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Global Market Quick Take: Asia – April 21, 2023

Macro 5 minutes to read
APAC Research

Summary:  The S&P500 appears on track for its worst weekly performance since March weighed by investors digesting more Fed Reserve official commentary backing another interest-rate hike, despite softer labor and housing market data, on top of the economic fallout from banks. Tesla shares shed about 10% on operating margin concerns. Oil and copper retreat on recessionary concerns and technical selling, despite longer term fundamentals pointing to shorter supply. Rio cut its copper guidance, BHP kept its full year copper guidance unchanged. While the VIX index trades at its lowest level since January 2022.

What’s happening in markets?

The US equity benchmarks the (US500.I and USNAS100.I) end lower, being weighed by Tesla's 10% pull back  

With investors digesting more Fed Reserve official commentary backing another interest-rate hike, despite softer labor and housing market data, on top of the economic fallout from banks, the S&P500 appears on track for its worst weekly performance since March. The S&P500 slipped 0.6% on Thursday, marking its second straight day of losses, with the biggest weight coming from Tesla shares shedding 9.8%, and AT&T losing 10.4%. AT&T sold off after missing estimates in Postpaid phone net adds and cash flows.

On Friday, earnings releases from Procter & Gamble, Freeport-McMoRan and HCA Healthcare will be on watch, while investors will also get another economic pulse check, with the Purchasing Managers’ Index for the manufacturing and services sectors to be released.

Treasuries (TLT:xnasIEF:xnasSHY:xnas): yields dropped, led by the front end on weaker data

The 2-year yield dropped by 10bps to 4.14% following a larger-than-expected rise in initial jobless claims and a big decline in the Philadelphia Fed Business Outlook headline. The 10-year yield finished 6bps lower. The 2-10-year yield curve steepened around 5bps to -61bps. The USD21 billion 5-year TIPS auction went all right.

Muted responses to Fedspeak from Mester, Logan and Bowman which did not add much new information to the Fed’s rate path. The sell-off in the SOFR 3-month interest rate futures, in particular, the 13 to 15bp move (lower futures price, higher rates) in the red months, i.e. 2024 contracts, were largely in response to the weaker economic data. The SOFR Jun-Dec 2023 spread widened 7bps to -61bps, adding back some rate cut expectations for 2H 2023.

Chinese equities (HK50.I & 02846:xhkg): semiconductor, consumer and Macao gaming outperformed

Hang Seng Index edged up 0.2% while CSI300 slid 0.3% on muted trading. In Hong Kong, semiconductors, consumers, and Macao casino operator names advanced while China developers, pharmaceutical, and automaker stocks declined. Yuexiu Property (00123:xhkg) plummeted 11.6% after announcing a right issue at a discount of 28.3%. Leading Chinese developers declined by around 2-3%. In the China Internet space, Kuaishou (01024:xhkg) plunged 5.2% as an investment arm of Tencent (00700:xhkg) reduced its stake. Meituan (03690:xhkg) outperformed with a 3.5% gain. XPeng (09868:xhkg) down 8.8% led a decline in automaker stocks.

In A-shares, media, telecommunication, and home appliance stocks advanced.  

The Australian equity benchmark, the S&P/ASX 200 trades lower for the first time in five weeks

The Australian share market’s gains this week have been capped after heavy weight resources companies shares, including BHP and Rio Tinto have shed 3% and this is adding weight to the market, while the market seems to also be pricing in another potential RBA rate hike in May.

As for major mining companies shares pulling back, the market contending with iron ore companies such as Rio Tinto exporting a record amount of iron ore, and ramping up production. This is despite a steel research report from Mysteel saying China’s steel mills are struggling to remain profitable, with some curbing output. Steel producers in China have been grappling with volatile steel prices, while paying more to buy iron ore. Steel prices, as measured by hot-rolled coil are up 58% this year, but the iron ore price is up 50% from October last year. This has contributed to China’s steel mills facing a profit squeeze, at the time when China wants the nation to cut steel production for the third year in a row, to reduce emissions. All in all, the latest developments may suggest price pressures for iron ore could potentially continue. It seems the iron ore price in a downward pattern after also moving further below its 100-day moving average. The iron ore price this week, as fallen over 5% and taken its pull back from its March high to 15%, with iron ore trading at $111.80.

Crude oil: continues to fall, but the fundamentals have not changed for 2023

Crude oil has continued to fall entering a technical downside break on fears of a possible recession. Both oil benchmarks Brent and WTI are lower, with WTI, settling around $77, which is its lowest level since last March and wipes out most of the gains following on from OPEC+’s cut. A technical sell off, known as gap fill also accelerated the price drop. But, as mentioned on our Podcast on Thursday, the selloff in oil does not really reflect the 2023 fundaments. Meaning, in 2023 we see there being a lack of oil supply. Also consider the US could begin to refill its Strategic Petroleum Reserve as soon as the third quarter.

Copper continues to pull back on recessionary fears; while Rio drops copper guidance. BHP and Codelco also report 

Mining companies’ quarterly results are continuing to come in thick and fast, and highlight that global tightness in the copper market will continue at a time when copper consumption continues to rise. BHP reported Copper production rose 12% for its nine month reporting period, but BHP kept its production guidance for the year unchanged. Rio’s cut its outlook for copper production due to technical problems at two mines. And Chilean copper company, Codelco reported first-quarter output being at the lower end of annual guidance, and expects output to stay at similar levels through next year. That said, the copper price has fallen for the third day on fears of a possible recession. This is despite the fundamentals showing supply won’t be able to keep pace with demand, with Rio seeing China’s post-Covid outlook “improving”.

What to consider?

US initial claims increased to 245K as the Philly Fed index slid to -31.3

Initial jobless claims in the U.S. rose by 5K to 245K, above the consensus estimate of 240K. Continuous claims increased by 61K to 1,865K, higher than the 1,825K expected. The Philadelphia Fed Business Outlook index came in weaker at -31.3 in April, sliding 8.1 points from -23.2 in March while the consensus forecast, according to Bloomberg, is expecting an improvement to -19.2. The price-paid sub-index decreased by over 15 points to 8.2. Nonetheless some of the components were stronger than the headline suggests as the new orders, shipments, and employment sub-indices have improved.

Fedspeak added little new information about the Fed rate path

Fedspeak on Thursday basically toed the line of reiterating the Fed’s resolve to fight inflation. Fed Governor Bowman (voter) emphasised the importance of lowering inflation. Likewise, Dallas Fed Logan (voter) reiterated inflation still being too high and Atlanta Fed Bostic (non-voter) said the Fed must get inflation down to 2%. Cleveland Fed Mester (non-voter) said the Fed funds rate would need to move above 5% and staying higher than inflation for some time but precisely how much higher will “depend on economic and financial developments”. Governor Cook (voter) is scheduled to speak today and it will conclude this busy week in Fedspeak before the Fed goes into the pre-FMOC blackout period. 

The ECB governing council is divided about the scope of the next hike

We are only two weeks away from the ECB meeting. Yesterday, the minutes of the ECB’s March meeting suggested there is a growing divide within the governing council about the scope of the next hike. We believe a 50-basis point hike is still on the table next month. But a minority of members pointed out that the lag of the transmission of monetary policy is perhaps longer and therefore they seemed to worry about tightening too much. This minority will be inclined to vote in favor of a 25-basis point hike. We consider the debate about the short-term pace of monetary policy in the eurozone will certainly intensify in June. For now, there are not enough reasons to slow the pace of tightening.

RBA shake up; RBA to likely create a new board, and meet less frequently

Following an independent review of the RBA, ordered by the Australian government, 51 sweeping recommendations were handed down yesterday. Among these are that the RBA should create a new monetary policy board and meet less frequently (eight meetings per year, down from eleven), in better alignment with international counterparts. These were just some of the recommendations and were welcomed by the RBA. Australia’s Treasurer, Jim Chalmers ordered the review in July 2022 after the RBA’s inflation forecasts failed to detect a surge in price pressures. The report criticized the RBA’s board composition, that includes one economist and six independent directors who are mainly from business. All in all, this means, the powers of the Governor could likely be diluted, with more economist expertise being brought onto the board. The changes could start from July 2024 and see the RBA governor speaking at a press conference after policy meetings. Governor Lowe’s term expires in September.

Separately, Bloomberg economists expect the RBA to end its tightening cycle with a final 25bp hike in May, which will take the cash rate to 3.85%. Economic growth is expected to taper off after that, with the RBA expecting inflation to cool, and that may allow the RBA to cut rates in Q4 potentially.

Japan national CPI core core hotter than expected

The March national headline CPI released this morning in Japan was 3.2% Y/Y, in line with consensus forecast and slightly lower from 3.3% in February. The ex-fresh food as well as the ex-fresh food and energy measures, however, came in hotter at 3.1% (vs consensus 3.0%; February 3.1%) and 3.8% (vs. consensus 3.6%; February 3.5%) respectively.

For a detailed look at what to watch in markets this week – read or watch our Saxo Spotlight.

For a global look at markets – tune into our Podcast.

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