APAC Daily Digest – July 27, 2022; What's happening in markets and what to consider next
APAC Strategy Team
Summary: Equities retreated in the midst of recession fear over cuts in natural gas flows from Russia, IMF downgrade of global growth, declines in U.S. consumer confidence and new home sales, and S&P downgrade of Italy’s credit rating outlook to stable from positive.
What is happening in markets?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) fell 1.9% & 1.2% on big tech outlooksU.S. equities fell into the red with the S&P500 falling below its 50-day moving average, signifying a bearish tone has been reached, while the key index also formed a downtrend, meaning equities could now re-tests lows, if Wednesday’s results are not better than expected. The bearish weight on indices came as mostly negative earnings reports and outlooks were released; Microsoft (MSFT) reported an upbeat sales forecast for the fiscal year ending June 2023; expecting revenue to see double-digit revenue and operating Income growth, while guiding that a higher USD will cut sales down 4% for the year, and 5% in the current quarter. All in all, investors concerns eased somewhat about growth not slowing as much as feared. MSFT shares rose 4% afterhours. Google parent Alphabet (GOOG) shares were also higher after hours, up about 5% after reporting results that reflect the internet giant’s niche business and resilience amid slowing growth revenue. All in all, it's results mostly met analysts expectations.
U.S. rates are little changed ahead of the FOMC with 75bps priced in
At one point, U.S. 10-year yield fell as much as 9 basis point in early trading following German Bunds’ fall in yield as Russia’s Gazprom stopped a second turbine and slashed natural gas flows to Europe to 20% of normal level. Yields however climbed steadily through the day with 2-year and 10-year notes closing 3 basis points and 1 basis point higher respectively. Money market rates are pricing in a 75bp point rate hike at today’s FOMC.
Hong Kong’s Hang Seng (HSI.I) and China’s CSI300 (000300.I)
Property developers continued to trade higher on Tuesday in reaction the second day to Monday’s news that China was setting up a state support fund through the People’s Bank of China and China Construction Bank to provide developers with liquidity to complete stalled presold development projects. Country Garden (2007:xhkg) surged 13%. China Overseas Land & Investments (00688:xhkg), China Resources Land (01109:xhkg), Longfor (00960:xhkg) gained more than 3%. Alibaba (09988:xhkg) climbed 4.8% in HK hours on Tuesday after saying that the company was applying to change its HK listing from secondary to primary listing so as to become eligible for the Stock Connect before paring all the gain overnight in U.S. ADR trading, China Securities Regulatory Commission (CSRC) denied what foreign media reported about China planning to divide U.S. listed companies into three categories based on how sensitive the data the companies possess. Chinese internet stocks firmed moderately. Hang Seng Index and Hang Seng TECH Index (HSTECH.I) were more than 1% higher while CSI 300 was up 0.8%. Trading in general was light and cautious ahead of the U.S. Fed’s FOMC meeting. China is scheduled to release June industrial profits this morning.
European natural gas price soared; WTI crude declined
European natural gas price jumped as much as 21% to over €210/MWh as Russia announced deeper cuts to European gas flows. Meanwhile, crude oil prices were lower as the U.S. announced to release from barrels from the Strategic Petroleum Reserve. Gains in crude however returned higher in the Asian morning. US crude oil inventories fell sharply last week, with API data showing a drawdown of 4 million barrels for the week ended July 22 compared to a build of 1.9 million barrels in the previous week.
EURUSD heading for parity as Fed meeting approaches
EURUSD was the underperformer in the G10 basket on Tuesday, sliding back below 1.0200 to lows of 1.0108. A firmer dollar underpinned, with the Fed meeting approaching and IMF cutting global GDP forecasts leading to some risk aversion. A test of parity may be seen again if Fed proves more hawkish than the markets currently expects, with the gas supply issues hanging over the euro and ECB’s policy options remaining limited.
What to consider?
Another jumbo Fed rate hike in the cards today
The Federal Reserve is expected to tighten policy further today, with most officials so far signalling a 75bps move is on the cards. A second consecutive 75bps Fed interest rate increase would increase the federal funds rate range to between 2.25-2.5%, a territory that is considered neutral which means it is no more stimulating the economy. This suggests the pace of rate hikes may slow from here, and that will be the key thing to watch out for this week especially at Fed Chair Powell's presser. Economic data from the US has been mixed, showing some signs of some weakening despite a still-strong labor market, but we think inflation will continue to be a concern and keep the Fed's action aggressive. Still, the Fed is likely to preserve some ammunition for future meetings as key economic data is due after the July meeting and that would suggest that 100bps remains off the table for now.
U.S. consumer confidence and new home sales declined
The US consumer confidence index fell 2.7 points to 95.7 in July, with the component for perceptions of current economic conditions down substantially by 5.9 points to 141.3. job market outlook also softened, suggesting that the labor market strength may start to come in question over the next few months as well. Meanwhile, new home sales disappointed as they fell 8.1% to 590,000 in June following a rebound in the prior month. While some of the slowdown can be attributed to post-pandemic normalisation in demand, higher mortgage rates also remain a dampener.
IMF cuts world GDP growth outlook
The International Monetary Fund has cut its global growth outlook, estimating a slowdown in growth to 3.2% for 2022 from April estimate of 3.6%. The downgrades were broad-based, but led by the biggest hit in US growth estimate which was down 1.4% pts. China’s growth, meanwhile, was revised lower by 1% pt to 3.3% amid the zero-covid policy and a deepening property crisis. The IMF estimated that global output will slow further in 2023 to 2.9%.
President Biden and President Xi are holding talk on Thursday
U.S President Biden and Chinese President Xi will speak this Thursday in the midst of tension arising from a potential visit of U.S. House Speaker Pelosi’s to Taiwan. In the meantime, Taiwan kicked off a week of annual military exercises and China sent troops and tanks to Russia to take part in a war game across 12 countries, including Russia, Iran, India, Kazakhstan, Uzbekistan, Azerbaijan and Armenia, according the SCMP.
Australia CPI released today; it will preview that we may expect Australia’s economic utopia to end with higher-than-expected rates
Australian inflation data is tipped to show inflation rose to 6.3% y/y in June-ending quarter, up from 5.1% in Q1 with upward pressure coming from fuel, food, non-alcoholic drinks, housing and utility bills (with coal prices at record highs). If the reading shows 6.3% yoy inflation it will be the hottest inflation since 1990 and strengthens the case for the RBA to hike by 0.75% in August. Secondly, the RBA recently gained further ammunition to hike as Australian unemployment is its lowest monthly record in history, and retail spending is at a record high. So we will not only watch today’s CPI but also tomorrow new retail spending gauge in Australia. The market expects retail spending to grow 0.6% in June, following May’s 0.9% jump. Department store and café, restaurant and takeaway food spending are likely to continue to grow, while pressure remains on clothing/foot ware/accessories. And we see these behavioural shifts continuing while rates rise and covid restrictions are relaxed.
AUDUSD trades in tight range ahead of Australian CPI and Fed meeting
The pair will likely stay round bound ahead of Australian CPI and any Federal Reserve decision. Any lift in AUD over 0.7000 if CPI data is hotter than expected, will likely be short lived due to the darkening global outlook, and ahead of the Fed’s hawkish move on interest rates. Although spot AUDUSD stalled at 50-DMA, resistance is at 0.6996 which will be watched.
Busiest earnings week; 30% of S&P500 companies report. What to watch next?
This week’s blockbuster of 175 of companies reporting; will likely show how much corporate America’s balance sheets have been restricted in Q2 by higher costs and higher rates, how much logistics issues are easing, and how much the higher US dollar will impact forward earnings. We will be watching to see what companies guide for 2022; and how much these factors will continue to bite into in 2022. The market needs to see results not as bad as expected in order for the S&P500 and the Nasdaq to continue to rally. If results are weaker than expected, then the market will remain vulnerable to a sharp pull back. Today we will be hearing from Rio Tinto (RIO) after hours and also Boeing (BA). We also hear from Meta. Meta is suffering a host of challenges from slowing ad revenues, increasing competition as well as regulatory hassles. This means the core business is slowing, and there is lack of visibility on the Metaverse transition. Later this week we hear from Apple (AAPL) and Intec (INTC) and Procter & Gamble (PG).
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