Equities rebounded but the road ahead remains bumpy and downside risks are high

Equities rebounded but the road ahead remains bumpy and downside risks are high

Equities 8 minutes to read
APAC Research

Summary:  Elon Musk’s acquisition of Twitter and lower treasury yields triggered a turnaround in U.S. equities. This morning in Asia, China and Hong Kong markets rallied on less than feared development in lockdowns in China and supportive rhetoric from the central bank and the State Council. Through a cut in the reserve requirement ration for forex deposits, China’s central bank signals that the pace of the renminbi depreciation has gone a bit too fast.


What’s happening in markets?

Turnaround Tuesday has limited legs. While the threat of US indices breaking below March lows continues, there was some respite into the close of Monday. S&P500 (US500.I) closed in gains of 0.6% while the tech-heavy NASDAQ 100 (USNAS100.I) was lifted by 1.3% following the Twitter deal. A decline in treasury yields also helped equities. Asian equities remained under pressure from threats of a wider China lockdown but some respite was seen as the PBoC stepped up efforts/rhetoric to support the economy. Japan’s Nikkei (NI225.I) rose 0.6% in the morning while Singapore’s STI Index (ES3) was in loss of 0.4%. Australia returned from the long weekend to witness easing commodities, especially industrial metals such as iron ore, and ASX 200 was down nearly 2%, breaking the support at 7356.

China A shares and Hong Kong stocks rebounded.  With an another round of supportive rhetoric from central bank officials and pledge of the State Council to boost domestic consumption, CSI300 (000300.I) and Hang Seng Index found a bid and gained over 1%.  While residents in additional 11 districts in Beijing are required to do Covid tests, the new measures are less severed than the much feared lockdowns.  Chinese mega caps stocks traded in Hong Kong led the charge higher, with Alibaba (09988), Meituan (03690), Tencent (00700), JD.COM (09618) rising 3% to 10%.

USDCNH retraced after the PBoC cut the Reserve Requirement Ratio for FX deposits by 1%, bringing it from 9% to 8% effective May 15.  Before the announcement, USDCNH rose to as high as 6.609 and then fell to 6.57 right afterward the PBoC move.  At the time of writing, it is trading at 6.5557.  There is about USD1.05 trillion equivalent of forex deposits in China so this 1% cut will increase the loanable forex liquidity in the banking system by about USD10.5 billion. 

Twitter (TWTR) deals raises questions for the future of social media. Expectations of wide-ranging changes by Elon Musk, especially given his ideas around free speech on the internet, could go either way. Alternative platforms are probably already under development, but whether they will see any interest will depend on how unpopular are Musk’s changes to Twitter.

What to consider?

USDJPY in a bearish breakout ahead of BoJ. The Japanese yen is seeing a respite from two key factors: a fall in US yields and the CNHJPY cross exposure being trimmed. Japan finance minister Suzuki said that there is no truth to the media report on Japan/US discussion on joint FX intervention. While there maybe room for a further fall in USDJPY given the outsized gains we have seen so far, policy divergence between the Fed and Japan remains the key theme and any BOJ policy tweak this week remains on watch.

How long can the grain gains last? Cooler temperatures and more rains in north US are pointing to further delays in wheat production. Corn futures are also higher given wet conditions slowing planting and Brazilian corn output is likely to be lower as well. Corn is up 35% this year and Wheat up over 40%. The COT report shows massive net longs in the sector but despite strong fundamental support, the sector is exposed to a speculative sell out should the mentioned general commodity sector weakness continue.

IMF warns on Asia stagflation risk. IMF has said that the Asian region faces stagflationary outlook with growth being lower than previously expected and inflation being higher. The larger-than-expected slowdown in China due to prolonged or more widespread lockdowns, longer-than-expected slump in the property market, constitutes significant risk for Asia. Monetary tightening will be needed in most countries, with speed of tightening depending on domestic inflation developments and external pressures.

Trading ideas to consider

Around half of the S&P 500 market capitalization is reporting this week. Earnings reports from Coca-Cola (KO) and Activision Blizzard (ATVI) have continued to show a strong consumer and the ability to pass on the rising costs. Still, the disappointment from Activision Blizzard is hinting potentially at more disappointments on technology earnings this week, but only time will tell. Our equity strategist Peter Garnry wrote in a note yesterday that if US technology companies as a whole this week can show that it is insulated from inflation then investors could suddenly begin treating large cap technology stocks as an inflation hedge and prop up the broader equity market while the long tail of non-technology companies will continue to suffer from inflation.

The weakening trend of the renminbi remains unchanged. Through the cut in the reserve requirement ratio for forex deposits yesterday, the PBoC is sending a signal to the market that it considers the pace of depreciation of the renminbi over the past five sessions excessive.  On the other hand, by not cutting more, not evening reversing the 2% increase made in last December, the PBoC seems also intentionally not to push back this trend in development for a weaker renminbi too much. The 8% level is still much higher than the 5% level from 2007 to as recently as May 2021.  We suspect that the PBoC is aiming for an orderly depreciation of the renminbi, in particular to reverse the renminbi’s sharp appreciation versus its trading partners such as the Japanese yen, Korean Won, and Euro since September last year amid a deteriorating outlook for exports. 

Key economic releases this week:

  • Tue, Apr 26: US Durable goods orders, US New home sales
  • Wed, Apr 27: Australia Q1 inflation
  • Thu, Apr 28: Japan retail sales, Bank of Japan meeting, US GDP
  • Fri, Apr 29: Eurozone April inflation rate flash, US March PCE index, US employment cost index

Key earnings to watch:

  • Tue, Apr 26: Warner Bros. Discovery (WBD), UPS (UPS), PepsiCo (PEP), General Electric (GE), Alphabet (GOOG, GOOGL), Microsoft (MSFT), General Motors (GM), HSBC(00005), China Overseas Land & Investment (00688), Jiangxi Ganfeng Lithium (01772)
  • Wed, Apr 27: T-Mobile US (TMUS), Boeing (BA), Kraft Heinz (KHC), Ford Motor (F), Meta Platforms (FB), Qualcomm (QCOM), BAIC Motor (01958), BYD (01211), BYD Electronic (00285), China Life Insurance (02628), Guangzhou Auto (02238), HKEX(00388)
  • Thu, Apr 28: Caterpillar (CAT), Twitter (TWTR), Comcast (CMCSA), Merck (MRK), Amazon (AMZN), Apple (AAPL), Intel (INTC), PayPal (PYPL)
  • Fri, Apr 29: Exxon Mobil (XOM), Chevron (CVX), Colgate-Palmolive Company (CL), China Molybdenum (03993), China Vanke (02202), Haier Smart Home (06690)

 

For a global look at markets – tune into our Podcast

Quarterly Outlook

01 /

  • Macro Outlook: The US rate cut cycle has begun

    Quarterly Outlook

    Macro Outlook: The US rate cut cycle has begun

    Peter Garnry

    Chief Investment Strategist

    The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c...
  • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Quarterly Outlook

    Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Althea Spinozzi

    Head of Fixed Income Strategy

  • Equity Outlook: Will lower rates lift all boats in equities?

    Quarterly Outlook

    Equity Outlook: Will lower rates lift all boats in equities?

    Peter Garnry

    Chief Investment Strategist

    After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto...
  • FX Outlook: USD in limbo amid political and policy jitters

    Quarterly Outlook

    FX Outlook: USD in limbo amid political and policy jitters

    Charu Chanana

    Chief Investment Strategist

    As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ...
  • Commodity Outlook: Gold and silver continue to shine bright

    Quarterly Outlook

    Commodity Outlook: Gold and silver continue to shine bright

    Ole Hansen

    Head of Commodity Strategy

  • FX: Risk-on currencies to surge against havens

    Quarterly Outlook

    FX: Risk-on currencies to surge against havens

    Charu Chanana

    Chief Investment Strategist

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperfo...
  • Equities: Are we blowing bubbles again

    Quarterly Outlook

    Equities: Are we blowing bubbles again

    Peter Garnry

    Chief Investment Strategist

    Explore key trends and opportunities in European equities and electrification theme as market dynami...
  • Macro: Sandcastle economics

    Quarterly Outlook

    Macro: Sandcastle economics

    Peter Garnry

    Chief Investment Strategist

    Explore the "two-lane economy," European equities, energy commodities, and the impact of US fiscal p...
  • Bonds: What to do until inflation stabilises

    Quarterly Outlook

    Bonds: What to do until inflation stabilises

    Althea Spinozzi

    Head of Fixed Income Strategy

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain ...
  • Commodities: Energy and grains in focus as metals pause

    Quarterly Outlook

    Commodities: Energy and grains in focus as metals pause

    Ole Hansen

    Head of Commodity Strategy

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities i...
Disclaimer

Saxo Capital Markets (Australia) Limited prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at https://www.home.saxo/en-au/legal/.

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication.

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments.Saxo Capital Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Capital Markets or its affiliates.

Please read our disclaimers:
- Full Disclaimer (https://www.home.saxo/en-au/legal/disclaimer/saxo-disclaimer)
- Analysis Disclaimer (https://www.home.saxo/en-au/legal/analysis-disclaimer/saxo-analysis-disclaimer)
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)

Saxo Capital Markets (Australia) Limited
Suite 1, Level 14, 9 Castlereagh St
Sydney NSW 2000
Australia

Contact Saxo

Select region

Australia
Australia

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-au/about-us/awards

Saxo Capital Markets (Australia) Limited ABN 32 110 128 286 AFSL 280372 (‘Saxo’ or ‘Saxo Capital Markets’) is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms, Financial Services Guide, Product Disclosure Statement and Target Market Determination to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Saxo Capital Markets does not provide ‘personal’ financial product advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Capital Markets does not take into account an individual’s needs, objectives or financial situation. The Target Market Determination should assist you in determining whether any of the products or services we offer are likely to be consistent with your objectives, financial situation and needs.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan.

Please click here to view our full disclaimer.