STI and S&P 500 slump amid stock market sell-off. What to watch out for next?

What happened?

Global stocks slumped with major indices recording significant losses.

• S&P 500 fell 1.8% on Friday, 2 Aug 
• STI fell 4.1% to 3,244 on Monday, 5 August 
• Nikkei 225 fell by 12.4% on Monday, 5 August 
• Oil prices spiraled downwards. WTI was down 4.05% on Friday to US$73.22, and Brent fell 3.6% to US$76.80.
• US 10-year treasury yields fell below 4% 

In the article, we will find out what are some of the reasons behind the fall in global equity markets, and what to look out for next. 

#1 – US unemployment rate unexpected rises 

Latest economic data in the US point to slowing growth, driving concerns that elevated interest rates may lead to a recession. 

The concern is the Fed’s policy rate of 5.5% has hurt consumption spending and businesses. 

The US added 114,000 jobs in July, below market expectations for a 175,000 increase. 

At the same time, the unemployment rate unexpectedly rose to 4.3%, a near three-year high. 

The higher unemployment could impair consumers’ demand for goods and services, and the ability to service mortgages.

Earlier in the week, a measure of US manufacturing activity also fell to a 8-month low in July amid a slump in new orders.        

#2 – Fed official downplay talks of accelerated rate cuts 

The weakness in the economic data led some investors to think that the US Federal Reserve has been too slow in cutting interest rates, and will have to take more drastic action in the upcoming meetings.  

According to the CME Fedwatch Tool, the Fed is almost certain to cut interest rates in the upcoming meeting in September. 

In fact, there is now a 22% probability that the Fed will cut interest rates by 0.50% (50 basis points) in September. 

However, Fed officials have downplayed the need to cut interest rates aggressively.

Chicago Fed president Austan Goolsbee said in an interview with Bloomberg that “We’d never want to overreact to any one month’s numbers” 

Richmond Fed president Thomas Barkin also pushed back from a 0.50% interest rate cut in an interview with The New York Times, noting that “More significant reductions typically would be associated with an economy that feels like it’s deteriorating rapidly.”

#3 – Japan raised interest rates

For 30 years, Japan has maintained a 0% interest rate on the yen. This policy allowed investors to borrow yen at no cost and invest the borrowed funds globally. They invested in assets like US T-bills and tech stocks.

Last week, the Bank of Japan raised interest rates by 0.25%, an almost unprecedented move. This increase signals to the market that borrowing costs are rising.

Consequently, investors are now worried that the yen they borrowed for free is no longer available at no cost. They are unwinding their trades and repatriating the funds back to Japan.

#4 – Escalating Middle East tensions

Tensions in the Middle East escalated with the assassination of a Hamas leader in Tehran. 

Iran has pledged to retaliate, but how it does so will determine how much the conflict escalates from here.

The killing of the Hamas leader also diminishes any hopes of a cease-fire in the near term.

What would Beansprout do?

The stock market correction appears to be driven by a number of different factors, including weakening US economic data, strength in the Japanese Yen following an interest rate hike, as well as rising geopolitical tensions.

Markets are likely to remain volatile until there is greater clarity on these factors.

Hence, we will watch for the following in the coming days to determine the direction of the market:

• US Fed official comments about how they perceive the trajectory of interest rate cuts in the coming months, and if a 0.25% rate cut in September may be adequate
• Direction of the Japanese Yen and if continues to strengthen relative to the US Dollar  
• Any potential escalation in the Middle East tensions

If you are looking for a safer place to park your cash while waiting for the volatility to subside, we compare the yields of T-bills vs fixed deposit to find out where to get the highest yield. 

To diversify our portfolio and make it more resilient, we can also consider looking at gold which has long been regarded as a safe haven during periods of market uncertainty. 

Stocks with sustainable dividend payouts can provide some income support to our portfolios amid a broader market sell-off. To look for stocks which pay an attractive dividend, check out our Best Singapore High Dividend Stocks Screener.

Singapore REITs and business trusts are typically seen as potentially beneficiaries should there be a sharp fall in interest rates. We share if it is time to buy Singapore REITs, and why it may be worthwhile staying selective. preferring names such as OUE REIT and Keppel Infrastructure Trust. 

If you are looking for key support levels for these major indices, we discuss technical indicators to look out for in our latest Weekly Market Review. 

It might also be worth noting that short term market corrections can present opportunities for investors taking a longer-term view of the market.   

Most importantly, do not panic and have a long term plan when it comes to your investments!

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