What’s happening in markets?
US equities (US500.I and USNAS100.I): Nasdaq 100 rallies 1.6%, Nvidia shines with stellar earnings
Following a swift reversal in the recent surge of bond yields on Wednesday, the S&P 500 rallied 1.1%, closing at 4,436 and the Nasdaq 100 advanced 1.6%, reaching 15,148. The surge was driven by the information technology sector ahead of the earnings report from Nvidia (NVDA:xnas) after the market's closing bell. Subsequent to the market close, Nvidia reported a more than twofold increase from a year ago in quarterly revenue and the sales guidance provided for the ongoing quarter exceeded expectations by a substantial margin. Having already achieved a 3.2% gain during regular trading hours, Nvidia's stock had an even greater surge in momentum during after-hours trading, soaring an additional 10% and reaching USD 520. Some of these gains were subsequently retracted, ultimately stabilizing the stock around the USD 503 mark.
Treasuries (TLT:xnas, IEF:xnas, SHY:xnas): rally on weak PMI data
US Treasuries staged a strong rally, with yields falling 8bps to 13bps across the curve, initially triggered by weak PMI data from the Eurozone and the UK, intensified later after softer-than-expected manufacturing and services PMI prints in the US. The yield curve bull flattened as the long end rallied further in the New York afternoon following a solid 20-year bond auction. The 2-year yield declined by 8bps to 4.97% while the 10-year yield tumbled 13bps to 4.19%, bringing the 2-10 curve 5bps flatter at -78.
Hong Kong & Chinese equities (HK50.I & 02846:xhkg): mixed performance, Anta and Baidu surge
Anta Sports (02020:xhkg) surged by 9.7%, while Baidu (09888:xhkg) had a 4.4% increase, leading the performance as the performance within the Hang Seng Index, which managed a 0.3% climb. Anta exceeded expectations with robust earnings growth attributed to margin expansion. Meanwhile, Baidu's Q2 results surpassed predictions, boasting higher revenue and earnings due to a robust advertising sector. Although sentiment has somewhat stabilized on the Hong Kong bourse, A-shares plummeted on the mainland. Net selling persists in northbound flows, totalling RMB 10.5 billion. The CSI300 Index saw a decline of 1.6%, primarily influenced by drops in software, computing, telecommunication, semiconductor, defense, and brokerage stocks.
FX: Softer yields reversed the dollar gains
The US dollar was bid up higher after the disappointment from European PMIs but gains were reversed as US PMIs also came in below expectations and BLS revisions hinted at a weaker labor market than previously thought. Softer yields helped the yen to recover and USDJPY slid below 145 but EURUSD stayed below 1.09 despite having rebounded from lows of 1.0803. GBPUSD back above 1.27. AUDUSD gained momentum to be the G10 outperformer on weaker dollar and gains in Australia’s iron ore and gold exports, and was seen inching towards the 0.65 handle in early Asian hours.
Crude oil: focus turning to Jackson Hole
Crude oil prices continued to be weighed down by demand weakness concerns after a broad-based disappointment from PMIs on both sides of the pond. Supply concerns are also continuing to ease with the Biden Administration in talks with Venezuela to explore easing sanctions that have hindered oil sales. This will potentially add to incoming supplies from Iran. Prices saw some recovery as EIA data reported US commercial crude oil inventories fell 6,134kbbl last week. Focus will now turn to Fed Chair Powell’s comments at Jackson Hole, and any signs of concern on the economy could make the markets start to price in rate cuts from the Fed which can be positive for oil.
Metals: driven higher by softer yields
Iron ore and copper prices were higher on Wednesday despite weakness in PMIs, as markets started to reduce the pricing of further rate hikes. China’s economy continues to struggle, but there was speculation that Chinese mills will ramp up output ahead of the peak construction period. Gold also pushed higher following the softness in yields reaffirming that the higher gold prices had only been delayed due to the surge in yields lately, not cancelled.
What to consider?
PMI Shock: Services slips into contraction in Europe & UK, US disappoints as well
The PMI shock began as Europe came in yesterday, with France and Germany prints suggesting a small improvement in manufacturing albeit still firmly in contraction but services sliding into contraction as well. Germany’s numbers were clear indicative of a recession, with mfg PMI at 39.1 and services at 47.3. Overall EZ manufacturing PMI was at 43.7 in August from 42.7 in July but services came in at 48.3 from 50.9 previously and 50.5 expected. UK’s manufacturing and services PMIs were both below expectations at 42.5 and 48.7 respectively. US services PMI managed to stay in expansion at 51 but was below 52.3 in July and 52.2 expected. Manufacturing slipped further into contraction to come in at 47 from 49 previously. All of these numbers are clearly indicative of slowing US and European economies as high interest rates continue to bite.
Nvidia's Q2 revenue soars 101% Y/T to $13.51 Billion driven by AI chip demand
Nvidia reported an impressive 101% year-over-year surge in Q2 revenue to $13.51 billion, surpassing the consensus estimate of $11 billion. This growth is driven by global AI chip demand and reflects a heightened interest in AI that has exceeded projections. Notably, a significant portion of this demand originates from China, with Chinese buyers contributing 20-25% of the $10.3 billion revenue generated by data center products, marking a 171% increase year-over-year. The adjusted net profit reached $6.74 billion, exceeding the forecast of $5.2 billion. Looking ahead, Nvidia anticipates its current quarter revenue to outperform expectations by $3.5 billion, with projections hovering around $16 billion.
US NFP jobs data sees downward revisions
The yearly revisions to the BLS establishment survey (March 2022-March 2023) saw a downward revision by 306k, implying that the labour market was perhaps a touch cooler than initially expected during this time. With Jackson Hole ahead, this may be another reason for Powell to stay away from committing to further rate hikes but continue to highlight a data-dependent approach. The preliminary re-benchmarking — which will likely lower March 2023 payrolls by 306k, or 0.2% of total payroll employment — is approximately double the historical average. The actual re-benchmarking won’t take place until next February, and could differ somewhat from the preliminary estimates. Private industries saw the largest downward revision.
Meituan expected to report strong revenue growth in spite of competition
The consensus forecast for Meituan's 2Q predicts a 31.9% revenue growth to RMB 67.2 billion, and adjusted net income to turn profitable at RMB 4.5 billion from a RMB 0.9 billion loss last year. Investors will focus on the impact of competition with Douyin on Meituan's operating margins.
Japan’s Tokyo inflation could ease but will that help JPY?
Japan’s Tokyo inflation for August is scheduled to be released on Friday, and Bloomberg consensus hints at some easing of inflation pressures. Headline CPI is expected to come in at 3.0% YoY from 3.2% while ex-fresh food core measure is seen at 2.9% YoY from 3.0% YoY in July. The core-core measure (ex-fresh food and energy) is still seen to be firm at 4.0% YoY and wage pressures are also seen rising with reports suggesting that a subcommittee of Japan's Central Minimum Wages Council (an advisory body to the minister of Health, Labor, and Welfare) has decided to raise Japan’s weighted average minimum hourly wage by ¥41 in fiscal 2023 amid inflation concerns. It is the largest increase since the current method was adopted of indicating wages on an hourly basis, and is well above the ¥31 increase the previous fiscal year, bringing the minimum wage to ¥1,002. However, despite these wage increases and persistent inflation pressures, Bank of Japan is unlikely to announce any major tweaks to its yield curve control policy and that could signal some further weakness for the Japanese yen until Fed expectations can turnaround.
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