APAC Daily Digest: What is happening in markets and what to consider next – August 18, 2022
APAC Strategy Team
Summary: U.S. equities took a pause from their week-long advance, with S&P 500 retreating before its 200-day moving average. Target’s Q2 results disappointed as the retailer suffered from high inventories and U.S. consumers shifted from discretionary to grocery items.
What is happening in markets?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I)
U.S.’s advance higher took a pause yesterday amid higher bond yields and disappointing results from Target (TGT:xnys), -2.7%. Target’s Q2 earnings fell sharply and missed consensus expectations on weaker gross margins due to slower sales in discretionary items and inventory impairments. Lowe’s (LOW:xnys) reported mixed results, with earnings beating estimates but same-store sales growth weaker than expected. Higher U.S. bond yields triggered by a dramatic rise in U.K. bond yields and reported pension fund rebalancing-related selling added to the equity weakness. S&P 500 dropped 0.7% and Nasdaq 100 shed 1.2%.
U.S. treasury yields rose from spilling over from a massive rise in U.K. Gilt yields and weak 20-year bond auction
U.S. 10-year treasury yields jumped 9bps to 3.05%, taking cues from the sharp move higher in U.K. Gilts and European sovereign bond yields following white-hot UK CPI data. Long-end yields moved further higher on poor results from the 20-year auction. Short-end yields fell in the late afternoon after the July FOMC minutes signaling that it “would become appropriate at some point to slow the pace of policy rate increases” which reaffirmed the market’s expectation of a 50bps, instead of 75bps on the September FOMC.
Hong Kong’s Hang Seng (HSIQ2) and China’s CSI300 (03188:xhkg)
Hang Seng Index bounced modestly by 0.5%; CSI399 gained 9.6%. Meituan (03690:xhkg) rallied 3.3% after a 9% drop yesterday due to a Reuters story suggesting that Tencent (00700:xhkg) plans to divest its 17% stake (USD24 billion) in Meituan. Tencent denied such a divesture plan last night. Power tools and floor care equipment maker and a supplier to Home Depot (HD:xnys) and Wal Mart (WMT:xnys), Techtronic Industries (00669:xhkg) jumped more than 10% after better-than-expected results from the two U.S. retailers. China Resources Power (00836:xhkg) +5.7% after reporting weak 1H22 results but more wind and solar projects on the pipeline. Other Chinese power producers also outperformed amid power shortages. China Power (02380:xhkg) surged more than 8%.
On Tuesday, China’s Premier Li Keqiang visited Shenzhen and held a meeting with provincial chiefs from Jiangsu, Zhejiang, Shandong, Henan, and Sichuan to reiterate the central government’s push for full use of policies to stabilize the economy. Hong Kong Exchanges (00388:xhkg) fell 1.6% after reporting lower revenues, higher costs, and a 22% YoY decline in EPS, worse than market expectations. After the market close, Tencent reported weak but in line with expectations revenues and better-than-feared earnings in Q2. Tencent’s ADR climbed 3.5% overnight from the Hong Kong close.
AUDUSD eying the labor market report, GBP will see more pain ahead
A mixed session again overnight for the US dollar with FOMC minutes and US retail sales failing to provide any fresh impetus to the markets. AUDUSD was the biggest loser on the G10 board, sliding below 0.7000 to lows of 0.6911 after real wage data for Q2 showed a massive slump. Labor market data due this morning could further weigh on RBA expectations, if it comes out softer than expected. The weakness seen in the commodity markets, especially iron ore and copper, weighed on the antipodeans. GBPUSD stays above 1.2000 despite a 40bps gains in UK 2-year yields after the double-digit UK CPI print. USDJPY tested the resistance at 135.50 but was rejected for now.
Crude oil prices (CLU2 & LCOV2)
Crude oil prices made a slight recovery overnight, with WTI futures getting back to over $87/barrel and Brent futures close to $94 after data showed US inventories fell sharply. Sentiment was also supported by comments from OPEC’s new Secretary-General, Haitham Al Ghais, who said that world oil demand will rise by almost 3mb/d this year. He also said there is a high chance of a supply squeeze this year, in part because fears of slowing usage in China are exaggerated. This helped to take the focus off the prospects of the Iran nuclear deal for now.
What to consider?
Stale FOMC minutes hint at sustained restrictive policy
Fed’s meeting minutes from the July meeting were released last night, and officials agreed to move to restrictive policy, with some noting that restrictive rates will have to be maintained for some time to bring inflation back to the 2% target. Still, there was also talk of slowing the pace of rate hikes ‘at some point’, despite pushing back against easing expectations for next year. The minutes were broadly in-line with the market’s thinking, and lacked fresh impetus needed to bring up the pricing of Fed’s rate hikes. Chairman Powell’s speech at the Jackson Hole Symposium next week will be keenly watched for further inputs.
US retail sales were a mixed bag
July US retail sales are a little softer at the headline level than the market expected (0% growth versus the +0.1% consensus) but the ex-auto came in stronger at 0.4% (vs. -0.1% expected). June’s growth was revised down to 0.8% from 1%. The mixed data confirmed that the US consumers are feeling the pinch from higher prices, but have remained resilient so far and that could give the Fed more room to continue with its aggressive rate hikes. Lower pump prices and further improvements in supply chain could further lift up retail spending in August.
UK CPI opens the door for another 50bps rate hike
UK headline inflation hits 10.1%, the highest in decades and above the 9.8% expected and for the month-on-month reading of +0.6%, higher than the +0.4% expected. Core inflation hit 6.2% vs. 5.9% expected and 5.8% in Jun. That matched the cycle high from back in April. Retail inflation rose +0.9% MoM and +12.3% YoY vs. +0.6%/+12.0% expected, respectively. The Bank of England has forecast that inflation will peak out this fall at above 13%. While the central bank forecasted a recession lasting for five quarters at the last meeting, it will be hard for them to not press ahead with further tightening at the August meeting, and in fact the scope for another 50bps rate hike is getting bigger.
Reserve Bank of New Zealand hikes 50 basis points to 3.00%, forecasts 4% policy rate peak
The RBNZ both increased and brought forward its peak rate forecast to 4.00%, a move that was actually interpreted rather neutrally – more hawkish for now, but suggesting that the RBNZ would like to pause after achieving 4.00%. RBNZ Governor warned in a press conference that New Zealand home prices will continue to fall. This is actually a desired outcome after a huge spike in housing speculation and prices due to low rates from the pandemic response and massive pressure from a Labor-led government that had promised lower housing costs were behind the RBNZ’s quick pivot and more aggressive hiking cycle in 2021.
Australian wages grew at their quickest pace in eight years, but less than expected
Australia’s wage-price index gained 0.7% in the second quarter, just shy of estimates further pressuring the Aussie dollar back toward its 50-day moving average against the US dollar. Annual wage growth came in at 2.6% but real wages - adjusted for headline inflation fell 1% QoQ, and was 3.3% lower than a year earlier, eroding consumer spending power. What’s next. All eyes will be on Australia’s Reserve Bank which might be pressured to hike more than expected at its September meeting. Despite Australian wages growing slower than expected, the RBA estimates retail gas and electric prices to rise 10-15% in the second half of the year, so that will be a focus point when they consider their next move in interest rates.
Tencent reported weak but in-line Q2 revenues and better-than-feared earnings
Tencent reported a revenue decline of 3% YoY in Q2, weak but in line with market expectations. Non-GAAP operating profit was down 14% YoY to RMB 36.7 billion and EPS fell 17% YoY to RMB2.90 but they beat analyst estimates. Revenues from advertising, -18% YoY, were better than expected. In the game segment, weaker mobile game revenues were offset by stronger PC game revenues.
Disappointing results from Target and mixed results from Lowe’s
Target reported EPS of USD0.39, missing estimates. The company indicated strength in food and beverage, beauty, and household essentials but weaker in discretionary categories. Gross margin of 21.5%, down from 30.4% year-ago quarter and below expectations.
Lowe’s reported better than expected EPS of USD4.67 (vs consensus USD4.58) but a decline of 0.3% in same-store sales. Lowe’s inventories grew 11.6% YoY, substantially lower than peer Home Depot. With a 15% increase in product costs, the inventory volume was in effect down low-single digit.
Power crunch in China shut factories
Chongqing is limiting power supply to industrial users from yesterday to next Wednesday. In Sichuan, Foxconn’s Chengdu factory is suspending operations for six days from August 15 to 20 due to a regional power shortage. The suspension is affecting Foxconn’s supply of iPad to Apple. The company says the impact “has been limited at the moment” but it may affect shipments if the power outage persists. The Chengdu government is imposing power curbs on industrial users to ensure electricity supply for the city’s residents. Toyota and CATL are also suspending some operations in Sichuan due to a power shortage.
Foxconn has started test production of the Apple watch in Vietnam
Foxconn has started test production of the Apple watch in its factories in Vietnam. With the passage of CHIPS and Science Act earlier this month in the U.S., investors are monitoring closely if Taiwanese and Korean chipmakers as well as their customers may be accelerating the building up of production capacity away from China.
World’s biggest Sovereign Wealth fund posts its biggest half-year loss on record
Norway’s oil fund, the world’s biggest owner of public traded companies lost 14.4% in the six months through to June. In currency terms that’s $174 billion. The slump was driven by the fund’s loss in technology stocks with Meta Platforms (owning Facebook and Instagram) and Amazon, leading the decline. However, just like the market, the fund’s energy sector delivered positive share price performance, benefiting from a sharp rise in earnings in the oil, gas, and refined energy product sector. Meanwhile, investments in logistics property helped the fund’s unlisted real estate holdings gain 7.1%, though they account for 3% of its assets.
Japan’s inflation will surge further
Japan’s nationwide CPI for July is due to be reported at the end of the week. July producer prices came in slightly above expectations at 8.6% y/y (vs. estimates of 8.4% y/y) while the m/m figure was as expected at 0.4%. The continued surge reflects that Japanese businesses are waddling high input price pressures, and these are likely to get passed on to the consumers, suggesting further increases in CPI remain likely. More government relief measures are likely to be announced, while any little hope for a Bank of Japan pivot is fading. Bloomberg consensus estimates are calling for Japan’s CPI to accelerate to 2.6% y/y from 2.4% previously, with the ex-fresh food number seen at 2.4% y/y vs. 2.2% earlier.
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