries, currently at 3.6927%, has fallen below the confluence of its 50-day moving average of 3.8647% and the neckline of a minor double-top. If the 10-year yield continues to ease towards its 100-day moving average of 3.4065%, the S&P500 would be able to rally further. As at Nov 23, the S&P500 (4,027) is down 16% year to date, but up 12% from its Oct 11 low.
One way to play risk-free rates is to trade the SPDR S&P500 ETF Trust listed on the SGX and priced in US dollars. While SPDR S&P500 ETF is down 25%, it reflects the trend of the main index, which has 500 stocks in it. That in itself makes the ETF a low-cost hedging vehicle for institutional investors.
Technically, the SPDR S&P500 ETF is in a rebound phase, supported by rising shortterm indicators, and moves above the 50- and 100-day moving averages. The latter will likely provide support at US$388 ($532.85). Resistance-cum-breakout is at the confluence of the declining 200-day moving average and a pattern gap at US$403.
See also: STI’s upside from breakout remains valid as risk-free rates fade, but stay watchful for FOMC
The Chinese markets have underperformed the US markets, with the Shenzhen Stock Exchange Component (SZSE) Index down almost 26% year-to-date despite a rebound, and the Shanghai Stock Exchange (SSE) Composite Index down 14.8%. The SZSE Index has a higher proportion of tech stocks.
The Singdollar-priced Lion OCBC Securities China Leaders ETF replicates the trend of the Hang Seng Stock Connect China 80 Index. This ETF is down 26% this year, and recent movements are replete with black candles suggesting that the immediate decline has yet to bottom.
For traders looking for a contrarian trade, there is the Singdollar-based Lion-OCBC Securities Hang Seng Tech ETF, which has lost 34% this year. Its investment objective is to replicate the performance of the Hang Seng Tech Index. While this ETF is also full of black candles, prices may find support at 61.2 cents, which is the level of its 50-day moving average. There are some positive divergences between prices and RSI but this could go on for a few weeks before a good rebound materialises.
See also: Continued steps towards a Chinese New Year rally
