APAC Daily Digest: What is happening in markets and what to consider next – September 2, 2022
APAC Strategy Team
Summary: Higher US dollar and yield momentum extended further despite a minor pullback in equities, with USDJPY rising above 140 and some pain coming back to EURUSD as well. Resilient US ISM manufacturing underpinned, even as global demand concerns were somewhat raised due to fresh China lockdowns and weakness in North Asian and Euro-area PMIs. US chipmakers in focus amid fresh licensing requirements on exports to China. Nonfarm payrolls due today, ahead of US CPI data next week, and these remain key for further upward repricing of Fed expectations by the money markets.
What is happening in markets?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I)
U.S. equities pared losses and snapped their four-day losing streak, S&P 500 up 0.3%, Nasdaq 100 flat as investors adjusted their positions ahead of the job report on Friday. Nvidia (NVDA:xnas) tumbled as much as 12% during the day and finished 7.7% lower after the U.S. government imposed licensing requirements on some of the chipmakers’ export to China. Data come out on Thursday showed a still resilient U.S. economy with the ISM manufacturing PMI unchanged at 52.8. Fresh Covid lockdown in China, in particular full lockdown of Chengdu and extended restriction in Shenzhen, caused some demand concerns. Lululemon (LULU:xnas) surged 10% in extended hours trading after reporting results better than market expectations.
US chip stocks sink on the US curbing exports to China, putting chip makers on notice
Nvidia and AMD sales to China are in trouble after the US government warned them to stop exporting some AI chips to China. However, Nvidia (NVDA) managed to get a partial exception to export to US customers in China. Regardless Nvidia said in a statement, the export cut back will cost the group $400 million in revenue this quarter, as most of its revenue comes from the Asian country. This leaves Nvidia in a precarious position if the export curbs continue. Nvidia shares fell 8%, taking its shares to the lowest level since May 2021. It also marked the fourth day Nvidia traded under its 50-day moving average. As for Advanced Micro Devices (AMD) its shares didn’t fall as hard, but it lost 3%, closing under its 50-day moving average for the third day in a row. AMD didn’t fall as hard as Nvidia, as AMD did not quantify the potential material damage to the business, and said the impact is not expected to be significant.
U.S. treasuries (TLT:xnas, IEF:xnas, SHY:xnas)
After better-than-expected ISM prints, the long end of the treasury curve was sold. Yields of the 10-year and 30-year segments surged 6 to 7 basis points with the benchmark 10-year closing at 3.25%. The 2-year yield surged to 3.55% during the day, a 15-year high before pulling back to settle at 3.51%. Atlanta Fed president Bostic said “inflation is too high and we have got to bring it down to our target” and Dallas Fed president Logan echoed reiterating that the Fed’s number one priority was “to restore price stability”.
Hong Kong’s Hang Seng (HSIU2) and China’s CSI300 (03188:xhkg)
Hang Seng Index dropped by 1.8%, being dragged down by autos and China internet stocks on fear of off-loading by major shareholders, BYD (01211:xhkg) plunged another 4%, falling for the third day in a row since the news about Berkshire Hathaway’s stake reduction. A story in the Financial Times about an RMB100 billion target of Tencent to sell down its stakes in Meituan (03690:xhkg) and Kuaishou (01024:xhkg) plus some other names in its investment portfolio, sent the share prices of Meituan and Kuaishou 5.9% and 2.5% lower respectively. Tencent denied the existence of such a target.
Container liner stocks tumbled as spot container freight rates continued their slide, down another 5% in the week ended Sept 1, and downgrades on the stock from analysts, Orient Overseas (00316:xhkg) -7.5% COSCO Shipping (01919:xhkg) -5.8%.
Adding to the negative sentiment was a bunch of bad news. Taiwan shot down a civilian drone, believed to have come from mainland China, near its frontline island, Kinmen. Further, the announcement of lockdown over Chengdu, a city of 17 million residents and the largest city being locked down since Shanghai, stirred up concerns about the economic costs of China’s strict pandemic control policies. Shenzhen also extended the city’s pandemic control restrictions to three additional regions. The United Nations issued a report on the human rights conditions in China’s Xingjian region alleging abuses that might add tension to China’s relationship with the West. China’s foreign ministry condemned the U.S. move to restrict Nvidia and AMD to sell high-end processors to China. Caixin manufacturing PMI fell more than expected to 49.5, into contractionary territory. On the other hand, Premier Li Keqiang urged to expedite the implementation of stimulus initiatives that had already been announced. CSI300 fell 0.9%.
USDJPY breaks 140, stronger verbal intervention likely
Dollar momentum sees no sign of breaking, with US yields taking a run higher again overnight with the markets now digesting the inflation and interest rates higher-for-longer scenario. The initial surge in yuan on reports of Russia purchasing as much as USD 70bln in "friendly" currencies was also reversed in the overnight session, further supporting dollar strength. The biggest carnage of the higher yields and higher dollar came in the Japanese yen, understandably given the yield differentials at play. USDJPY took out the 140 barrier to fresh 24-year highs of 140.26, despite some modest verbal intervention yesterday. Japanese Chief Cabinet Secretary Hirokazu Matsuno had said the government is watching fluctuations in foreign exchange with a high sense of urgency and reiterated that rapid moves are undesirable. The break of the key barrier suggest stronger intervention may be likely today, and continues to test the limits of Bank of Japan’s easy monetary stance.
EURUSD back below parity
While the ECB chatter and potential rationing in gas demand in Europe had been supporting the EUR over the course of this week, a drop below parity for EURUSD returned yesterday. EURUSD slid to lows of 0.9911, with Nordstream 1 going into maintenance. Current grid data suggests Nord Stream 1 flows are expected to resume early Saturday, in line with the maintenance schedule, with first shipment orders from 02:00 CET. Cable, meanwhile, faces more pressures to touch March 2022 lows of 1.1500.
Crude oil prices (CLU2 & LCOV2)
Crude oil prices extended their sell off amid demand concerns getting a leg up with China locking down city of Chengdu. There are also increasing restrictions in the southern technology hub of Shenzhen, which could compound the pain for China. Weak PMI prints from China to South Korea to Europe also added to weakening demand outlook. Meanwhile, chatter on production cuts by OPEC on Monday still underpin, and flows from Libya and Saudi are also seen rising. WTI futures slid below $88/barrel while Brent was close to $93. There were also reports that Iran has submitted a constructive response to finalize revival of the nuclear deal.
Rising dollar and yields have weighed on the precious metal again this week and Gold slid below $1700/oz. Key test ahead at July low of $1680 and a test may be likely with US jobs data scheduled for release in the day ahead and CPI data due next week. China demand weakness concerns are also weighing on Gold. Other metals such as copper and silver also continue to suffer.
What to consider?
US ISM manufacturing, jobless claims
Another strong report from the US economy as ISM manufacturing topped expectations, coming in at 52.8 (exp. 52.0, prev. 52.8), and new orders and employment both rising back above 50, and into expansionary territory, to 51.3 (prev. 48.0) and 54.2 (exp. 49.0, prev. 49.9), respectively. In further relief, inflationary gauges softened more than expected to come at 52.5 from 60.0 in July, reaching the lowest level since June 2020. Jobless claims data also supported the case for further rate hikes by the Fed, printing its third straight decline to 232k coming in below expectations at 248k and last week’s 373k.
From Powell to jobs
After a hawkish message by Fed Chair Powell at the Jackson Hole conference last Friday, focus shifts to the August jobs report in the US today to steer between a 50 vs. 75 basis points rate hike at the September meeting. Last month’s robust employment gains of 528k outperformed market expectations boosted the dollar, although the gains were reversed a few days later with a soft CPI report. Both of these reports have to send out a consistent message this time to seal the deal on a 75bps rate hike at the September meeting. Consensus expectations are for gains of 298k on nonfarm payrolls for August, with a steady unemployment rate of 3.5% and slight weakness in average earnings to 0.4% MoM from 0.5% earlier. Meeting or slightly exceeding these forecasts would put the ball in the court of the CPI release, but another strong outperformance could bump up the tightening expectations. Still, our sense is that that the deliberation should now move to how long the Fed will stay at the peak rate, as well as Quantitative Tightening.
Upside surprise in Lululemon earnings
The athletic clothing retailer reported Q2 earnings beating analyst estimates. The company’s revenue rose 29% YoY to USD1.9 billion and same-store sales increased 23% YoY. EPS, which came in at USD2.26, was firmly above the USD1.59 forecasted by analysts. The management guided Q3 revenue between USD1.78 and USD1.805 billion. While we continue to warn about a slowdown in consumer discretionary spending amid rising inflation and interest rates, Lululemon earnings still continue to suggest that the US consumer is holding up well for now and pockets of demand will stay.
Caixin China manufacturing PMI fell into contractionary territory in August
Caixin manufacturing PMI fell more than expected to 49.5, into contractionary territory. The output sub-index decreased to 50.2 from 52.0 and the new orders sub-index fell to 48.9 from 50.30. Caixin attributed the weakness to the resurgence of Covid cases and power rationing amid heatwaves and droughts and suggested that the downward pressure on the economy had increased.
Asia PMIs show divergence, South Korea inflation softens
Manufacturing PMIs in Asia have seen a clear divergence with general strength across India and Southeast Asia as these economies continue to gain strength from improving domestic demand as reopening benefits continue to flow. On the other hand, South Korea and Taiwan PMIs were seen dipping further into the contractionary territory to come in at 47.6 and 42.7 respectively. The data raised further concerns on the uncertain macro environment and slowing global trade. Meanwhile, South Korea’s August CPI eased to 5.7% YoY and was down 0.1% MoM after six months of gains.
Australia’s Pilbara shares are on watch after rallying 80% from June
The ASX’s biggest lithium stock Pilbara Minerals (PLS) has seen a lot of activity in the Australian region after its shares moved up 80% from the June low. However now its shares are suggested to pull back, with the technical indicators (The MACD and RSI) suggesting it looks toppy. This might explain why at Saxo we’ve seen Australian clients of late, take profits, short or use options to protect against a possible pullback. The next level of technical support is 20% lower from where it is today, implying if Pilbara pulls back, it could potentially retreat that much. That said, the long-term outlook remains strong. Pilbara’s forward earnings are likely to grow 80% in 2023 according to Bloomberg consensus estimates, with free cash flow expected to hit a brand-new record high next year. It also has a strong book of clients including Great Wall, LG and Genfeng.
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