With US quantitative tightening looming, Asian equity markets are vulnerable to shocks With US quantitative tightening looming, Asian equity markets are vulnerable to shocks With US quantitative tightening looming, Asian equity markets are vulnerable to shocks

With US quantitative tightening looming, Asian equity markets are vulnerable to shocks

Equity Options 8 minutes to read
APAC Strategy Team

Summary:  U.S. equities retreated on the aggressive stance from the Fed on balance sheet reduction and are set to be rerated in adjustment to dissipation of liquidity. Chinese equities are consolidating, wondering what is next in the midst of deceleration in the economy and supportive government policies. Asian equity markets are at risk to shocks that are looming.

Co-written by Market Strategists Jessica Amir in Australia, Redmond Wong in Hong Kong, Charu Chanana in Singapore.

What’s happening in markets that you need to know?

US equities are on edge after the Fed paves out tighter financial conditions are ahead, seeing US stocks fall the second day. The Fed paved out its plan to prune its balance sheet by $1.1 trillion a year, $95 billion a month, likely from May, while also rising interest rates by possibly 0.5%, to slow the hottest inflation in four decades. This saw investors adjust portfolios;  the Nasdaq fell 2.2%, the S&P500 down 1% to 4,481. The level to watch for the S&P500 is 4400 (March 3 high), this is the former resistance (upper level) is now a key support . So if S&P500 falls through that, a down trend is on. So consider putting stops on to minimise losses. Also consider the S&P500 is below its 200 day moving average, indicating indecision. When the war in Ukraine broke out, the S&P500 was about 8% below its 200 day moving average. But the market since recovered. Also consider there may be positivity ahead, and this downtrend could be short lived. Since 1942, in the non-recession years, when this scenario/recovery in the 200 day played out, , 90% of the time, the stock market was higher over the next 6 month.

Toyota on a backfoot due to supply issues and Honda-GM partnership. Toyota has cut its 2022 outlook due to the supply chain issues, revising down its prediction for new vehicle sales in the U.S. for 2022 by about 1 million vehicles mainly due to the lack of availability even as demand remains robust. Some downside also seen due to the announcement from, Honda and General Motors to produce a compact electric SUV together. Other affordable and small EVs are also being planned.

Samsung’s preliminary earnings have topped estimates. Samsung has reported a 50% jump in quarterly operating earnings to post its highest first-quarter profit since 2018. The guidance beat market expectations, probably due to memory chip shipments and prices being better than expected. Samsung is due to release detailed earnings on April 28, when investors will be interested to hear any comments on its M&A plans, how it plans to operate its memory chip business to boost profitability, and chip demand outlook.

HK & China equity markets are waiting for the roll-out of supportive polices from the Chinese authorities. Hong Kong and mainland China equity markets continued its consolidation after the impressive rally two weeks ago.  Opening lower initially following the sell-off in overseas markets, Hang Seng Index (HSI.I) fell 1.3% and CSI300 (000300.I) was down 0.9%.  After the special meeting of the Financial Stability and Development Committee of the State Council that triggered the dramatic reversal on March 16, investors have been waiting for the delivery of the policy initiatives that Vice Premier Liu He pledged.  So far, we have been seeing loosening of restrictive measures against the property sector and a rare concession to address the ADR issue.  For the market to move higher from here, investors will demand more accommodative policies from the People’s Bank of China (PBOC) and additional initiatives in infrastructure spendings. 

Oil prices stage a recovery in Asia. WTI oil prices slid below $100/bbl overnight as IEA said members will deploy a coordinated release of  60 million barrels of oil from stockpiles on top of the 1 million barrel per day release for 6 months from US strategic reserve (a total of 180 million barrels). Between the IEA and the United States, 240 million barrels of crude oil is set to be released from the world’s strategic energy stores. Latest sanctions from the US, UK and EU have still left the energy sector out. We still struggle to see much additional downside to crude oil while the war in Ukraine continues. Overall, however, the combination of sharply higher global interest rates to combat inflation and an already elevated cost of everything is likely to prevent prices from spiking much above the levels already reached last month when peak panic hit the market. Volatility is likely to remain high as inflationary concerns remain top of the mind.

USDJPY remains capped as yields remain restrained. A decline in Treasury yields in Asia is helping keep a lid on USDJPY, which has been capped below 124 despite the hawkish tilt in FOMC minutes. JGB 10-year yield at 0.235% is holding below the BOJ’s threshold of 0.25%.

What you need to consider

The best investing cure for monetary tightening blues is getting exposure to commodities companies. Investors need to consider stocks and sectors that will continue to grow, regardless of higher intertest rates and tighter financial conditions. So, look at high dividend paying oil and coal companies about to report record profits.

Australia’s Balance of Trade unexpectedly falls, but Australia’s surplus income (exports minus imports) stays high, supporting the AUD. Australia’s balance of trade fell from $11.8 billion in Jan, to $7.5billion in Feb, mirroring the pull back in the iron ore price. However, keep in mind the iron ore price since recovered, so we expect a recovery and higher surplus in March, as the iron ore price is now trading at over $160, its highest level since August. What does this mean? It means income from Australia’s biggest export (iron ore) will rise, and this supports the AUD rising.

Three simultaneous shocks are hitting Asia: 1) Tightening of financial conditions, 2) China zero Covid (demand shock), and 3) Supply shocks. With Asian growth still in a nascent stage of recovery, it will be tough for most Asian central banks to follow the Fed in hiking rates. This means policy divergence and likely weaker Asian asset prices. Singapore likely to outperform the region with Monetary Authority of Singapore (MAS) set to tighten in the week ahead. The MAS first steepened the slope of the SGD NEER policy band to 1% last October, and later to 2% at an unscheduled meeting on 25 January. This is likely to be increased further to 3%, and a re-centring higher is also likely within the year.

All-eyes are on the much anticipated easing to come in mid-April from the PBOC.  Yesterday, Chinese Premier Li Keqiang remarked in a State Council meeting that appropriate and timely monetary policy would be implemented to support the real economy.  This is in line with the recent narrative of the Chinese authorities that it will use available tools, including monetary policy to stabilize the economy.

Trading ideas to consider

Shorting US equites, but be on hedge. If you invested in the Nasdaq or in US equities, consider shorting the Nasdaq and S&P500 given what we highlighted above, however, keep in edge, as we could see a tilt to the upside if the market hits the key support level. 

Singapore is seeing an increased focus on reviving tourism. That will help bring some more focus to the reopening stocks that we have been talking about. About a half a million support package has been announced to support Singapore’s tourism recovery. Key aviation players like Singapore Airlines (SIA) and SATS likely to remain in focus, as well as Hospitality REITs.

It may be time to sell Chinese stocks when the PBOC eases.  A 10bps cut in policy rates and 50bps reduction in the reserve requirement ratio are already in the price of the equity market.  With 2, 3 and 5-year Chinese Government bond yields being below those of the U.S. and China’s concern about the implication of a weaker renminbi on inflation, the room for more aggressive beyond monetary easing what has already been price in, in our view, is limited.  It may be a typical buy-the-rumour sell-the-fact trade for equities when the PBOC cuts rates in mid-April

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