Market Insights Today: Dollar declines ahead of US midterms – 8 November 2022

What’s happening in markets?

The Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) rose with tech and energy leading gains

Ahead of the U.S. midterm election, equity market sentiments maintained a risk-on tone. Both S&P 500 and NASDAQ rose about 1%.  Community services, energy, and information technology led gains while utilities were the largest loser in S&P 500. On corporate news, Meta (META:xnas) gained 6.5% after the company announced plans to cut staff. Viatris (VTRS:xnas) surged 13% after the pharma company agreed to acquire Oyster Point (OYST:xnas). Lyft (LYFT:xnas) plunged 15% in extended-hour trading after reporting weaker-than expected ridership growth. Tesla (TSLA:xnas), losing 5%, dragged the benchmarks indices most.

US  treasury (TLT:xnas, IEF:xnas, SHY:xnas) edged higher on incoming supply

Yields across the treasury curve rose around 6bps ahead of refunding auctions of the 3-year notes, 10-year notes, and 30-year bonds for a total of USD96 billion from Tuesday to Thursday. A rise of 16bps across the pond in the 2-year UK Gilt yield also added to the pressure on treasuries. Investors will be watching closely the U.S. mid-term election on Tuesday and CPI on Wednesday.

Hong Kong’s Hang Seng (HSIX2) China’s CSI300 (03188:xhkg) continued to rally on China reopening hopes

Stocks in Hong Kong shrugged off the headlines about China’s National Administration of Disease Control and Prevention reiterating adherence to the dynamic zero-Covid policy over the weekend. Investors took note that the health officials added that local governments should not unreasonably double down on the implementation and must ensure people’s livelihood and economic activities remain normal.  In addition, the resumption of large-scale sports events, relaxation of PCR test requirements, increases in international flights, cancellation of circuit breaker for international flights, and approval of BioNTech vaccine for foreigners living in mainland China were among the factors cited by street analysts in their reports anticipating gradual reopening in the coming months. The Hang Seng Index rose for the second day in a row, finishing 2.7% higher. Financials outperformed, with HKEX (00388:xhkg) up 5.4%, HSBC (00005:xhkg) up 3.7%, and AIA (01299:xhkg) up 3.3%,  China property names surged on better-than-expected home sales data from some tier-1 cities. Country Garden (02007:xhkg), up 11%, was the top gainer in the Hang Seng Index. Despite Apple (AAPL:xnas) cutting iPhone production, Sunny Optical (02382:xhkg) jumped 11%. MMG (01208:xhkg) surged 16%, following the removal of blockage by locals to the company’s copper mine in Peru. Zinjin Mining (02899:xhkg), up 10.3%, announced to buy a 20% stake in Zhaojin Mining (01818:xhkg), up 9.7%.  China’s October trade data came in weaker than expected but it did not have much impact on the market on Monday.

FX: Dollar’s decline extends despite rise in 10-year yields

The US 10-year yields rose to last week’s post-Powell highs at 4.20%+, but the dollar tumbled for a second day in a row to drop to over one-week lows. Dollar decline was broad-based, against all G10 currencies barring the loonie. Gains were led by sterling, with GBPUSD above 1.1500 and EURGBP also sliding lower to 0.8700. EUR benefitted from the weaker dollar which helped EURUSD rise above parity from lows of 0.9900 even as President Lagarde reiterated her usual tone noting inflation must be brought back down to 2%. Midterms bring further volatility risks to FX, with a clean Republican sweep likely being dollar negative as yields will likely plunge amid speculation of a hamstrung administration limiting scope for fiscal support. 

Crude oil (CLX2 & LCOZ2) lower despite dollar weakness

Oil prices ended lower as hopes of China easing its zero covid policy faded, even as near-term supply constraints continued to limit the slide. OPEC has begun reducing output in line with the agreement to reduce quotas by 2mb/d at its last meeting. The market is also facing the deadline for European imports of Russian oil before sanctions kick in on 5 December. This has left fuel inventories tight, with Brent crude oil futures still below $100 per barrel and WTI futures staying above $91. Meanwhile, US natural gas futures soared on cold weather fears in the West and the Northeast. December natural gas futures contracts climbed as much as 12.8% to $7.22 per MMBtu before trimming the advance later.

Copper (HGZ2) trimmed last week’s gains

Copper reversed back to $3.60 after racing to $3.70+ levels on Friday on China reopening optimism. However, reports that China would stick with its adherence to strict virus controls, made the metal reverse some gains. Weak economic data also weighed on sentiment with China’s imports of Copper ore down and overall imports also unexpectedly falling for the first time in more than two years. Gold (XAUUSD) held steady despite the lower USD, and it may still be quite early to call a reversal in the short-term downtrend.

What to consider

US mid-term elections to spook market volatility

Pundits suggest that the Republicans have very strong odds of flipping the House of Representatives in their favour, while the odds look finely balanced for whether the Senate ends retaining the slimmest of Democratic majorities. Republicans taking both houses has few immediate ramifications, as US President Biden has the presidential veto, but a stronger than expected Democratic showing that somehow sees them retaining the House and strengthening their Senate majority would be a game changer – opening for more policy dynamism from the US over the next two years rather than the expected lame-duck presidency. Uncertainty is high as pollsters have had a hard time gathering accurate indications for the election results since Trump’s victory in 2016.

China’s October trade data disappointed

China’s exports in USD terms declined 0.3% Y/Y in October, much worse than the growth of 4.5% expected in the Bloomberg survey and the 5.7% in September. It was the first decline in export growth since May 2020 and might point to a turning point of deceleration in exports as the global economy slowed. If adjusting for inflation in export prices, the decline of China’s exports would be even larger in the real term. Imports in USD terms declined 0.7% Y/Y (vs consensus 0.0%, Sept: +0.3%).

Bank of Japan affirms easy policy, but not without some mention of a future exit

The Bank of Japan released summary of opinions of the October policy meeting today, broadly reaffirming the easy monetary policy stance. Still some members stuck a slightly different tone, noting that Japan's inflation likely to remain fairly high as there are signs service prices starting to rise, and “cannot rule out chance prices will sharply overshoot forecasts.” Still, sustained wage gains remained the base case for Japan to achieve its price target and members agreed that there was no immediate need to tweak monetary policy. Importantly, one member noted that the Bank of Japan must continue examining how a future exit from ultra-low interest rates could affect financial markets, in a rare mention of an exit.

Big slump in Australian business and consumer confidence

Australia’s consumer sentiment tumbled to its lowest level in 2.5 years and business confidence also weakened as higher interest rates and surging inflation stoke caution over the economic outlook. NAB business confidence plunged to 0 from 5 in September, while the Westpac consumer confidence index was down to 78 for November from 83.7 previously. This bodes ill for spending ahead, suggesting RBA’s caution on rate hikes may continue to prevail despite the continued hot CPI reports.

Walt Disney earnings ahead

Walt Disney is scheduled to report on Tuesday with analysts expecting Q4 (ending 30 September) revenue growth of 15% y/y but EBITDA at $3bn down from $3.86bn in Q3 highlighting the ongoing margin pressure.

Layoffs are coming to Meta and Apple cuts iPhone production

The demand for iPhones is coming down and Apple is now announcing a cut of 3mn units as consumers are under pressure from inflation and might be extending the life of their old phones. Apple has recently hiked prices on some of its services aiming to offset the weakness in its hardware business. Meanwhile, investors have been frustrated with Meta following the Q3 earnings release as Mark Zuckerberg has reinforced the image that he does not listen to the concerns of investors that Meta is spending too much capital on its metaverse bets. According to Wall Street Journal, Meta might have listened after all as the technology company is expected to begin laying off thousands of employees. Read our equity strategist Peter Garnry’s note here.

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