What’s happening in markets?
US equities (US500.I and USNAS100.I): Tech Stocks Plunge on Post-Earnings Selloff; Johnson & Johnson Impresses with Strong Q2 Earnings.
Tesla and Netflix’ post-earnings selloff weighed on the Nasdaq 100, which plunged 2.3% while the S&P slid 0.7%. In addition, semiconductor stocks declined after TSMC revised down its 2023 sales outlook, seeing the PHLX Semiconductor Index tumbling 3.6%, Nvidia (NVDA:xnas) shedding 3.3%, and Intel (INTC:xnas) dropping by 3.2%.
The performance of the banking sector was mixed, with the KBW Bank Index gaining 0.7% while the SPDR S&P Regional Bank ETF (KRE:arcx) slid 0.4%. Zions Bancorp (ZION:xnys) jumped 10% after reporting better than expected pre-provision net revenues and deposit trends, as well as improved guidance, KeyCorp (KEY:xnys) added 4% while Fifth Third Bancorp (FITB:xnys) climbed 2.7% following the regional lending reporting increases in deposits from a quarter ago. On the other hand, Truist Financial (TFC:xnys) plummeted 7.1% after reporting largely flat deposit growth.
Johnson and Johnson, gaining 6.1%, was the second-best performer among the S&P 500, after reporting adjusted EPS USD2.80, beating consensus USD2.62 and raising its 2023 earnings guidance.
Treasuries (TLT:xnas, IEF:xnas, SHY:xnas): sell off on a smaller jobless claims print
US Treasuries declined (rose in yields) following the initial jobless claims coming in at the lowest level in two months. Selling was heaviest in the 5-year segment. The 10-year TIPS auction received strong demand. The Treasury announced a USD120 billion auction schedule for next week in 2-year, 5-year, and 7-year notes. The 2-year yield finished the session 7bps higher at 4.84% while the 10-year yield rose 10bps, reaching 3.85%. The 2-10 yield curve steepened by 3bps to -98.
Hong Kong & Chinese equities (HK50.I & 02846:xhkg): ): property stocks extend rally
The joint statement from the Communist Party of China’s central committee and the State Council pledging support to private enterprises did not stir up much excitement in the market. The Hang Seng Index ticked down 0.1%. Southbound flows from mainland investors recorded a net sale of HKD13.8 billion, the second-largest daily outflow on record, reversing most of the HKD16.5 billion outflow the day before.
China property stocks extended their rally since yesterday, with Country Garden Services (06098:xhkg), Country Garden (-2007:xhkg), and Longfor (00960:xhkg) gaining over 3%, helped by news headlines suggesting that China is considering relaxing home purchase restrictions, including mortgages in Tier-1 cities. On the other hand, Sunny Optical (02382:xhkg) plummeted 13.7% after warning about a 65%-70% fall in earnings in H1.
In the A-share market, the CSI300 Index dropped by 0.71%. Telecommunication, computing, AI stocks, electronics, and media were the top losers while e-commerce, retailing, and property outperformed.
FX: Dollar pushed higher on gains in yields
The DXY index pushed higher to touch 101-levels overnight on lower jobless claims after being initially pressured yesterday on CNH and AUD strength following PBoC support measures and Australia’s firm employment data. EURUSD plunged 1 big figure to lows of 1.1119 while GBPUSD dipped below 1.29 as a dovish shift in ECB comments and softer UK CPI continued to underpin. USDJPY surged to 140.50 overnight on higher Treasury yields but was back below 140 later. USDCNH slipped from 7.23+ to 7.17 as China’s central bank moved to support the yuan with a strong fixing and a tweak to rules on how much Chinese companies can lend in foreign currencies.
Crude Oil: battling tightness vs. demand concerns
Crude oil prices were choppy but eventually closed higher on Thursday. Supply cuts from Saudi Arabia and Russia continue to signal that a tighter market may be in store for H2, but a firm weekly US claims report last night fueled fears of more policy tightening. Brent futures are closing in at $80, about the high of the recent range.
What to consider?
US initial claims come in below expectations
US initial jobless claims fell to 228k from 237k in the latest week, coming in short of the expectations at 240k. This marked the lowest number of claims since early May and the second lowest since February, and has once again sparked concerns of labor market remaining tight. Philly Fed index marginally improved to -13.5 from -13.7, short of the consensus -10.0.
Japan June CPI will keep traders on edge
June inflation report out of Japan this morning was mixed. Headline CPI increased slightly to 3.3% YoY from 3.2% previously, coming in above expectations of an unchanged print. Core measures were as expected, with the ex-fresh food print coming in at 3.3% YoY from 3.2% YoY previously while the ex-fresh food and energy print was only a notch softer at 4.2% YoY from 4.3% YoY previously. With expectations of a July tweak running high until last week but dampened somewhat this week after Governor Ueda’s comments, there is little to read in the inflation report to guide the markets about what to expect at the BOJ meeting next week. Inflation remains above BOJ’s 2% target but the central bank isn’t convinced that it is driven by wage gains.
The PBOC eases restrictions on cross-border borrowing capital inflows
The People’s Bank of China (PBOC) raised the macro-prudential parameter from 1.25 to 1.5 on Thursday which pave the way for approving more cross-border borrowing in foreign currencies by Chinese corporate and financial institutions going forward. According to the PBOC’s notice in 2017, approvals for cross-border borrowings for corporate and financial institutions are referenced to a product of net assets, cross-border financing leverage ratio, and the macro-prudential parameter. After the PBOC lowered the macro-prudential parameter from 1.0 for financial institutions in Dec 2020 and for corporate in Jan 2021, the appreciation of the Chinese yuan slowed. When the PBOC raised it from 1.0 back to 1.25 in October 2022, it happened to coincide with the high point of USDCNH (low point in the Chinese yuan) at 7.37.
Janet Yellen’s Vietnam visit highlights the fragmentation game
US Treasury Secretary Yellen was in Vietnam to push for reshaping of logistics as US tries to cut its dependence on China. She said that diversified global supply chains are key to achieving long term economic resilience and that the US will pursue a strategy of friend-shoring. We have highlighted earlier that Vietnam, Mexico, Brazil, India, Indonesia and others are the likely winners of the global fragmentation game.
TSMC Q2 earnings beat but lowers full-year sales guidance
Taiwan Semiconductor Manufacturing (TSM:xnys) shed 5.1% overnight in ADR trading after the largest chip foundry in the world reported Q2 earnings beat analyst estimates but lowered its full-year 2023 revenue guidance to a 10% Y/Y decline from previously suggested low-to-mid single digit decline. The management attributed the downward revision to weaker economic environments and a deeper than expected downturn in smartphone chips and end-market handset demand. TSMC also said that it is postponing the start of production at its new Arizona plant to 2025.
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