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APAC Daily Digest: What is happening in markets, what to consider – September 1, 2022

Equities 6 minutes to read
APAC Research

Summary:  The S&P500 fell 4.2% in August, erasing half of July’s rally, with investors selling down companies that face balance sheet tightening from runaway inflation and higher for longer interest rates. Meanwhile, in August, investors bought into sectors contributing to inflation. At Saxo, we think these trends will probably continue. We cover everything you need to know about what is happening in markets today and what to consider next.

What is happening in markets?

Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) 

U.S. equities declined for the fourth day in a row, with S&P 500 down 0.78%, the Nasdaq 100 falling 0.57%.The month of August ended with S&P 500 losing 4.24% and Nasdaq 100 down 5.22%.  The markets were in a risk-off mood with the focus being fixed on rising bond yields and the hawkish stance of the central bank in the U.S. and across the pond in Europe, and with an eye on the job report coming out of the U.S. tomorrow.  Chewy (CHWY:xnys) dropped 7.9%, as the pet retailer lowered guidance for 2022 revenues, citing customer pulling back on discretionary items. The consumer trade-down echoed the general trend found in other U.S. retailers.   Bed Bath & Beyond (BBBY:xnas) tumbled 21.3% after announcing a plan to close about 150 stores.  Nvidia (NVDA:xnas) plunged 5%. Nvidia (NVDA:xnas) plunged 5% in extended hours after the company warned that the new U.S. rules restricting the export of artificial intelligence may substantially affect the company’s sales to China. 

U.S. treasuries (TLT:xnas, IEF:xnas, SHY:xnas)

Yields took a blip lower initially after the weaker-than-expected ADP Employment report but surged higher to finish the day at the high.  The benchmark 10-year note yield closed at 3.19%.  Cleveland Fed President Mester joined the recent chorus of hawkish fedspeaks vowed to get inflation down “even if the economy were to go into recession” and “it will be necessary” to raise the Fed fund rate to “above 4% by early next year and hold it there”.  The U.S. treasury yield curve bear steepened, with the 2-year yield +5bps as the belly to the long-end yields jumped 8bps to 9bps.

Hong Kong’s Hang Seng (HSIU2) and China’s CSI300 (03188:xhkg)

Hang Seng Index gapped down by nearly 2% at the open but managed to crawl back all the losses to finish the day flat.  China consumption stocks led the market higher in anticipation of incremental policy stimuli and recovery of consumer demand during the mid-autumn festival, Xiabuxiabu Catering (00520:xhkg) +9.4%, Haidilao (06862:xhkg) +6.5%, China Tourism Group Duty Free (01880:xhkg) +7.1%, Li Ning (02331:xhkg) +3.9%, Anta Sports (02020:xhkg) +1.5%.  In the auto space, BYD (01211:xhkg) tumbled nearly 8%, following news of Berkshire Hathaway reducing its stake in the company. On the other hand, Nio (09866:xhkg) and XPeng (09868:xhkg) rose more than 2%.  Hang Seng Tech Index (HSTECH.I) gained 1%, with performance divergence among stocks.  Tencent (00700:xhkg) gained 1.1% while Baidu (09888:xhkg) dropped by 3.3% on operating margin contraction. China banking shares traded in Hong Kong were mixed after ICBC (01398:xhkg), China Construction Bank (00939:xhkg), and Bank of China (03988:xhkg) reported growth in revenues and profits but higher non-performing loan ratios. Coal mining and oil stocks fell on the Hong Kong bourse as well as the mainland bourses on weaker energy prices.  CSI 300 bounced from the early sell-off and closed little changed.  

Australia's ASX200 (ASX:XASX) closes higher for the 2nd month, but on the first day of September equities unwind the August rally and cut July’s rally 

Australia’s market has rallied for two straight months. But the rally is likely to run out of steam iin September, with Aussie equites to face selling pressure. September is historically the worst month for equities, with the ASX200 losing 0.6% each month on average since the index was formed. The reason for this? Companies pay out their yearly dividends in September. Today, many major companies go ex-dividend, transferring the dividend right to shareholders. Companies going ex-dividend include BHP, Whitehaven Coal, AGL and Credit Corp. This month, the ASX faces a host of extra issues. The RBA is tipped to hike interest rates at its September meeting next Tuesday, front loading rate hikes for the next few months. This comes at a time when home prices marked their steepest decline in four decades and building approvals for private homes, fell to their lowest level since 2012. This means banks will face selling pressure.

Crude oil prices (CLU2 & LCOV2)

EIA reported a decline in crude oil inventory of 3.3 million and gasoline inventory of 1.1 million with SPR slowing to 3 million barrels, so resulting in an overall draw of 6.4 mb/d, but the reaction in the oil market remained muted. Production was adjusted higher by 0.1 mb/d to 12.1 mb/d. No change in net trade with imports and exports both declining 0.2 mb/d. WTI futures still trading below $90/barrel in Asian morning as focus shifts back to demand concerns, and Brent futures were below $96.

USDJPY heading to 140

The late move higher in US 10-year yields has come back to haunt the yen, with Bank of Japan still remaining committed to keeping its 10-year yields capped at 0.25%. USDJPY rose to fresh 24-year highs of 139.44 in early Asian trading hours, and heading straight to 140 unless we see some verbal intervention coming through from the Japanese officials today. Risk abound with US jobs data due on Friday, and dollar momentum remaining strong. EURUSD still above parity with ECB’s rate hike in focus for next week, beyond the vagaries of gas supplies. GBPUSD however made fresh 2022 lows at 1.1586 as economic weakness remains in focus. 

What to consider? 

Fed’s Mester calls for over 4% Fed funds rate

Cleveland Fed President Loretta Mester backed rates to go above 4% early next year and holding it there, while also clearly calling for no rate cuts in 2023. On inflation, Mester noted it is too soon to say inflation has peaked and wage pressures show little sign of abating, while the fight against inflation will be a long one. This message should get stronger if jobs, and more importantly CPI, data continues to be strong. At the same time, we now have Quantitative Tightening going to its full pace and Mester said that balance sheet reduction could take three years or so.

New US ADP jobs data disappointed, but wage data remain upbeat

While it is hard to trust estimates on the US ADP report given that it is using a new methodology and market impact/trust is only likely to build over time, it was notable that the headline came in at less than the half of the median estimate. Employment change for August was 132k vs expectations of 300k – clearly putting Friday’s NFP release in focus. ADP said that the data suggests a shift toward a more conservative pace of hiring. ADP noted that the median change in annual pay (ADP matched person sample) was +7.6% YoY for Job-Stayers, and +16.1% YoY for Job-Changers, still suggesting a pretty tight labor market. 

Eurozone August CPI continues to climb

According to the preliminary estimate, it was out at 9.1% year-over-year versus prior 8.9% and expected 9.0%. Core CPI, which is highly watched by the European Central Bank (ECB), is still uncomfortably high at 4.3% year-over-year. This is likely that double-digit inflation in the eurozone will become a reality by year-end. The Bundesbank has already warned that German inflation could peak around 10% year-over-year in the coming months. Expect a lively debate among the ECB Governing Council about the pace of tightening on 8 September. Several governors are leaning towards an aggressive hike (meaning 75 basis points) while a minority of governors and the ECB chief economist Philip Lane would rather prefer a step-by-step increase in order to take into consideration the risk of recession.

US stocks wipe out half of the July rally, what is behind this and what’s next?

The S&P500 fell 4.2% in August, erasing half of July’s rally, with investors selling down companies that face balance sheet tightening from runaway inflation and higher for longer interest rates. Meanwhile, in August, investors bought into sectors contributing to inflation (The Oil & Gas sector rose 9%, Agricultural 6%, Fertilizers 5%, and Food Retailers 3%). Meanwhile, investors topped up exposure to stocks/sectors that benefit from higher rates, which is why Insurance rose 3%. Inversely, the most selling was in sectors that will likely suffer from slower growth, higher rates, and inflation (Home Furniture fell 14% in August, Semiconductors lost 10%, Office REITs slid 10%). Notably, the S&P500 closed under its 200-day moving average for the 100th day. The last time this occurred was in the GFC. And since then, this is also the only time the S&P500 and Nasdaq have not made a typical V-shape recovery. This is something Saxo’s strategists Peter Garnry and Jessica Amir warned of, and recently highlighted in the Quarterly Outlook. As uncertainty remains, and comments from Fed and ECB speakers are increasingly bearish; we think growth sectors (tech, consumer spending, and REITs) will face further pressure given their futures earnings will dimmish. Inversely we expect commodities to continue to outperform.  

China’s official manufacturing PMI edged up but remained in contractionary territory 

China’s official NBS manufacturing PMI edged up to 49.4 in August from 49.0 in July, above expectations but remaining in contractionary territory. The improvement was largely driven by the rise of the new orders sub-index to 49.8 in August from 48.5 in July and helped by strong activities in the food and beverage industries ahead of the mid-autumn festival.  Covid-related disruptions and energy rationing were negative factors pressuring manufacturing activities.  Heatwaves and drought-induced power curbs have caused Sichuan and Chongqing to shut-down manufacturing activities for six days and eight days in August respectively. The stepping up of pandemic controls in quite a number of cities affected the survey negatively. The non-manufacturing PMI decelerated to 52.6 in August from 53.8 in July.  Both the services sector and the construction sector weakened.  

Caixin China Manufacturing PMI is expected to fall to 50.0

The median forecasts of economists surveyed by Bloomberg expect the Caixin manufacturing PMI to slide to 50.0 in August from 50.4 in July, right at the threshold between expansion and contraction.  The official NBS Manufacturing PMI released yesterday showed that improvements were found in large and medium-sized enterprises but the activities in small businesses decelerated t a 47.6 reading in August from 47.9 in July.  Moreover, during the survey month, a Covid-19 outbreak hit Yiwu, an export-focussed manufacturing hub in Zhejiang, and might drag on the Caixin manufacturing PMI, which has a higher weight for medium and small-sized businesses in the eastern coastal region.  

Australian manufacturing data falls, pressured by higher rates, wages, and scarcity of staff 

Manufacturing only contributes 30% to GDP, however, two key sets of weaker manufacturing data will be reflected on by professional investors today. Manufacturing data released by AI Group showed activity fell into contractionary territory, following six months of expansion. The drop in Australian PMI to 49.3 in August was triggered by slower growth in factory activity from higher interest rates and wages, and a lack of workers. The other set of manufacturing data released from S&P Global showed manufacturing fell to a reading of 53.8 in August, down from 55.7 in July. Significantly, the reading was revised lower from the flash (preview reading) and was the lowest read in a year. As such, investors may see selling pressures in key manufacturing stocks. ASX manufacturers and producers to watch include; Woodside, Caltex, Woodside, Whitehaven and Viva Energy, in energy, which may also see profit-taking after gaining a post as some of this year’s best ASX performers. Other companies to watch include Amcor, the global packaging giant. CSL, the global vaccine, and blood therapy business. As well as BHP, Rio Tinto, and Fortescue, global mining producers. 

US ISM manufacturing data due today

Lower prices at the pump has seemingly helped the US economy reverse from the slowdown concerns, with Chairman Powell also getting the confidence to say that the economic momentum is strong. ISM manufacturing, which is scheduled to be reported on Thursday, may reflect the weakness seen in the S&P survey, but will still be lifted by the backlog in auto vehicle production. Consensus estimates expect ISM manufacturing to cool slightly from July’s 52.8 and come in at 51.9 in August, still remaining in expansionary territory. ISM employment will also be key to watch ahead of the NFP data due on Friday. 

Singapore’s first digital bank launch

Grab and Singtel have entered an alliance to roll out a banking app next week in Singapore called GXS, that will be Singapore's first digital bank. This is mostly targeted to younger users and small businesses, tapping on Grab's food and ride-hailing customers, in order to improve the penetration of financial services in Singapore. A savings account is also in the offering, with no minimum balance requirement, in direct competition to the traditional banks.

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