What is happening in markets?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I)
U.S. stocks lost their footing on Tuesday first following escalating geopolitical tension and then later hawkish Fedspeak. US House Speaker Nancy Pelosi went ahead to visit Taiwan, with China warning her for weeks not to make the controversial visit. The issue is China warned her not to visit as China considers China must be ‘reunified’. After opening lower on the Taiwan strait tension, markets rallied as Pelosi touched down in Taiwan without interferences from China as some had feared. Stocks turned south again later in the day after San Francisco Fed president Mary Daly said the Fed is “nowhere near” done with raising rates to put inflation under control. S&P 500 was 0.67% lower and Nasdaq 100 was down 0.3%. Shares of Uber surged 18% after reporting results beating market expectations. Caterpillar (CAT) plunged 6% after reporting results and noting a slowdown in their China business. Before the bell on Wednesday CVS, Under Armour and Moderna’s result will be on tap. Also ahead is July’s jobs data slated for release Friday, which will give clues about the job market.
US bond yield surged on hawkish Fedspeak
The hawkish Fedspeak during the day overshadowed the safe-haven bids for bonds. US 10-year yield surged 16 basis points to 2.73 and 2-year yield jumped 18 basis points as the market reassess the path of the Fed rate hikes ahead.
Hong Kong’s Hang Seng (HSI.I) and China’s CSI300 (000300.I)
The confirmation that Nancy Pelosi, speaker of the U.S. House of Representative’s plan to visit Taiwan sent the Hang Seng Index down 2.4% and CSI300 nearly 2% lower. Northbound net sold A-share USD485 million while southbound flows had a net buying of about USD290 million. With the tension over the Taiwan strait and with the U.S. heightened, the Chinese semiconductor names continued to be sold. SMIC (00981:xhkg) declined 3.5% and Hua Hong Semiconductor (01347:xhkg) was down 2%.
Despite the PBOC said in its first half of the year review meeting that the central bank will ensure stable financing for the property sector, Chinese property names remained trading weak, CIFI (00688) -1.6%, China Resources Land (01109:xhkg) -2.3%, Longfor (00960:xhkg) -4.7, Country Garden (02007:xhkg) -6.5%, China Vanke (02202) -1.8%.
Oil & gas and mining stocks declined more than 2%. New energy stocks plunged, Xinyi Energy (03868:xhkg) -18%, Xinyi Solar (00968:xhkg) -4%, Flat Glass (06865:xhkg) -6%.
China mega-cap internet stocks were sold. Hang Seng TECH Index (HSTECH.I) dropped 3%. Alibaba (09988:xhkg), Meituan (03690:xhkg), and JD.COM (09618:xhkg) dropped nearly 2 to 3%. Tencent (00700:xhkg) and NetEase (0999:xhkg), both were not on the list of the 69 new online game licenses approved in August, declined 1.5% and 3.4% respectively. However, Nasdaq Golden Dragon China Index bounced 1.4% overnight after Pelosi arrived in Taiwan without any disturbances. Alibaba’s ADR ended U.S. trading 4% higher than the Hong Kong close.
USDJPY makes a recovery, NZD weighed by jobs report
USDJPY touched lows of 130.41 but a run higher in US yields overnight brought gains back to the pair and it was seen inching above the 133 handle in the early Asian hours. Hawkish Fed commentary underpinned, taking the dollar higher. The surge in US/China tensions also stirred safe-haven demand, and the USD was higher across the board. AUD lagged the pack, resuming its declining this morning in Asia to sub-0.6900 levels following a slide yesterday on RBA being less hawkish than expected. NZDUSD moved lower to 0.6220 following the downbeat jobs report. AUDNZD took a brief look above 1.1100 before reversing back towards 1.1060.
Gold (XAUUSD) rejected at 1780 resistance
The recovery in US yields overnight meant that Gold turned back lower from the $1780 resistance it had been toying with. The yellow metal was seen reversing back down to sub-1760 levels after the USD was boosted by the Fed speakers guiding for a steady path of interest rate increases to come. Gold also likely gave back the gains it had been accumulating ahead of Pelosi’s visit to Taiwan and the upsurge in geopolitical tensions due to that, but there is further room for geopolitical rivalry as China announced military drills and missile tests, suggesting we can still have more bouts of gold strength. The 1780-1800 area will remain key to watch.
What to consider?
Fed speakers up the hawkish rhetoric
Even the dovish Fed speakers are turning hawkish as the markets have been mispricing the future path of Fed rates. Chicago Fed President Charles Evans (voter in 2023) said a 50bps rate hike is a reasonable assessment for the September meeting, and 75bps is a possibility too if inflation does not improve. He expects 25bps from there on until Q2 2023 and sees sees a policy rate between 3.75-4% in 2023, which is in line with Fed’s median view of 3.8% for 2023, but was above the 3-3.5% that the market is currently pricing in. Cleveland President Loretta Mester (2022 voter) said she isn’t seeing inflation cool at all, even though she sees some slowdown in the economy but the labor market is still strong. Mary Daly (2024 voter) stated work on inflation is nowhere near almost done. Overall, Fed speakers generally suggested that the Fed will continue to hike rates as inflation continues to stay higher. JOLTS job opening for June fell for a third straight month to 10.698 million, coming in below expectations but still suggesting that the labor market remains tight despite some easing lately.
Australian stagflation to bite; RBA hikes inflation estimates, drops GPD outlook, rises interest rates by 0.5% for 3rd time.
The RBA made it clear it’s not on a pre-set path to normalizing rates, after it rose interest rates for the third time in three months, by 0.5%, taking the cash rate to 1.85% to slow. The RBA not only left the door open to more rate hikes but also increased its inflation forecast to 7.75% this year. However, surprisingly the RBA thinks inflation will fall to 4% in 2023 (then 3% across 2024). In our eyes, this unrealistic, as coal, gas and oil prices are sticky at higher levels supported by the lack of supply. Demand will also rise ahead of the US/EU winter and pressure energy prices higher. More broadly, the RBA dropped its growth and employment outlook, which proves we could see a stagflation environment. It expects GPD to slow to 3.25% in 2022, then 1.75% next and the following year. It sees unemployment creeping up from 3.5% (50-year lows) to 4% later this year; probably as businesses need to trim their balance sheets to account for wage growth and interest rate hikes.
US earnings season proves energy companies still have the strongest earnings momentum
With much of US earnings season behind us for Q2, with almost 300 of the S&P500 companies reporting results, we have again continued to see the most earnings growth come from energy companies. For the second quarter in a row energy companies have shone the most as gas, coal and oil prices continued to move higher. Average energy company earnings growth of 288% was reported by 13 energy companies in Q2. Stand out companies include Valero Energy, Hess Corp, Devon energy, Diamondback, and Chevron, all reporting earnings growth of over 200% each. Meanwhile, overall S&P500 companies earnings growth was again lackluster, just 6.9%. Also consider; if you take out energy earnings growth, overall market earnings would be negative, given inflation and higher rates are denting earnings for most areas of the market. Financial companies were again the worst performers for the second straight quarter, reporting average earnings declines of 25%, with banks feeling the pinch from a drop in lending and savings rates. We think these themes will likely continue for the rest of 2022.
OPEC+ spare capacity questions linger
With the demand destruction fears somewhat at ease, the focus is shifting back on supply constraints in commodities. OPEC and its allies meet today to decide on the group’s output levels for September. With the group having under-impressed on the production roadmap for now, any increases in targets may remain underwhelming. A decision not to raise production would also disappoint, especially after President Joe Biden visited Saudi Arabia this month hoping to strike a deal on oil production.
US ISM services on watch
After the decline in US ISM manufacturing index earlier in the week, the focus is now on the services index. ISM services index is scheduled for release later today, and it might come with a downside surprise as the S&P flash services PMI and surveys from regional Fed have been weak. Bloomberg survey for July ISM services index has a median forecast of 53.5, down from 55.3 in June. That will continue to suggest that the post-pandemic services demand is cooling, further weighing on the growth outlook for Q3. A dip into contraction territory could bring the US yields back lower and spark further gains in the Japanese yen.
All eyes are on China’s responses to Pelosi’s visit
House speaker Pelosi arrived in Taiwan yesterday evening without disturbances despite numerous protests from China. China announced a series of military operations in six areas of the seas and airspaces surrounding Taiwan from August 4 to 7 and banning all vessels and flights into those areas during the period. It remains to be see how transportation and supply chain from and to Taiwan will be affected. Despite the strong rhetoric, China’s responses so far are measured. Investors will closely monitor what House speaker Pelosi says this morning when she meets Taiwan’s president Tsai Ing-wen and prepared for another wave of market volatility.
China’s 5.5% GDP growth target is a guidance not a hard target
Bloomberg reports, citing anonymous source, the Chinese authorities told ministerial and provincial officials China’s 5.5% GDP growth target for 2022 “should serve as guidance rather than a hard target that must be hit”. The report further says that officials were told that the GDP growth target this year would not be applied to evaluate their performance and there would not be penalties for not achieving the target. In the week’s readout of the July Politburo meeting, Chinese leaders already referred to the growth for this year was at a somewhat best effort basis.
The three reasons investor should consider being defensive in August; rate hikes, job cuts, geopolitical tension.
Firstly; US Fed speakers affirm more rate hikes are coming. The RBA also affirmed it too will continues to rise rates. Secondly, we’ve seen job cuts across countries and global companies. From New Zealand’s jobless rate unexpectedly rising today, to overnight a trading company, Robinhood being the latest company to announce job cuts to its workforce (cutting 23% of its workforce (780 people). But we think these new themes will continue in 2022. So who’s next? Australia’s RBA thinks unemployment will rise from the 50-year low of 3.5% to 4%. And Thirdly; US-China tension is increasing again after the US house speaker visited Taiwan when China asked her not to. So, this has set the tone for equities in August and perhaps the rest of the year. So We’ve seen bond yields spike after dropping in July. So this means defense stocks will be bid/be bought up, as investors think US-China tension worsen. And risky assets - interest rates sensitive sectors, tech, property, consumer spending, will likely lose their footing