Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
Summary: Rate hike worries were kept alive by the FOMC minutes, even though these were from the pre-January economic data prints that have been more hawkish than expected. US equities closed mixed as yields stayed near recent highs, while Chinese equities on the backfoot again amid escalating geopolitical tensions. USD strength pressuring AUD despite hawkish RBA. Crude oil prices slumped about 3% and Gold is back to testing key support at $1820 again.
US equity markets remain pressured as the US 10-year yields trades in the neighborhood of three-month highs at ~3.92% with the FOMC meeting minutes showing more tightening is on the horizon. The Nasdaq 100 fell for the second day, closing at its lowest level since February 1. The S&P500 also fell the second session - moving under the key 4,000 level, at 3,991, bringing the 200-day moving average just ~1% away - at the 3,941 mark - which will quickly be tested.
Intel shares were a laggard down 2.2% after the computer processor giant cut its dividend 66% - declaring a quarterly payout of 12.5 cents a share. This followed on from Intel reporting one of its weakest quarterly earnings forecasts in its history. All in all, this highlights that companies are trying to preserve capital amid margin compression – and that’s been a major theme of earnings seasons and we think it will continue to play out in Q1 earnings reports.
Hong Kong's Hang Seng Index (HSI) fell by 0.5% on Wednesday, with ongoing tensions between the U.S. and China over the latter’s alleged support to Russia, reports about China instructing state-owned enterprise to phase out the big-4 audit firms as their auditors for national security considerations, and overnight U.S. equity market weaknesses weighing on investor sentiment.
Shares of banks outperformed but failed to offset losses in technology and industrial stocks. HSBC (00005) surged 5.3% and Hang Seng Bank (00011:xhkg) climbed 2.7%, being the top two gainers in the benchmark Hang Seng Index. Techtronic (00669:xhkg), plunging 6.9%, was the biggest loser. JD.com (9618:xhkg), down 3% led the decline in the China interest space.
Hong Kong released its budget for this fiscal year, including HK$5000 per head in consumption vouchers, stamp duty reduction for first-time homebuyers, and support for airline operators. Hong Kong retail and property developer stocks rallied, with Chow Tai Fook (01929) rising 2.2%, Wharf Real Estate Investment (01997:xhkg) up 2%, and Henderson Land (00012:xhkg) up 1.6%.
After Hong Kong market close, Baidu (09888:xhkg) reported revenues and earnings beating market expectations despite weaker advertisements in Q4. The search engine giant announced a share buyback programme of up to USD5 billion. Baidu’s ADR (BIDU:xnas) fell 3.7%.
In mainland China, the CSI300 slid 0.9%. Construction materials, media, brokerage, and non-ferrous metals led the decline.
The Australian share market is being pressured by Australian bond yields rising, with the 10-year yield at its highest levels since January 4 - after the RBA affirmed it will continue to hike rates in the months ahead. The ASX200 fell briefly under its 50-day moving average with mining giants BHP and Rio trading lower after Rio reported weaker than expected numbers after the market close yesterday – but guided for a stronger 2023.
Travel stocks are continuing to gain attention on the revival of the travel sector – with a lack of fleet becoming an issue to keep up with strong demand. Qantas posted a record profit of A$1 billion in the six months to Dec 31, and announced A$500 million share buy back – as its sees relentless flight demand in 2023 - underscoring the surge in travel, post the pandemic. In fact, Qantas’ flagged higher than expected spending being needed to buy an extra aircraft, including nine Airbus A220s to keep up with surging passenger demand. Capital expenditure in the financial year ending June will rise by as much as A$400 million to between A$2.6-A$2.7 billion and will get as high as A$3.2 billion in the following 12 months. Despite guiding for strong demand, shareholders didn’t like hearing costs will need to rise – which send Qantas shares down 6% to $6.02, below its 100-day moving average. Qantas’ outlook underscores the pace and intensify of the travel industry’s recovery.
Logistics giant, Qube is trading up 10% after its half year profit rose 41% to $125 million and it also noted it sees stronger growth ahead in 2023 – supported by China’s reopening. Car dealership giant, APE is up by about 7% after its results beat expectations, and it guides for a stronger year ahead with demand for new vehicles continuing to outstrip supply. Today’s earnings highlight the reopening trade is gaining pace and also growing beyond market expectations – this could be a driver of the Australian equity market in the half year, while commodity companies continue to guide for a stronger year ahead – backing our bullish commodity outlook.
With ‘a few’ FOMC members supporting a larger hike to curb inflation - with James Bullard still favouring hiking rates to 5.375% as fast of possible, the US dollar gained the upper hand, pressuring most G10 currencies lower including the Aussie dollar. The AUD/USD pair closed below trend support, which opens up for a move lower to 0.6629, being the December low. The AUD/NZD pair however made a cleaner break down lower - with the Aussie against the Kiwi falling below its 50-day moving average. Weight on the pair also came after Australian wage growth data and construction work done were softer than expected, meaning the path of RBA hikes could slow after the RBA makes its tabled hikes in the ‘months’ ahead, versus the RNBZ, that just hiked by 50bps yesterday but gave a hawkish guidance.
A firmer dollar and expectations of more rate hikes from the Fed gathering pace saw a bearish momentum return in commodities on Wednesday, even ahead of the release of the marginally hawkish FOMC minutes. Crude oil prices slid by close to 3% with WTI below $74/barrel and Brent at $80 despite a Reuters report stating that Russia intends to cut crude exports from its western ports by a quarter in March/February, after prior reports that the country is cutting production in March by 500k BPD. API inventories were however higher, with crude stockpiles increasing by 9.9mn barrels last week suggesting demand weakness.
Gold gave up its recent gains amid the renewed pressure from USD and higher yields which are now close to their cycle highs despite some softening yesterday. The yellow metal is now close to the $1820 support, which held up last week after inflation concerns escalated. A break below will bring the 200DMA at 1776 in focus.
Despite the FOMC minutes being pre-January inflation print, they sounded hawkish at the margin suggesting there may be room for further escalation of that rhetoric given how the economic data has fared since the Jan 31-Feb 1 Fed meeting. A few of the participants favoured raising the rates by 50bps, and all agreed more rate hikes are needed thrashing pivot hopes. It also noted that a number of participants observed that financial conditions had eased in recent months, which some noted could necessitate a tighter stance of monetary policy. While this risk of a recession was noted, data since the meeting including the most recent PMI numbers this week have continued to ease recession concerns.
No reports of a peace treaty, and instead Chinese senior diplomat Wang Yi’s visit to Moscow was accompanied with China and Russia confirming stronger ties and President Xi’s visit to Russia in the coming weeks. This is suggesting that these escalated geopolitical tensions are here to stay, and our Defense equity theme basket provides a good way to hedge geopolitical risks. The red line for US and Europe will be if there is evidence that China is supplying weapons to Russia, and that could threaten a potential escalation of the war into a confrontation between Russia and China on the one side and Ukraine and the US-led Nato military alliance on the other. A WSJ article reported that Western nations have picked up on intelligence that Beijing might end its previous self-imposed restraint on weapons supplies to Russia, according to U.S. and European officials, although it appears that China hasn’t yet made a final decision.
Shares of Rio Tinto in NY fell 3.3% overnight and are down 3% on the ASX today after the world’s second largest miner reported underlying profit fell 38% to $13.28 billion in 2022 - vs the expected $13.96 billion consensus forecast. Rio’s profit fell after realised commodity prices fell from their records in the second half of 2022 – while earnings were also impacted by higher energy, raw materials prices and wages. Rio’s free cash flows fell 49% Y/Y in 2022 to $9.01 billion, resulting in Rio cutting its final (HY) dividend to $2.25 a share (down from $4.17), taking its total 2022 dividend to $4.92 - that’s a 60% pay-out ratio. Similar to BHP, Rio’s output looks stronger in 2023 with Rio guiding for higher copper, alumina, aluminium and iron ore production (but lower diamond production). It sees commodity prices being underpinned by ‘climate change scenarios’ which drive demand. Also note - in recent weeks - signs of a recovery in China have fuelled iron ore and copper prices up -with iron ore prices up 15% year to date. Rio is expanding its copper-gold presence, with the purchase of Turquoise Hill Resources- that will see Rio double its stake in the Oyu Tolgoi copper-gold project in Mongolia. Rio is also progressing the Rincon Lithium Project in Argentina – cementing itself in lithium. And despite the Serbian Government quashing its lithium mine Rio is ‘continuing to explore possibilities’.
Singapore bank UOB reported 13% increase in Q4 net income on higher net interest income offsetting the drop in fees from wealth management and rising impairment charges. Core net profit, after adjusting for one-off expenses related to the acquisition of Citigroup’s Malaysia and Thailand consumer businesses, rose 37% to S$1.4bn. UOB has recommended a final dividend of 75 cents a share. Together with the interim dividend of 60 cents a share, the total dividend for the full year will be $1.35 a share, representing a payout ratio of 49%. OCBC (O39:xses) reports results on Friday.
NVIDIA reported stronger than expected Q4 results with EPS of $0.88 on revenue of $6.05 billion, compared to analyst estimates of $0.81 on revenue of $6.01 billion. After-market gains were however driven by a strong outlook for artificial intelligence processors which is helping to offset the slowdown in PCs. Q1 revenue guidance at $6.50 billion, vs. expectations of $6.35 billion.
Reporting results on Thursday after the Hong Kong market close but before the U.S. market opens, Alibaba and NetEase are scheduled to announce earnings. Analysts are expecting Alibaba’s results from last quarter to be soft, with the Adjusted EPS expected to fall slightly to RMB1.999 from RMB2.015 a year ago. Investors’ focus will be on the outlook regarding the current quarter. Analysts are expecting NetEase to achieve growth in both revenues and earnings on strength in the Justice Mobile and Eggy Party games.
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