The elephants in the room: a hawkish Fed and a slowing Chinese economy
APAC Strategy Team
Summary: Global equity markets continued to adjust downward amid of a hawkish U.S. Federal Reserve and the rising likelihood of a much weaker Chinese economy in Q2 as a result of the punitive Covid-related lockdowns. Commodities were down as investors shifted their attention from supply disruption to potentially weaker demand.
What’s happening in markets?
Asian equities weighed by Friday’s US session and China lockdown. US indices were down over 2% on Friday as risk off gripped markets that digested Fed’s hawkish tilt. S&P500 (US500.I) was down 2.8% while the tech-heavy NASDAQ 100 (USNAS100.I) was down 2.5%, likely to test March lows. Asian equities got a beating as well, with Japan’s Nikkei (NI225.I) down 1.9% and Singapore’s STI Index (ES3) in loss of 0.4%. Tech stocks, as well as energy and steel miners were on the backfoot.
Chinese equities made new lows. China’s CSI300 Index (000300.I) and Shanghai Stock exchange Composite Index fell below their March 16 intraday lows and closed the morning session down over 4%. Northbound investment registered a net outflow over RMB4 billion. China Merchants Bank (600036/03968) fell 6.4% in Shanghai and 9.5% in Hong Kong trading following news late last Friday that the bank’s former CEO being investigated by the Chinese authority. The overall markets in the mainland and Hong Know were pressured by rising worries about the Chinese economy heading for a sharp deceleration in growth in Q2. Mining and energy stocks were sold off. Hang Seng Index (HSI.I) and Hang Seng TECH Index were both down more than 3%.
Crude oil (OILUKJUN22 & OILUSMAY22) was also down over 2% in Asia amid fresh demand concerns from China with record deaths reported in Shanghai and hints of a spread in Beijing. WTI dropped below $100 and Brent was below $104. Asian energy stocks like Inpex (1605) and Eneos (5020) in Japan or Chinese oil stocks will be on watch. Australia has a public holiday today.
Iron ore (SCOA) is having a meltdown. Iron ore futures were down close to 12% in Singapore to 2-month lows. Rich valuations are coming to haunt, after steel output dropped over 10% in Q1. But key miners Rio Tinto (RIO), BHP (BHP) and Vale (VALE) have confirmed their guidance for full-year production. Fortescue Metals (FMG) will be reporting output data on Thursday. Miners and steelmakers will be impacted by this big move in iron ore in the Asian session, so Japan's Nippon Steel (5401) or Kobe Steel (5406) was key to watch.
No great news on the state of the UK consumer. Retail sales are down again in March (minus 1.4% month-over-month). They are still 2.2% above their pre-pandemic level. But the trend is really not looking good. In addition, UK GfK consumer confidence plunged in April more than expected, at minus 38 versus expected minus 33 and previous minus 31. Confiance is only slightly above all-time lows. This is hard to see how the UK economy could avoid at least a modest downturn in the coming months. We believe a 50-basis point interest hike by the Bank of England is now off the table in May. It would have negative ripple effects on the overall economy.
Rather good eurozone PMI indicators in April. The flash PMI data pointed to a pickup in the eurozone growth in April (55.8 versus prior 54.9). This was mostly driven by the service sector. The manufacturing sector fell to a 22-month low mostly due to record inflationary pressures. In Germany, supply issues seriously intensified, pushing the manufacturing sector into a downturn. Finally, the French composite PMI skyrocketed to 57.5 versus 56.3 in March. Both the services and the manufacturing sector experienced strong growth, at 58.8 and 55.4, respectively.
What to consider?
Macron’s victory prompted only short-term gains in EUR. The result of the French elections have taken a key risk off the table. President Emmanuel Macron is projected to win a second term in office after facing his far-right rival Marine Le Pen in a runoff election on Sunday. EURUSD popped up to 1.085 at the open in Asia but the rally was fully reversed. ECB President Christine Lagarde gave an interview over the weekend, saying that inflation is a “different beast” between the US and Europe. With Eurozone inflation mainly energy-driven and the labor market not as hot as the US, it is hard to imagine gains in EUR sustaining against the USD.
Heavy U.S. Q1 earnings calendar this week. With Amazon, Microsoft, Alphabet, Meta, and Apple reporting this week, analysts may have a better about whether margins for mega cap companies in the technology and consumer space can maintain their margins in the new inflation environment. You can refer to Peter Garnry’s note for a more detailed preview.
China’s container throughput declined. According to data from the China Port Association, foreign trade related container throughput fell 4.9% over the period between April 11 and 20, from the same period last year. It was another sign of weakening exports in April and shed a shadow over China’s GDP growth in Q2.
Secretary Yellen’s favorable comments on China did not cause much excitement. U.S. Treasury Secretary, Janet Yellen told Bloomberg that the Biden administration was re-examining its trade strategy with respect to China and considering the benefit of scaling back the Trump-era tariffs on Chinese goods to the reduction in U.S. inflation. She also remarked that she did not think China was undermining the sanctions on Russia.
AUD making new lows in Asia. Increasing risk off and a decline in iron ore prices is pushing AUDUSD lower to sub-0.7200 levels in Asia. NZDUSD also touched 0.6600 levels but AUDNZD slid below 1.0880. Australia’s Q1 CPI due on Wednesday.
Indonesia’s palm oil ban to aid inflation fears. Indonesia has announced plans to ban all exports of palm oil, which is a key ingredient of cooking oil, packaged food products, cosmetic, and other household items. Indonesia exports almost half of the global palm oil supply, suggesting further risks to Asia and global inflation outlook.
Trading ideas to consider
Brace for a busy earnings week. Q1 earnings season shift gear with 558 major earnings releases that will impact sentiment in equity market. It is the big test of companies’ ability to pass on costs to their customers. Focus is on the biggest names such as Microsoft, Alphabet, UPS, Meta, Qualcomm, Boeing, PayPal, Apple, Amazon, Mastercard, Intel, Caterpillar, Exxon Mobil, and Chevron. Markets are in a cautious mode right now, any misses in the key megacaps earnings may mean a further run down to test key levels. Analysts will examine the results closely to find out if the mega cap companies in the technology and consumer space can maintain their profit margins in the new inflation environment. Interested readers please refer to Peter Garnry’s note for a more detailed preview.
Shorting CNHJPY. The renminbi started its abrupt move to depreciate since April 19 when traders, in particular those in Europe, returned from a holiday, troubled by the underwhelming stimulus actions from the Chinese authorities, persistent lockdowns and deteriorating growth outlook for the Chinese economy. The move was probably also driven by the misalignment of valuation of renminbi and other Asian currencies, in particular the Japanese Yen, which accounts for 10.8% of the renminbi’s reference basket. Over the past several session, renminbi’s depreciated more against the Yen which was benefitted from lower commodities prices which in turn was a result of weaker China growth. We suspect this realignment have more to go. Interested readers can refer to our note on the renminbi last Friday.
Further reopening moves from Singapore and Hong Kong. Singapore announced further relaxation in Covid restrictions, scrapping predeparture tests for vaccinated travellers and allowing 100% of the workforce back into the office. Hong Kong also started to relax restrictions, opening restaurants for dinner after over two months and allowing non-residents from next months for the first time since 2020. Reopening gains, especially in Singapore are likely to stretch beyond airlines and airport operator to casinos and restaurants, as well as event organizers and mall and office-based REITs.
Key economic releases this week:
- Wed, Apr 27: Australia Q1 inflation
- Thu, Apr 28: Japan retail sales, Bank of Japan meeting
- Fri, Apr 29: Eurozone April inflation rate flash, US March PCE index
Key earnings to watch:
- Mon, Apr 25: Activision-Blizzard (ATVI), Coca-Cola (KO)
- Tue, Apr 26: Warner Bros. Discovery (WBD), UPS (UPS), PepsiCo (PEP), General Electric (GE), Alphabet (GOOG, GOOGL), Microsoft (MSFT), General Motors (GM)
- Wed, Apr 27: T-Mobile US (TMUS), Boeing (BA), Kraft Heinz (KHC), Ford Motor (F), Meta Platforms (FB), Qualcomm (QCOM)
- 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)
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