What’s happening in markets?
US equities (US500.I and USNAS100.I): market ends lower in a thin session, Nvidia down 4.7%
The US equity market finished lower in a volatile but thin trading session. The S&P 500 shed 0.7% to 4,467 while the Nasdaq 100 declined 1.1% to 15,101 after a failed attempt to rally during mid-day. Information technology, communication services, and consumer discretionary were the worst-performing sectors within the S&P500. The Philadelphia Semiconductor Index dropped by 1.9% and Nvidia (NVDA:xnas) plunged by 4.7% after Super Micro Computer (SMCI:xnas), a customer of Nvidia, plummeted 23.4% on a downbeat revenue outlook. The Biden executive order to limit sensitive technology investments in China may have added fuel to the weakness.
Treasuries (TLT:xnas, IEF:xnas, SHY:xnas): 2-year yield surged to 4.81% on crude oil and European natural gas price surge
The yield curve flattened as the 2-year yield rose 6bps to 4.81% while the 10-year yield declined 1bp to 4.01. An around 30% surge in European natural gas prices and a rise of the WTI crude oil price to the highest level since September last year weighed on the front end of the curve. The increases in energy prices add to inflationary pressure. On the other hand, robust demand in the 10-year auction lent support to the long end. Treasury will auction USD23 billon 30-year bonds today. Trading was light ahead of the CPI report today.
Hong Kong & Chinese equities (HK50.I & 02846:xhkg): Hang Seng Index gains modestly; Li Auto falls on cautious delivery projection
The Wednesday session concluded with the Hang Seng Index achieving a 0.3% increase. Investors found relief in reports suggesting that the Biden administration's limitations on U.S. investments into China would have a narrower reach. Additionally, Chinese pharmaceutical stocks, which had been struggling, managed to break a multi-day losing streak. Following a 2-day decline, China property stocks also showed signs of stabilization.
The Hang Seng Tech Index remained unchanged, as the gains in China Internet stocks were counterbalanced by declines in the EV sector. Notably, Li Auto experienced a sharp 5.5% drop after projecting Q3 deliveries in the range of 100,000 to 103,000, falling short of market expectations. Meanwhile, Southbound mainland flows resulted in a net sale of HKD 6.9 billion.
In the A-share market, the CSI300 Index declined 0.3%. This drop was primarily driven by decreases in the media, gaming, communication, and electronics sectors, although pharmaceuticals and properties rebounded. Northbound flows, for the third consecutive day, reflected a net sale.
FX: No fireworks ahead of US CPI
Dollar traded flat ahead of the US inflation release due for today. Despite a likely soft print today, inflation expectations may surge as crude oil and natural gas prices have been rising. EURUSD recovered from Tuesday’s lows of 1.0929 and 1.10 may come in focus again after Italy government decided to soften its stance on the windfall taxes on banks. USDJPY back higher to fresh highs of 143.76, threatening more measures from authorities.
Natural gas: rising supply risks
The EU gas price headed above €43/MWh, up 40%, before closing slightly lower. Concerns about supply interruptions due to strike actions in Australia may cause increased competition for gas destined for Europe. Europe has become more reliant on LNG imports following the Ukraine war. But increasing competition with Asia has seen its imports fall in recently. Strong demand amid extreme weather in Asia has seen inventories fall sharply. Moves in North Asian LNG on watch today.
Crude oil: supply concerns offset the mixed US inventory data
Oil prices rallied again overnight with concerns over the Russia-Ukraine situation continuing to escalate after a Ukrainian drone attack on a Russian tanker on the Black Sea. Around 15-20% of oil Russia sells daily to global markets transits through the Black Sea. These concerns add to the tightness concerns from OPEC+ and markets shrugged off a surprise rise in US oil inventories. The EIA weekly inventory report showed that crude stockpiles rose 5,851kbbls last week. However, oil product inventories fell, with gasoline down 2,661kbbls and distillate fuel oil 1,706kbbls lower.
Gold: extending downturn
Gold prices extended the slide on Wednesday to reach its lowest levels in a month as it reached $1914, breaking below its recent range of $1920-1937. Short-end yields have been higher overnight amid energy-driven inflationary pressures. Gold has been unable to turnaround despite weakness in equities and focus turns to US CPI today. A higher-than-expected inflation print may bring back inflation concerns, further weighing on gold as yields may potentially rise further.
What to consider?
Biden administration to restrain U.S. investment in China's national security relevant tech advancements
The Biden administration signed an executive order that aims to limit China’s progress in “sensitive” technology that “significantly enhances” China’s “abilities to conduct activities that threaten the national security of the U.S.” To do so, it'll restrict American investments as well as “intangible benefits” accompanying these investments including market access and networking in advanced semiconductors, AI, and quantum computing in China, including Hong Kong and Macao. This signifies unprecedented federal oversight to scrutinize and sometimes hinder such investments in China's tech sector. The order prevents U.S. funds from aiding China's military modernization. The rules won't take effect until 2024. During this time, public input will be sought for refining these regulations before finalization. Initially broader, the administration's investment limitations were refined after engaging with the private sector for months.
US CPI may not be able to get a Fed rate hike priced in for September
After a mixed US NFP jobs report on Friday failed to provide conviction to markets that the Fed can hike more from here, the focus turns to July inflation due on Thursday. The disinflation theme has so far been supported this year by the goods sector, while services have continued to create upside pressures. However, good prices may be seeing some pressures return amid an unfavourable base effect and modestly higher gas prices. Risks continue to escalate from drought conditions in the Panama Canal, El Nino weather patterns, labor strikes, and six consecutive weeks of gains in oil prices. However, shelter inflation now appears to be easing with the expected 12-month lag from measures of new rents and house prices. Shelter has been the biggest driver of services inflation, and it seems to be turning lower. Bloomberg consensus expects headline CPI to accelerate to 3.3% YoY in July from 3.0% YoY in June but stay unchanged at 0.2% MoM. On a core basis, CPI is expected to moderate to 4.7% YoY while remaining at 0.2% MoM. If inflation undershoots consensus expectations, the disinflation narrative will continue to gain traction, supporting risk assets.
China's CPI dips to -0.3% Y/Y amidst food price decline, PPI shows moderate improvement
China experienced a dip in CPI growth, reaching -0.3% Y/Y due to the high base in the previous year and a substantial decline of -1.7% Y/Y in food prices. On a month-on-month comparison, CPI registered a 0.2% growth in July, rebounding from the -0.2% decline noted in June. Notably, pork prices plunged by -26% Y/Y in July. Excluding food and energy, the core CPI showed a slight uptick to 0.8% YoY in July, up from June's 0.4%, primarily driven by an increase in service prices.
The PPI stood at -4.4% YoY, which indicates a slight improvement from June's -5.4%, although it fell short of the median forecast. When observing various industries, deflation persisted within the oil and gas and fuel processing industries, maintaining a significant contraction. However, deflationary pressures eased within the non-ferrous metal and ferrous metal industries.
Analysts expect robust growth in Alibaba's Q1 FY24 revenue and earnings
Alibaba is poised to unveil its Q1 FY24 results today, with consensus estimates projecting a 9% Y/Y rise in revenue, reaching RMB223.8 billion, and a substantial 27% surge in adjusted net income, amounting to RMB38.4 billion. Anticipations indicate that both Customer Management Revenue (CMR) and Gross Merchandise Value (GMV) are set to experience high-single-digit growth, leveraging the success of the robust 6.18 shopping festival. Notably, Alibaba's reporting will be structured around the six newly established business segments.
Disney reports an FYQ3 earnings beat
Walt Disney (DIS:xnys) reported FYQ3 revenue at USD22.3 billion, slightly below the consensus estimate but the adjusted EPS of USD1.03 came in better than expectations. The company attributed the improvement in profits to cost-cutting. The management also said the capex would be lower than projected previously and plan to pay a dividend this year. The share price of Disney gained over 2% in the extended hour trading.
Novo Nordisk Nears Top Spot in Europe's Valuation with Wegovy's Heart Benefits
Novo Nordisk (NOVOb:xcse) is on the verge of becoming the most valuable company in Europe, with less than a 5% difference, following promising trial data demonstrating that Wegovy reduces heart risks by 20%. This breakthrough is anticipated to pave the way for extensive coverage by US health insurers, thus greatly expanding the market for Wegovy. Anticipated to unveil a 34% year-on-year revenue growth in today's Q2 earnings announcement, Novo Nordisk's spotlight will be on its escalated production of Wegovy, intricate insights into future expansion, and the potential revision of higher revenue guidance for this fiscal year. For deeper insights into this thriving pharmaceutical firm headquartered in Denmark, delve into Peter Garnry’s most recent article.
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