Market Insights Today: Dollar strength returns; Oil whipsaws on OPEC reports – 22 November 2022
APAC Strategy Team
Summary: Risk off tone in the markets spilled over to the US session on Monday after a fresh surge in Covid cases in China. Fed speakers tilted neutral-to-dovish, but the USD has turned more risk-sensitive rather than being yield-sensitive and ended the day stronger, especially against the Japanese yen. Oil prices whipsawed, falling 6% on OPEC output boost speculation which was later denied by Saudi Arabia, and Gold tested key support as well. Earnings from Zoom and Dell beat consensus, but a consistent message on a tough Q4 continued to dampen sentiment.
What’s happening in markets?
The Nasdaq 100 (NAS100.I) and S&P 500 (US500.I) closed in the red
Nasdaq 100 dropped by 1.1% and S&P500 slid 0.4% in a relatively quiet session. The sentiment was dampened slightly by concerns of potential China backtracking in easing Covid control measures as new cases surged. On the other hand, dovish-leaning comments from the Fed’s Bostic and Daly boosted the sentiment somewhat. Among the sectors of the S&P 500, consumer discretionary, energy, and communication services declined the most. Tesla (TSLA:xnas) plunged 6.8% on a recall of over 300,000 cares for tail-lamp issues and the Covid outbreak in China. Walt Disney (DIS:xnys) surged 6.3% after Robert Iger, the entertainment giant’s former chairman and CEO to return as CEO, replacing Bob Chapek.
US treasuries (TLT:xnas, IEF:xnas, SHY:xnas) finished a choppy session little changed
The dovish comments from Atlanta President Bostic and San Francisco Fed President about the slowing the pace in December and a terminal rate potentially of around 5% did not have much market impact. The 2-year yield edged up 2bps to 4.55%. The long end however caught a bid in early New York trading, with the 10-year yield falling as much as 7bps to 3.76% at one point when the crude oil price fell over 6% to as low as USD75.08 intraday. The 10-year pared gains and finished the day unchanged at 3.83%.
The Australian share market opens 0.6% higher on Tuesday
Bright sparks are in lithium, fertilizers, coal and banking. Lithium company Pilbara Minerals trades 4% higher and Allkem (AKE) ais also up about 3% with sentiment in the lithium sector buoyed after lithium giant SQM shares rose almost 10% in NY on announcing a US$3.08 dividend per share following their optimistic update last week. SQM also operates in fertizliers as well, so ASX fertilizers companies are seeing a sentiment uptick with Incitec Pivot (IPL) are trading higher. Coal companies such as Whitehaven (WHC) and New Hope (NHC) also are trading sharply higher with large block trades coming through with traders expecting higher prices for coal in January. Also in commodities, it’s worth watching copper company Oz Minerals (OZL) as options trading volume increased dramatically after BHP increased their takeover offer for company. Yesterday OZL options volume was almost 7 times the 20-day average, with 5,000 calls and zero puts, meaning the market expects a higher price for OZL. In banking Virgin Money (VUK), trades up 13% today after the London listed stock rose 15%. Virgin reported stronger than expected profits for the year to Sept. 30 and upgraded its outlook on Monday, saying it expects its net interest margin to expand in the medium term. Virgin Money’s Slyce, a buy-now-pay-later product that launched earlier this year, had a waitlist of about 40,000. So many are thinking the business could be potentially turning around.
Hong Kong’s Hang Seng (HISX2) and China’s CSI300 (03188:xhkg) declined as Covid cases surged
Investors turned their focus on how the Chinese authorities would be handling the surge in Covid cases towards the April high and whether China would backtrack the 20 fine-tuning pandemic control measures. Hang Seng Index fell by 1.9% and Hang Seng TECH Index plunged by 3%, with China Internet, consumer, Macau gaming, and EV stocks leading the decline. JD.com (09618:xhkg), Alibaba (09988:xhkg), and Meituan (03690:xhkg) dropped by around 5% each. In mainland bourses, CSI 300 slid 0.9%. Food and beverage, beauty care, services, and media stocks were the major laggards. Kweichow Moutai (600519:xssc), and Wuliangye Yibin (000858:xsec) fell by around 3% each.
FX: Dollar strength returns, mainly on the back of Japanese yen
Risk off tone from the fresh surge in cases in China prompted a bid tone in the US dollar on Monday. Fed speakers were neutral-to-dovish, lacking the hawkish push seen from Collins and Bullard last week, but as we have written before, dollar is turning to be less yield-sensitive now, but more risk-sensitive as it draws safe haven flows. USDJPY rose above 142 with US 2-year yields inching above 4.55% and 10-year also somewhat higher. Even as the pace of Fed rate hikes slows down, most members have called for over 5% terminal rate, suggesting downside for the Japanese yen may be close but pressure isn’t completely off yet. Disappointing German PPI and dollar strength pushed EURUSD lower to 1.0222 lows.
Crude oil (CLZ2 & LCOF3) whipsaws on OPEC+ reports
A volatile day for crude oil amid reports that OPEC was planning to lift production. Oil prices fell sharply with WTI touching $75/barrel and Brent below $84after the Wall Street Journal reported that OPEC+ alliance was considering an output increase of 500kb/d in light of the looming EU ban on Russian oil imports. Oil pared these losses after Saudi Arabia denied the report; instead insisting that the current cut of 2mb/d was in place until the end of 2023. Demand concerns broadly remained with rising virus cases in China and slowing global consumption as central banks around the world continue to tighten policy. A stronger dollar also weighed on oil prices.
Gold (XAUUSD) tested the key 1735 support
A stronger dollar continued to push Gold lower on Monday, and it tested the key support at $1735. With FOMC minutes due this week, and more Fed speakers on the horizon, there may be more talk about a higher terminal rate pricing even as the pace of rate hike slows from December. This, together with the risk of repeat lockdowns in China, could continue to weigh on the precious metal. An extension of the recent rally likely requires further declines in yields and the US dollar driving fresh demand for ETFs or some other catalyst that sees a run to safety.
What to consider
Development in China’s handling of the Covid outbreak across large cities to watch
Daily new cases in mainland China surged to 26,824, a new high since April. Beijing reported three Covid deaths, the first time in more than half a year. Part of the population in Guangzhou, Beijing, Chengdu, Zhengzhou, and Shizjiazhung are urged to stay home or under some sort of movement restrictions. It is a testing time for the local authorities of how to control the outbreak and implement the recently released fine-tuning measures to minimize disruption to daily lives and economic activities. The People’s Daily published an article to call for handling pandemic control scientifically and with precision in the spirit of the 20 fine-turning measures. The National Health Commission released four documents to provide further guidelines on how to do PCR testing, management of high-risk districts, quarantine at home, and health surveillance. As Hong Kong’s Chief Executive John Lee was tested positive and he sat near President Xi in some meetings during the APEC Summit last week, investors are also closing watch if President will meet Cuban President Miguel Diaz-Canel when the latter visit China on Nov 24.
Fed’s Daly tilted dovish, while Mester was more neutral
Mary Daly (2024 voter) called on the Fed to be mindful of the lagging impact hikes have on the economy.She suggested financial conditions are tighter than what is suggested by Fed rates, saying financial markets are priced like the FFR is at 6%, not 3.75-4.00%.She also said the Fed must be mindful of overdoing rate hikes but there is still more work to be done but inflation is moving in the right direction. She noted policy is in modestly restrictive territory but she sees it peaking at around 5%, saying 4.725-5.25% is reasonable. Meanwhile, 2022 voter Mester said it makes sense to slow down the pace of rate hikes and believes they can slow down from 75bps in December.Mester is beginning to see the Fed's actions work but they need more, sustained good news. She thinks the Fed is just barely there in regards to restrictive territory, adding they need to get there.
Disappointing guidance from Zoom (ZM)
Zoom reported Q3 EPS of $1.07, $0.24 better than the analyst estimate of $0.83. Revenue for the quarter came in at $1.1 billion versus the consensus estimate of $1.09B. But guidance disappointed as with expectations penned lower than consensus as Q4 2023 EPS of $0.75-$0.78 was seen, vs. the consensus of $0.80. Zoom sees Q4 2023 revenue of $1.095-1.105B, versus the consensus of $1.12B.
Dell Technologies (DELL) beats consensus
A big beat for Dell as it reported third-quarter adjusted EPS of $2.30 on revenue of $24.7 billion, compared with estimates for $1.61 per share and $24.4B, respectively. However, PC demand remained weak and weighed on demand outlook, while Q3 were boosted by favorable corporate-PC positioning and robust operational execution to drive the margin and EPS beat.
RBNZ’s hawkishness to continue to outperform while Riksbank to play catchup
The monetary policy decision from the Reserve Bank of New Zealand (RBNZ) will be key on Wednesday to determine the direction of NZD, which has seen strong gains over the past month from higher hawkishness. After a series of 50bps rate hikes, there are some expectations that RBNZ could deliver a 75bps rate hike this week, as inflation and labour market conditions support the case for further front-loading. Inflation has reached 7.2% YoY in Q3 – well above the RBNZ’s 1-3% target. Most members of the RBNZ shadow board also supported a 75bps rate hike. Meanwhile, the Riksbank has been lagging other G10 central banks in tightening policy and is now playing catch up after delivering a 100bp hike in September. The Riksbank is expected to deliver a 75bps hike on Thursday while another 100bps hike can’t be ruled out.
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