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Global Market Quick Take: Asia – April 25, 2023

Macro 6 minutes to read
APAC Research

Summary:  US equities remained in range trading ahead of key megacap earnings announcements. Treasury yields fell on eco concerns from Dallas survey as well as deposit flight from First Republic, but EU yields rose on hawkish ECB commentary and the yield divergence saw EURUSD rising back above 1.10. Coca Cola beat estimates, and focus shifts to Alphabet and Microsoft today. However, concerns are rising on whether we have seen peak liquidity in the system and could be in for withdrawal symptoms.


What’s happening in markets?

US equities (US500.I and USNAS100.I): nearly unchanged again

Ahead of earnings from mega-cap technology companies this week, major equity indices once again finished the session in low volumes and little changed. Nasdaq 100 ticked lower by 0.2% while S&P 500 edged up 0.1% in mixed trading. Six of the S&P 500 sectors gained, led by an 1.5% rise in energy while five sectors declined moderately. Coca-Cola rallied initially on earnings beat but pared all the gain to finish nearly unchanged.

After the regular session close, First Republic Bank (FRC:xnys) reported a larger-than-expected loss in deposit in Q1 and offered litter clarity in the future of the regional lender while depending heavily on the life-line loans from the Fed and the Federal Home Loan Bank. The shares of the regional lender plummeted over 20% in extended hour trading.

Treasuries (TLT:xnasIEF:xnasSHY:xnas): stage a late rally

Yields fell first on a weaker than expected Dallas Fed manufacturing index in low volume trading and they took a decisive dive in late trading after First Republic Bank reported worse-than-expected deposit losses in Q1. The yield on the 2-year dropped by 9bps to 4.09% and the 10-year yield declined 8bps to 3.49%.

Chinese equities (HK50.I & 02846:xhkg): Hang Seng Index dropped below 20000

Hang Seng Index traded weak across the board, once falling as much as 1.7% before clawing back to finish 0.6% lower, a touch below the 20000 level. Heightened geopolitical tension stemming from China’s ambassador to France’s questioning of the sovereignty of former Soviet states which angered European countries.

Further, renewed worries about potentially another wave of Covid outbreaks weighed on the overall market sentiment but raised the share prices of pharmaceutical and digital healthcare platform stocks. The search for and reviewing of Covid related topic have surged on the Internet in mainland China. CSPC Pharmaceutical (01093:xhkg) gained 3.4% and Alibaba Health (00241:xhkg) jumped nearly 5%.

Consumer, property, and China internet names led the charge lower. Li Ning (02331:xhkg) and Haier Smart Home (06690:xhkg) slid 3.6% and 3% respectively, being the two top losers in the Hang Seng Index. Longfor (00960:xhkg) and Country Garden (02007:xhkg) lost more than 2%.

EV stocks bucked the decline to advance in share prices, led by BYD (01211:xhkg) which rose 3.6% after releasing a new electric hatchback model at the Shanghai auto show and expressing optimism in potentially introducing its ShyShuttle electric elevated rail transit system to Hong Kong.

In A shares, CSI300 retreated 1.2% as the weakness in semiconductors, electronics, tourism, lodging, and ferrous metal names more than offset the gains in media, online gaming, and autos.

FX: Dollar in downturn on lower yields; EUR back above 1.10

Markets continue to trade sideways with little catalysts ahead of the meagcap earnings due this week. US yields took a plunge as Dallas Fed manufacturing survey further confirmed the weakness from the Philly Fed survey last week, and deposit flight at First Republic Bank also underpinned concerns. EURUSD rose back above 1.10 as hawkish ECB commentary continued pushing EU yields higher. Schnabel noted 50bps next week is not off the table, and it is clear further hikes are required, even as Villeroy was slightly more dovish. GBPUSD also rose to test 1.25 again. AUDUSD was more subdued, still around 0.67 ahead of Q1 CPI due tomorrow but NZDUSD was up at 0.6170. JPY rangebound ahead of BOJ meeting this week.

Crude oil: gains return but short-term focus still on demand

Supply issues came into focus as shipments from Iraqi Kurdistan remain paused and supply risks in Sudan also underpinned, while economic data and earnings side remained muted. But focus for the rest of the week is likely to shift back to growth and inflation worries and how far the Fed will go, especially after megacap earnings announcements come due. Refinery margins also remain under pressure across all the major trading hubs sending a warning sign about demand ahead of the peak consumption season. WTI rose to $79 after a dip below $77 earlier while Brent surged to $83.

 

What to consider?

First Republic Bank reports a USD100 billion flight in deposits

The troubled regional bank, First Republic Bank reported results yesterday after the close of the regular session. The flight in deposits was worse than the market feared. Excluding the USD30 billion deposits from large U.S. banks in support of the regional lender, deposits fell by around USD100 billion from USD176.4 billion to USD74.5 billion. Deposits were down another 1.7% in Q2. Despite the bank attributing the quarter-to-date withdrawals in deposits to seasonal tax outflows, investors are concerned about the situation at the bank. With the deposit flight, the bank is relying on USD105 billion in loans from the Fed and the Federal Home Loan Bank which charge interests between 3% and 4.9% while the average yield of the bank’s loan book is 3.73%. The management said the regional lender is exploring strategic actions but gives no details in a 10-minute earnings call the management did not take questions.

Coca-Cola beats estimates

Coca-Cola (KO:xnys) reported Q1 earnings with adjusted organic revenue growth of 12% vs est. 9.6% and comparable EPS of $0.68 vs est. $0.65 as the soft drinks and snacks company continues to be able to pass on costs to consumers. The company is also reporting good expected growth for Q2 and the fiscal year despite ongoing currency headwinds.

More weakness from US survey data

The headline Dallas Fed manufacturing index fell to -23.4 in April from -15.7 in March, while the outlook index moved further into negative at -15.6, further confirming the weakness seen in Philly Fed survey, defying the strength of the NY Empire State survey. New orders index rose slightly to -9.6 from -14.3, although that marks the 11th month in a row in negative territory. Employment nudged lower to 8 from 10.4, reflective of moderate employment growth but a decline in work hours. Respondents were concerned about credit, funding and recession. Richmond Fed survey due on Wednesday, followed by US GDP and PCE data on Thursday.

Liquidity concerns are piling up

Reports suggest that a sudden boost in liquidity has supported the markets so far this year, with central banks injecting about $1tn. There has also been a liquidity boost for the banking sector after Silicon Valley Bank failed in March. However, there are risks of a pullback as debt ceiling concerns rise, ECB ramps up quantitative tightening and China easing measures cool off. Megacap earnings is a big factor to watch, following which this withdrawal of peak liquidity could mean higher yields, softer equity multiples and wider credit spreads.

Alphabet and Microsoft report today

Alphabet (GOOGL:xnas) and Microsoft reporting after the close as the two companies are locked into a fierce battle over new AI systems as they may unlock great commercial value for the companies. Alphabet is expected to report EBITDA of $26.4bn up from $24.8bn a year ago and significantly up from Q4 as layoffs should begin to lift expectations. The key risk for Alphabet is the slowing revenue growth in Q3 and Q4 and whether it extended into Q1 because that could jeopardize the EBITDA expectation.

Microsoft (MSFT:xnas) saw a sharp reduction in its revenue growth in Q4 to just 2% y/y but in Q1 analysts expect it to climb again to 4% y/y with flat earnings compared to a year ago. In both cases of Alphabet and Microsoft there will be a lot of focus on their comments related to the arms race in AI systems and whether it will impact cost trajectories going forward.

 

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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