APAC Daily Digest: The latest in markets, and what to consider next- September 5, 2022

What is happening in markets?

Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I)  

U.S. equities markets initially rallied on optimism about improved odds for returning to the equity-friendly Goldilocks scenario, i.e. not too hot, not too cold, following the job report showing inline job additions, higher labour participation, a bounce in the unemployment rate, and slower average earnings growth. In New York morning trading, S&P500 and Nasdaq 100 rallyed 1.3% and 1.4% respectively. But the benchmark indices pared thosse gains and plunged in afternoon trade after Russia’s Gazprom said it would not resume the supply of natural gas to Germany on the Nord Stream pipeline, due to a leak discovered at the turbine during maintenance. The news caused renewed fear of an incoming energy crisis in Europe and saw equities falling and finishing the week substantially lower, S&P500 -1.1% on Friday and -3.3% for the week, Nasdaq100 -1.4% on Friday and -4.0%. The U.S. equity market is closed on Monday for Labor Day.  

U.S. treasuries (TLT:xnas, IEF:xnas, SHY:xnas)

Hong Kong’s Hang Seng (HSIU2) and China’s CSI300 (03188:xhkg)

Weaknesses in semiconductor stocks and the EV space, plus declines in Chinese property names contributed to most of the 0.7% loss in the Hang Seng Index on Friday. Leading semiconductor stocks, SMIC (00981:xhkg) plunged 5.1% and Hua Hong (01347:xhkg) fell 3.7%.  Li Auto (02015:xhkg) fell 2% after its car delivery fell 52% YoY in August. BYD (01211:xhkg) fell 1,8% as exchange filing showed that Berkshire Hathaway sold 1.72 million BYD shares on Thursday, trimming its stake further down to 18.87% from 19.02% of BYD’s H-shares. China Overseas Land & Investment (00688:xhkg) fell 2.3% and China Resources Land (01109:xhkg) tumbled 4.5%. The 136 listed property companies that reported earnings in Hong Kong and mainland China saw their aggregate net income tumbling 87% to RMB17.6 billion in the first half of 2022. The lockdown over Chengdu, a city of 21 million residents and the largest city in western China, and the expansion of pandemic control measures to three additional areas in Shenzhen depressed the market sentiment. Shenzhen’s new restrictive measures might cause disruption to Foxconn factories and Apple’s supply chain. CSI300 declined 0.5%. 
                             

Australia gold stocks are charging on the ASX today for two key reasons. Firstly, Australian gold output increased 9% to 83 tons last quarter, with two new projects in the west coming online. Total production for the 12 months to June 30 hit 317 tons which is worth about A$26 billion, Secondly, gold stocks are also being bid after the Gold rallied when the US dollar retreated when the US jobs data came in mostly in line with expectations. St Barabar is up 4.5%, Gold Road Resources up 4%. However, most momentum is in coal stocks with Australia likely to run out of supply next year, while demand from Europe will likely increase. Whitehaven Coal (WHC) shares are up 4.52% to a brand new record high of A$8.33, after rising 217% this year, which makes it this year's best performer on the ASX. New Hope Coal (NHC) another coal giant, is also making a sizable gain.

GBPUSD falls to fresh lows, EUR in focus this week

The dollar momentum continued even as we saw lower US yields on Friday after the payrolls data showed higher unemployment rate and softer earnings. The dollar index has touched fresh over 2-month highs of 110 this morning in Asia, as European energy situation faces a Lehman moment. EURUSD was seen heading for the lows in the recent 0.99-1.01 range, while GBPUSD printed fresh YTD lows below 1.1500. USDJPY headed back to 140.50, and potential for Japanese intervention remains. 

Crude oil prices (CLU2 & LCOV2)

The upswing in crude oil prices in the Asian morning session was much expected following the action in the energy market over the weekend. Supply issues have ramped up considerably with Russian oil price caps setting in from December, and the indefinite Gazprom halt may mean more gas-to-fuel switching demand. Meanwhile, the Iran nuclear deal doesn’t look any closer to being finalised, and the OPEC+ meeting today is in focus. WTI futures rose over 1% to $88/barrel while Brent futures were up 1.5% to over $94/barrel.

What to consider?

US payrolls send mixed signals

A goldilocks jobs report puts the focus squarely on the CPI release on September 13. Headline jobs gains were at +315k vs. the expected +300k with labour force participation rate increasing to 62.4% from last month’s 62.1%. Unemployment rate rose to 3.7% in August from 3.5% previously due to the higher participation rate and more job seekers. With the energy situation deteriorating rapidly, the focus is rightly on inflation and a 75bps rate hike for the September meeting still remains priced in with the 75% probability. 

G7’s Russian oil price cap and Gazprom’s indefinite closure of Nord Stream 1

On Friday, G7 finance ministers agreed to implement a December price cap on Russian oil and there's growing chance it leads to a natural gas-style price explosion in oil. This brings the possibility of Russia cutting output and supplies to the West could be trimmed further, further tightening the oil market.

Just hours later, Gazprom announced that it found an oil leak and would be shutting the Nord Stream pipeline indefinitely. That could potentially increase oil demand as gas-to-fuel switching picks up. OPEC+ meeting will be the highlight on Monday, especially as Saudi Arabia openly floated the possibility of cuts to output. But the recent price action in the oil market and dwindling Iran situation along with the risk of reduction in Russian oil supply suggests we could see a price supportive action from OPEC.  

European energy subsidies and liquidity measures, eyes on EU emergency meet

The panic button on European energy crisis has been pressed. With Russia cutting off gas supplies, even the built-in storage levels will not be able to meet the winter demand. Many businesses have reported shutdown, and households are reeling under a cost crisis. As a result, government support has started to flow in with Germany unveiling a €65 billion package to shield consumers and businesses from energy price hikes on Sunday. The package will be paid for via an energy windfall tax and bringing forward a planned 15% global minimum corporate tax. Sweden and Finland have announced liquidity guarantees of USD 23bn to electricity companies. All eyes are now on the EU emergency meet scheduled for Friday, 9 September, which may include discussions around price caps or rationing. 

As U.S. stocks rallied in July and August, analysts were busy cutting EPS estimates

According to a report from Factset released on Sept 2, while the S&P500 rallied by 4.8% in the two months of July and August, equity analysts cut Q3 S&P500 EPS estimates by 5.4% (to USD56.21 from USD59.44).  Nine of the 11 sectors of the S&P500 had their Q3 EPS estimates cut by street analysts, led by the communication services (-12.8%) and information technology (-9.1%) sectors.  The energy sector stood out as the sector having the most EPS estimate upward revision (+9.6%). 

During these two months, analysts cut the EPS estimates for the S&P 500 for the full year of 2022 by 1.5% (to USD226,15 from USD229.60).  Nine out of 11 S&P500 sectors had their EPS estimates reduced.  The communication services (-8.3%) and consumer discretionary (-6.9%) sectors were the biggest causalities while the energy sector was the best performer with 2022 EPS estimates raised by 12.3%.  Analysts also shed their 2023 EPS estimates for the S&P500 by 2.8% (to USD243.68 from USD250.61).  

The summer rally in the S&P 500 was largely a result of PE multiple expansions, not an improvement in earnings prospects.  

California’s wildfires threaten its energy supply, plus more. Uranium power on stand by

Blisteringly hot temperatures and a rash of wildfires are threatening California’s power grid with a heat wave expected for the next four days. The state’s grid operator has asked homes and businesses to conserve power and is warning of shortfalls (blackouts). Last week, lawmakers in the region approved a bill to extend the life of the state's only remaining nuclear power plant as a protection against blackouts. So we are watching the uranium ETF, URA. Also keep in mind, that California is the largest supplier of almonds in the world. So we are watching almond pricing and almond stocks like Select Harvest (SHV). 

China widened the Hong Kong-mainland China Stock Connect scheme to allow mainland investors to invest in overseas companies listed in Hong Kong

The China Securities Regulatory Commission (CSRC) said that it plans to give allow Chinese investors to buy shares of overseas companies listed in Hong Kong via the Stock Connect scheme.  The regulator is also studying a plan to set up a special trading counter at the Stock Exchange of Hong Kong to trade yuan-denominated stocks as well as help the Hong Kong bourse launch futures contracts linked to the Chinese government bonds.