Market Insights Today: - US bond yields surged and equities retreated on the Fed’s Bullard signaling the Fed Fund rate rising to at least 5%-5.25% or even 7% - 18 Nov 2022
APAC Strategy Team
Summary: US equities retreated for the second day as Fed Bullard signaled that the Fed fund rate needs to go to at least 5% to 5.25% or even as high as 7% to become sufficiently restrictive. US retailers’ results and outlooks came in better than feared on Thursday. China and Hong Kong’s shares consolidated on Thursday but futures and ADRs bounced on Alibaba earnings and the release of a new round of online/mobile gaming licenses to companies including Tencent and NetEase.
What’s happening in markets?
The Nasdaq 100 (NAS100.I) and S&P 500 (US500.I) closed lower but paring most of the early losses
Nasdaq 100 and S&P 500 traded weak in the morning, falling as much as 1.3% and 1.5% respectively at one point, following hawkish comments from St. Louis Fed President, James Bullard who said rates will need to be sufficiently restrictive and showed a chart showing a range between 5% and 7%. Stocks however managed to pare losses through the day, with Nasdaq 100 finishing the session with a modest 0.2% loss and S&P 500 closing 0.3% lower. Utilities, consumer discretionary, and materials were the biggest losing sectors as information technology and energy finished the session with small gains. Cisco (CSCO:xhkg) gained 5% to a three-month high after the company raised its sales forecast for the current quarter. After disappointing results from Target on the day before, retailers reported on Thursday did better than expected. Macy (M:xnys) jumped 15% after reporting better-than-expected earnings and increasing full-year guidance. Bath & Body Works (BBWI:xnys) jumped 24.5% after the retailer raised its profit outlook. Rose Stores (ROST:xnas) surged 15.7% and Gap (GPS:xnys) climbed 7% in the extended-hour trading, both on earnings beating street estimates.
US treasury (TLT:xnas, IEF:xnas, SHY:xnas) yields surged on Fed Bullard’s hawkish comments
Yields surged across the treasury yield curve with yields rising the most in the front end. The 2-year yield jumped 10bps to 4.45% and the 10-year climbed 8bps to 3.77%. The 2-10 year curve became further invested, hitting a new low of minus 71bps. Selling concentrated on the front end as St. Louis Fed President James Bullard referred to the “sufficiently restrictive level” being “5% to 5.25%” and “that’s a minimum”. IN addition, Bullard showed a chart that suggested a range of terminal rates from 5% to 7%. Meanwhile, Minneapolis Fed President Kashkari said the Fed is “not there yet” to pause and it is an open question of how far the Fed needs to go.
Hong Kong’s Hang Seng (HISX2) and China’s CSI300 (03188:xhkg) retreated for the second day in a row
Hong Kong and China stocks consolidated, with Hang Seng Index falling by 1.1% and CSI 300 declining by 0.4%. Tencent (00700:xhkg) finished the session 0.8% lower after reporting Q3 EPS beating analyst estimates but a 2% Y/Y decline in revenues, being dragged down by online gaming and advertisement. Meituan (03690:xhkg) plunged 5.7%, following Tencent’s announcement to divest its 17% stake in Meituan to shareholders. NetEase (09990:xhkg) tumbled 9% after US gaming company Blizzard Entertainment (ATVI:xnas) did not renew its expiring licensing agreement with NetEase. Also weighing on sentiment was the People’s Bank of China’s emphasizes on financial stability and warns against potential inflation risks in the central bank’s Q3 monetary report, as well as news reports about the temporary suspension of redemption in some investment products suffering losses from the recent surge in Chinese bond yields. In addition, new Covid cases surged to 23,132, a new high since April.
Overnight in ADR trading, Alibaba (09988:xhkg) gained 5.3% from its Hong Kong closing on Thursday after reporting earnings beating expectations and an increase to the share buyback programme. The ADR shares of Tencent (00700:xhkg) climbed 4.8% and those of NetEase (09990:xhkg) surged 7.4% each from their Hong Kong closing levels after China announced the approval of a new batch of 70 online/mobile gaming licenses to companies including Tencent and NetEase.
The Pound Sterling was steady as UK’s Autumn budget statement in line with expectations
The Pound Sterling was little changed, trading at 1.1887, after some initial weaknesses. The UK Chancellor’s Autumn budget statement was in line with previous announcements and market expectations as the £55 billion package includes taxes increases targeting the wealthy and energy companies and spending cuts. The UK economy is forecasted to shrink by 1.4% in 2023 after growing 4.2% this year.
What to consider
Japan’s CPI increased more than expected in October
Japan released its national CPI data which came in hotter than expected. Headline CPI grew 3.7% Y/Y (consensus: 3.6%, Sep: 3.0%). CPI excluding Fresh Food was 3.6% higher from last year (consensus: 3.5%, Sep: 3.0%) and CPI excluding Fresh Food and Energy increased 2.5% Y/Y in October (consensus: 2.4%, Sep: 1.8%).
China urges local authorities to strike a better balance in pandemic control measures
China’s National Health Commission urged local authorities to avoid “irresponsible loosening” of pandemic control measures. In a press briefing, health officials said local authorities “must continue to rectify the practice of excessive measures such as lockdowns and oppose the irresponsibility of evading a solution by loosening up”.
Alibaba reported earnings beating expectations
Alibaba reported 2QFY23 adjusted net income of RMB33.82 billion, rising 19% Y/Y and beating the street consensus. Group revenue came in at RMB208.24 billion, edging up 3% Y/Y, but it was slightly below expectation. China commerce revenue shrank by 1% Y/Y while AliCloud revenue grew by 4% Y/Y. The company increased its share repurchase programme by USD15 billion through March 2025, on top of the unused balance of USD7 billion in its existing programme of USD25billon.
Cisco sees supply chain pressure starting to ease and gives a bullish revenue forecast
Cisco shares were one of the best performers on Thursday, up 5%, with its shares hitting a three-month high. The maker of equipment that runs computer networks gave a rosy quarterly report and upgraded its full-year forecast. Recurring revenue from its new product offerings also increased to more than $23 billion on an annualized basis, and greater availability of chips helped Cisco fill more orders. Like most companies it’s feeling the pain of inflation and interest rates- so plans to cut 5% of its employees (with staff given the opportunity to move to other positions), while also reducing office space. For fiscal 2023, revenue is said to grow as much as 6.5%, which is more than its prior outlook of 6%. For the current quarter, profit, excluding some items, will be $0.84 to $0.86 a share.
Lithium miners in focus; as SQM sees lithium prices staying higher and demand rising 40%
Shares of lithium-related firms may gain after the world’s second biggest lithium company, SQM said it expects prices for lithium to stay high into 2023. SQM sees global lithium demand expanding 40% this year. In particular, the Chinese electric vehicle market is showing strong growth - buttressing solid demand for lithium. As a house, Saxo, remains optimistic on energy commodities, including lithium. Keep an eye on Australia’s Pilbara Minerals, Liontown, Allkem, Mineral Resources, as well as Chinese lithium and cobalt producers: Chengtun Mining Group, Tianqi Lithium, Ganfeng Lithium, China Molybdenum, Jinduicheng Molybdenum, Zhejiang Huayou Cobalt.
Australia’s unemployment falls, employment rises more than expected in October, following Australian wage growth growing more than expected
Australia’s jobless rate fell to 3.4%, from 3.5% last month, which supports the RBA continuing to rise rates, and not pause on rate hikes at their next meeting in December. Australian employment rose by 32,200 month-on-month in October, almost double the 15,000 jobs expected to be added to the economy. Job growth is also up markedly, from the tiny 900 jobs that were added the month prior. However, our view is that the RBA will rise rates by 0.25% in December, give the RBA has observed bad debts, and bankruptcies rising.
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