Market Insights Today: End of quarter rebalancing, BOE tentatively calms markets – September 29, 2022
APAC Strategy Team
Summary: Global markets rallied after the Bank of England decided to stage a ‘temporary’ market intervention, sending bond yields and the USD lower. This seems to have tentatively calmed markets, while end of month and quarter rebalancing could lead to significant flows with notable bond moves and USD strength in this quarter. Oil and gold spiked, and APAC equities futures are returning to green. News of Apple’s production cuts is casting further pessimism on the upcoming earnings season.
What is happening in markets?
The Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) rallied after BOE soothed nerves
The Nasdaq Composite rallied 2.1%, and the S&P500 gained 1.97%, snapping its six-day rout. Treasuries jumped after the BOE gave some respite and that pushed down 10-year yields 21bps to 3.73% after briefly breaching 4.00%. The dollar also weakened across the board supporting gains. Nasdaq was bolstered by gains from Amazon with its shares gaining 3.2% after it pushed further into wellness, security and the auto industry. On the flip side, Apple’s shares sank about 1.3% on news it is not increasing iPhone production, which casts doubt over the outlook for consumer spending.
The U.S. treasury yields (TLT:xnas, IEF:xnas, SHY:xnas) plunged on BOE bond buying
Once again, the action started from across the pond when the Bank of England surprised the market by announcing a “temporary” plan to purchase long-dated UK Gilts starting immediately yesterday through Oct 14. The announcement pushed 10-year UK Gilt yields 50bps lower to 4.01% and 30-year UK Gilt yields 106bps lower to 3.93% from the prior day’s 4.99%. U.S. bond traders took note of the fact that the rout in the U.K. bond market and the Pound Sterling caused the Bank of England to blink and reverse course to roll out a QE-like yield curve control policy and sent in bids to U.S. treasuries. 5-year to 10-year U.S. treasury yields plunged most, down about 20bps from the day before, to 3.97% and 3.75% respectively. 2-year yields fell 14bps to 4.14%. Market implied terminal Fed Fund rate fell to 4.54% from 4.62 a day before.
Hong Kong’s Hang Seng (HSIU2) and China’s CSI300 (03188:xhkg)
On Wednesday, stocks traded in the Hong Kong bourse notably underperformed those in Shanghai and Shenzhen. Hang Seng Index dropped 3.4% and Hang Seng TECH Index plunged 3.8%. Risk-off sentiment hung over the market as the Renminbi weakened below 7.20 versus the dollar and Apple’s decision to withdraw its plans to increase the production of new iPhones added to the worries of a slowing global economy. Apple suppliers, Sunny Optical (02382:xhkg) and AAC Technologies (02018:xhkg) dropped 2.8% and 1.5% respectively. China Internet names fell across the board, with JD.COM and Bilibili (09629:xhkg) leading the charge lower each plunging 5.6%. Alibaba (09988:xhkg) lost over 4%. U.K. headquartered HSBC (00005:xhkg) and Standard Chartered (02888:xhkg) continued their slide, each falling nearly 6% for the day and 11% to 12% since last Friday’s post-mini-budget turmoil in the Pound Sterling and U.K. Gilts. Both Hong Kong and China developers plunged across the board, mostly by 2% to 6%, with CIFI (00884:xhkg) falling over 32% and being the largest casualty in the property space. CIFI, the 13th largest property developer in mainland China was reported to have missed a payment on a project-related debt. Another leading Chinese developer, Country Garden (02007:xhkg) plunged by nearly 13%, being the worst performer in the Hang Seng Index. Automakers were among the laggards. Great Wall Motor (02333:xhkg) and XPeng (09868:xhkg) tumbled more than 9%, NIO (09866:xhkg) and Li Auto (02015:xhhg) lost over 7%, CSI300 fell by 1.6%, with materials, industrial, and information technology dragging down the index most. Non-ferrous metal, electric equipment, auto, and defense stocks were among the biggest losers. Banks were outperformers in the A-share market with small gains.
Australia’s ASX200 (ASXSP200.1) futures suggest the market will rally 1.5%; monthly CPI and borrowing/credit data ahead.
Given the rally on Wall Street, gains in tech are expected, along with a oil and gold stocks. Meanwhile, the iron ore (SCOA) jumped 1.3% to US$96, which should support iron ore companies higher. Today, on economic news watch; will be Private Sector credit (lending) growth, which will give a gauge into if borrowing has continued to slow amid runaway inflation. Bloomberg’s survey suggest credit growth year on year will slow from 9.1% growth to 9.0% growth. So it’s worth watching the big lenders in Australia, CBA, ANZ, WBC, MQG as well as the smaller banks, SUN and BOQ which are seeing the most lending growth. Secondly, also on the economic news watch, the ABS will publish its first ever monthly CPI reading, with the data out at 11.30am Sydney time. However keep in mind, only about two-thirds of the items in the CPI data basket will have up-to-date prices each month, including food, clothing, rent, petrol, and holiday travel.
Sterling resumed its decline in Asia
It was a surprise to see a big move higher in GBPUSD on the BOE intervention yesterday, when the BOE action remains temporary and one that will weigh on sterling, much the same way as we have seen the Japanese yen suffer this year due to the yield cap. GBPUSD however reversed the gains to 1.0838 to drop to lows of 1.0540 but the subsequent weakness in the USD took the pair back to 1.0900 in US session. The downside however returned in early Asian trading hours as pair dropped close to 1.0800. EURGBP dropped back from 0.9066 to 0.8950 but a slight upside returned in Asia.
Crude oil (CLU2 & LCOV2) rebounds on worsening geopolitics and drop in US inventories
Crude oil prices rallied as supply conditions worsened, as suggested by the first drop in US crude inventories in a month. EIA data showed stockpiles fell 215kbbl last week, while West Coast gasoline stockpiles fell to their lowest level in 10 years. Disruption to supplies due to Hurricane Ian are also causing some concerns, with US president Joe Biden warning oil companies not to hike prices for the second time this week. Furthermore, geopolitical situation has turned more fragile once again with the European Union announcing a new round of sanctions against Russia including a ban on European companies from shipping Russian oil to third countries above an internationally set price cap. Brent futures rose close to $90/barrel while WTI futures got in close sights of $82/barrel.
What to consider?
Bank of England’s market intervention to avoid systemic risks
The Bank of England on Wednesday announced that it would purchase long date UK gilts to stabilize the market in a “temporary operation”. The move forced UK yields sharply lower, with the 10-year UK Gilt yield moving close to 50bps lower, but US yields were also some 30bps lower. While this may be touted as a yield curve control of some sort, BOE has made it clear that it is a time limited event until October 14 with the intention of restoring orderly market conditions. Pressure is building on Chancellor Kwasi Kwarteng, who faces calls to reverse planned tax cuts.
Fed speakers maintain optimism on US economy and markets
Fed’s Bostic suggested year-end rates of 4.25-4.50% while the market pricing is still at 4.2% suggesting more room for upward pricing. Although not a voter this or next year, he said that his baseline is a 75bps increase at November meeting and 50bps in December. Meanwhile, he continued to be optimistic on the US economic momentum, as well as ruled out any contagion risks from systemic global events (possibly referring to the UK crisis). Meanwhile, Bostic noted no evidence of dysfunction in the Treasury market at this point. Another Fed speaker, Charles Evans, vouched for a further move into restrictive territory, suggesting a terminal rate of 4.5-4.75% by March as suggested by the Fed’s September dot plot.
Apple backs off iPhone production boost; casting doubt over the outlook for consumer spending
Apple has reportedly backed off plans to increase production of new its iPhones this year, with demand failing to materialize. That means 6 million extra handsets won’t be produced in the second half of the year. Although it’s not confirmed, Apple is said to instead be focusing on its original production target for its summer period, and produce 90 million handsets. Apple shares fell 1.3% on Thursday, and key chipmakers including Taiwan Semiconductor fell 2.2% and Apple’s biggest iPhone assembler, Hon Hai Precision Industry lost 2.9% amid the electronics supplier selloff, on fears demand will slow. According to our colleague Peter Garnry’s analysis, Apple FY22 Q4 (ending 30 September) earnings estimates are down 20% from the peak in March and that is before adjustments from Apple’s own warning. Apple EPS is expected at $1.26 up 1.4% y/y, but factoring in Apple’s warning it could be a decline of 5-10%. Revenue is expected at $88.5bn up 6.1% y/y compared to 1.9% y/y revenue growth in the previous quarter. It is quite likely that revenue could slip into negative growth for the quarter.
Walt Disney and Universal are closing their theme parks due to Hurricane Ian
Hurricane Ian strengthened to a Category 4 hurricane and hit the west coast of Florida. Walt Disney (DIS:xnys) closed its Orlando theme parks for at least two days and Comcast’s (CMCSA:xnas) Universal Orlando Resort and SeaWorld Entertainment closed their Florida theme parks.
U.S. Q3 earnings are set to miss significantly to the downside
As per Peter Garnry, Saxo’s Head of Equity Strategy, analysts may be way off in their estimates for the S&P 500 for Q3. It is highly probable that there will be significant misses to the downside followed by gloomy comments from company management about the outlook on margins.
China warned banks about one-way bets on the weakening of the renminbi
As the onshore and offshore renminbi weakened below 7.20 versus the dollar, the China Foreign Exchange Market Self-Regulatory Body, attended by PBoC Vice Governor Liu Guoquiang, told banks in a meeting to “safeguard the stability of the market and prevent volatile movements in the exchange rate”, in particular not to make one-way bets on the weakening of the renminbi.
BHP update: The giant takes advantage of sterling slump, redeems notes more than half a century early, announces exploration expansion
BHP shares rallied to a three-day high yesterday and are likely to see some extra bids after the iron ore price rose. BHP shares lifted after the mining giant paid off debts earlier than expected. The world’s biggest commodity company took advantage of the slump in the sterling against the USD, and used its record profits to redeem pound-denominated notes (due in 2077). This resulted in BHP effectively paying down $643 million of notes early. Last month BHP reported net debt of just $333 million. So will this mean BHP has little to no debt when they report? BHP also announced mining expansion plans; from exploring the idea of mining copper at Cerro Colorado beyond 2023, with Chilean regulation easing, to also spending $12m on exploration in Peru over 10 months (as it sees huge commodity there). BHP also affirmed it’s working toward bringing forward production of its new potash (fertilizer) business to 2026.
Australian retail trade hit another record high, ahead of next week’s 6th RBA rate hike. What’s next?
Australia retail spending hit another record in August, and rose more than consensus expected, showing Aussie consumers aren’t perturbed by the five RBA rate hikes. Aussie retail sales rose 0.6% in August, up 19.2% year-on-year. The most sales growth came from department store sales, up 2.8% in August to a brand-new record. Household goods sales rose 2.6%, perhaps boosted by winter shopping given the most overall retail growth came from the coldest regions of Australia. The retail record figures give the RBA more room to hike rates with a 0.5% hike likely on the cards at the RBA’s meeting on Tuesday (October 4). In our view, we think retailers or consumer discretionary companies; for instance Harvey Norman (HVN), Bunnings and Kmart owner Wesfarmers (WES) or JB Hi Fi (JBH) are doing it tough here, hurt by higher costs (inflation and wages), while they’re also buffering for higher rates to come. This is why those sectors will likely face downside pressure to come. Inversely, we still remain of the view that commodities offer the most cashflow growth, and likely upside in share price growth, particularly in energy. For more see our Australia resources theme, or our global Commodity basket for inspiration.
Currency pairs to watch for month-end and quarter-end
With month-end and quarter-end approaching, our head of FX Strategy outlines the currencies to watch. And whether this seasonal time could put some support under the treasury market and or a ceiling on the US dollar, or if even a tactical consolidation in the two markets will require a change of direction from the Fed. John Hardy also details the US dollar rally finally taking the USDCNH above the 7.20 area (which defined a major top on two occasions in 2019 and 2020) and set a new high-water mark for USDCNH in the history of the offshore CNH currency, getting as high as 7.26 at one point. John covers what to watch next. Read on here for more FX pair updates, see how trends are emerging, and what to watch next.
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