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Global Market Quick Take: Asia – May 3, 2023

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APAC Research

Summary:  Heading into the Fed announcement, we have fresh concerns in the market on the US labor market as well as the regional banking sector which brought equities lower and strong bids in Treasuries. Crude oil saw another 5% plunge lower, while Gold rallied above $2000 again on risk-off. The Fed is still expected to hike by 25bps today, but guidance (or the lack thereof) will be the key focus. In FX, yen gained but AUD pared some of the post-RBA gains while NZD was wobbly after hawkish Q1 employment report.

MI 3 May 2023

What’s happening in markets?

US equities (US500.I and USNAS100.I): decline driven by energy and financials

Nasdaq 100 declined 0.9% and the S&P500 declined 1.2% on Tuesday as the energy sector tumbled 4.3% on an over 5% decline in crude oil prices and financials sliding 2.3%. Despite the weekend regulator brokered acquisition of JPMorgan Chase (JPM:xnys), the concerns over the U.S. banking sector returned to haunt investor sentiment. As the deal is estimated to reduce JPMorgan’s common equity Tier-1 capital (CET1) ratio by 40-50bps, investors are wondering who will be the buyer when the next regional lender falters. The SPDR S&P Regional Banking ETF (KRE:arcx) plunged 6.3% and the KBW Bank Index declined 4.5%. Consumer Discretionary was the only sector within the S&P 500 that advanced, with lodging and cruise names as well as Amazon (AMZN:xnas) gained.

Treasuries (TLT:xnasIEF:xnasSHY:xnas): yields plunge on soft JOLTS and banking woes

US Treasuries caught strong bids (yields lower) following the JOLTS job openings shedding 384K to 9,590K in March and softer-than-expected prints in factory orders. Buying intensified as regional bank shares plummeted, signalling concerns about the U.S. banking industry lingered despite JPMorgan’s taking over of First Republic Bank. The front end to the belly outperformed, with large-size buying in the SOFR interest rate futures and five-year T-notes futures. The Dec 2024 SOFR (SR3Z4) contract jumped 19.5bps (rate down) to 97.095 (2.905%), pricing in more rate cuts in 2024. The 2-year yield declined sharply by 18bps to 3.96% while the 5-year yield fell the most, down 19bps to 3.45%. The 10-year lagged, with yields falling by 14bps to 3.42%. The 2-10-year curve steepened by 4bps to -54bps. For the FOMC meeting decision today, the curve is pricing an 87% chance for a 25-bp hike. The focus will be on whether the Fed will signal a pause for the June meeting as the banking woes continue.

Hong Kong equities (HK50.I): shrug off weak China PMI to focus on golden week consumption trend

While the mainland Chinese stock market remained closed, Hong Kong equities returned from the long weekend with a strong opening. Despite the across-the-board softer PMI data coming out in China on Sunday, the Hang Seng Index gapped up and soared at one point as much as 2.2%. The strong opening was partly attributed to China’s travel and mobility data during the Labour Day holiday. The pledge to support economic growth in the Politburo’s readout last Friday was also cited by investors for the optimism at the open. However, all the early gains waned within half an hour as investors turned defensive. In addition to lingering concerns about the strength of economic growth in China, some investors cited the Wall Street Journal article that reported overseas entities were denied renewal of subscriptions to Wind, a popular database of economic and financial data in China, as another sign of increased fragmentation of the world.

Shares of Macao casino operators climbed, led by Melco’s (00200:xhkg) 3.6% and Galaxy’s (00027:xhkg) 2.2% gains, following the release of strong April gross gaming revenue data as mainland Chinese tourists returned to the gaming enclave. Besides gaming stocks, HSBC (00005:xhkg) was also a noted outperformer and contributed to Hang Seng Index’s recovery in the afternoon. HSBC surged 4.5% after reporting Q1 results solidly beat estimates.

China internet stocks finished the session mixed with Baidu (09888:xhkg) and JD.COM (09618:xhkg) advanced around 2% while Alibaba (09988:xhkg) and Tencent (00700)  registered small gains but Meituan (03690:xhkg) edged down 0.4%.

FX: JPY recovers as Treasury yields slide, NZD bid on Q1 employment data

The concerns on the US jobs market as well as the banking sector sparked buying in Treasuries on Tuesday and also disrupted the Fed pricing. The pricing for today’s expected 25bps rate hike went down from over 90% to 86%, and brought the US dollar lower. Japanese yen benefitted from the risk-off tone in wake of banking weakness and the plunge in US yields, and USDJPY fell from highs of 137.77 to sub-136.50. EURUSD reversed back above 1.10 despite the weak bank lending survey yesterday while GBPUSD is still stuck below 1.25. Gains in AUDUSD to 0.67+ after the RBA’s surprise hike were somewhat pared while NZDUSD spiked up by 20bps since the Asia open today as Q1 labor data out showed unemployment rate steady at 3.4% vs. expected 3.5% and wage inflation climbing higher.

Crude oil: sharp drop amid fresh banking sector concerns

Crude oil prices were down a sharp 5% yesterday as the market continued to fret about the stability of the regional US banking system despite the bailout of First Republic by JP Morgan. These concerns were further aided by a weak economic picture as US job opening indicated some cooling in the labor market. Despite these demand concerns, the Fed is expected to hike once again later today, which continues to weigh on the demand outlook even as supply side is looking stable for now, even as API inventories were down more than expected last week. Saudi Arabian exports jumped to a six-month high of 7.42mb/d in April, according to tanker tracker data. Russia shipments advanced to 3.8mb/d. WTI prices slid below $72/barrel while Brent was close to $75.


What to consider?

Regional banking concerns reignite

Despite the bailout of First Republic by JP Morgan, banking sector concerns were reignited on Tuesday without any particular catalyst of note. Short sellers appear to be actively targeting the regional banks now with questions over increasing funding costs and the sector being on the precipice of a regulation overhaul. Some have also expressed concerns over the lack of guarantees for blanket deposit insurance. Charlie Munger’s FT interview over the weekend also warned that regional banks were "full of" bad commercial property loans. East West Bancorp, M&T Bank Corp and Comerica are some of the regional banks with over 30% of their loan portfolios in commercial real estate.

Slowing US JOLTs job opening spark concerns of softening labor market

US JOLT survey revealed that job openings fell to 9.59mln in March from a revised up 9.974mln previously, falling beneath the consensus of 9.736mln. That was the lowest in nearly two years and hinted at the gradual moderation in labor demand, which had so far continued to run higher than the supply keeping the market in an imbalance. Ratio of openings to unemployed dropped further to 1.6 in March from 1.8 earlier, but still remains above the pre-pandemic level of 1.2. Today, the focus turns to the Fed decision but private ADP employment survey and the US ISM services, where the priced paid component will again be key after the jump higher in the manufacturing prices on Friday sparked inflation concerns yet again, is also due.

Macao gaming revenues surged 4.5 times Y/Y in April

With the surge in mainland tourists into the casino and entertainment enclave, Macao casinos’ gross gaming revenues soared 4.5 times Y/Y and 15.6% M/M to MOP14.7 billion (USD1.8 billion) in April ahead of the Labour Day holiday, and reached the highest level since January 2020 and about 59% of the pre-pandemic level.

Euro data on inflation and credit conditions keeps 25bps hike in place

The flash print for April Eurozone inflation came in-line with expectations – 5.6% YoY and 0.7% MoM, cooling a notch from the cycle high of 5.7%. Meanwhile, ECB bank lending survey for Q1 2023 reported that 27% of the Eurozone banks tightened lending standards for companies and 38% reported fall in demand for credit from companies. The decline in net demand was stronger than expected by banks in the previous quarter and the strongest since the global financial crisis. With the banking crisis also worsening in the US, it appears that the ECB may turn more cautious and downshift from its pace of 50bps rate hikes to 25bps at this week’s meeting.

Australia’s Reserve Bank surprises with a hike

After a pause in April, the Reserve Bank of Australia surprised with a 25bps rate hike on Tuesday when the market was expecting almost nothing. The statement guided on the potential for further tightening, though the market remains reluctant to price much more. While Q1 inflation print came in below expectations, RBA may have been encouraged to hike again given the revival of home prices across Australia. As well, it may also have been about Governor Lowe pushing back against the RBA’s outlier status relative to global peers in terms of the RBA’s cash target rate level and all of the criticism that has been heaped on his management style. He is leaving in September and in July, the RBA is set for a massive overhaul.

HSBC reported EPS 67% above the consensus estimate

HSBC’s revenues grew 64% Y/Y to USD 20.17 billion in Q1, beating the consensus estimate by 35%. Profit before tax surged 211% Y/Y to USD12.89 billion and EPS soared 271% Y/Y to USD0.52, higher than the consensus USD0.31 by a wide margin. Credit costs and capital ratios were also better than analyst estimates. The bank announced plans to buy back as much as USD2 billion of shares.

Earnings recap: AMD, Starbucks, Uber, Ford

Advanced Micro Devices (AMD) declined in postmarket trading as its Q2 revenue forecast came short of the estimate - $5-5.6b vs $5.51b. Q1 revenue was $5.35b down 9.1% YoY that was the first decline since 2019. The chipmaker remains concerned due to the falling PC market, but is optimistic that the chip market would start to recover in the second half of 2023.

Starbucks beat estimates underpinned by a sharp recovery in China. Comparable sales climbed 11%, smashing expectations of a 7.3% rise. Full-year guidance was also reaffirmed, but that disappointed markets.

Uber jumped 11% after reporting in-line revenues and a smaller-than-expected loss in Q1 and delivering an upbeat outlook guiding for profitability in Q2.

Ford Motor posted a robust Q1 revenue and profit, with strong demand for trucks and SUVs, but the full-year outlook was cautious due to the continued losses in its electric-vehicle unit amid price wars with Tesla. The company also warned that "higher industrywide customer incentives as vehicle supply-and-demand rebalances" will be a "headwind" for profitability.

Will it be the Fed’s last rate hike of the cycle?

Today’s Fed announcement in expected to bring another 25bps rate hike despite considerable uncertainty on the growth and inflation trajectory as well as the risks of a banking turmoil. But the big question is whether this hike will mark the end of the Fed’s tightening cycle. An outright signal of a pause could spur a rally in equities and a slump in the dollar. Still, message to keep rates higher for longer will likely be reaffirmed given that the most recent PCE print has again indicated sustained price pressures. There are now over 60bps of rate cuts in market pricing for 2023, but banking sector concerns have just been reignited and there remain pockets of risks. How the Fed balances its message in such a scenario, which inflation is still sticky, will be key to monitor. T

Our Head of FX Strategy, John Hardy, writes in his FX update that the setup here is that Fed Chair Powell will likely want to say as little as possible in the way of guidance, which can leave the market to its own interpretations of the likely path from here (even when the Fed has tried to protest against the notion that it will be cutting rates later this year, the market largely ignores guidance anyway.). In sum – look for a Fed that is trying to avoid signaling very much and a market that may realize that it is too confident in the Fed rolling over to cutting by later this year. That could mean risk off and USD up.

IBM sees back-office jobs replaced by AI and Chegg impacted by ChatGPT

The disruption to jobs and businesses from AI and ChatGPT increasingly catch the attention of investors. IBM (IBM:xnys) CEO said yesterday the technology giant is suspending hiring in back-office functions as he sees 30% of these types of positions, now amounting to 26,000 in his company to be replaced by AI in five years. Clegg (CHGG:xnys), an online homework help provider, plummeted 48.5% after noting that ChatGPT had negatively  impacted their addition of users. 

For a detailed look at what to watch in markets this week – read or watch our Saxo Spotlight.

For a global look at markets – tune into our Podcast.

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