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Global Market Quick Take: Asia – May 23, 2023

Macro 6 minutes to read
APAC Research

Summary:  Fed officials, particularly Bullard (non-voter), had a hawkish bent in their commentaries as markets awaited further talks between Biden and McCarthy on the debt ceiling. However, no agreement was reached but talks remained positive. Impending liquidity drainage risks however spells caution, and PMIs in US, UK and Europe in focus today amid deteriorating economic conditions. Treasury yields continued to surge higher and dollar was firm as JPY losses deepened. Metals were weaker led by iron ore on demand concerns from China’s construction sector.


What’s happening in markets?

US equities (US500.I and USNAS100.I): Nasdaq 100 advance modestly led by mega-cap tech

The S&P 500 Index finished the session nearly flat while the Nasdaq 100 added 0.3%. Communication services, advancing 1.2%, was the best-performing sector in the S&P 500, seeing Alphabet (GOOGL:xnas) gaining 1.9%. Meta (META:xnas) rose 1.1% despite being fined by the European Union a record EUR1.2 billion for transferring data to the U.S.

Regional banks rallied following PacWest (PACW:xnas) successfully unloaded USD2.6 billion real estate loans. The Los Angeles regional lender soared 19.6% and the SPDR S&P Regional Banking ETF (KRE:arcx) surged 3.2%.

Micron (MU:xnas) dropped by 2.9% as investors were assessing the impact on the chipmaker’s revenues from the Chinese ban on its products selling to critical data infrastructure operators in the country. Chevron (CVX:xnys) declined 1.8% after announcing the oil major’s plan to acquire PDC Energy (PDCE:xnas) in a USD6.3 billion all stock deal. Nike (NKE:xnys) on analyst downgrades and the weaker athletic apparel trend in the disappointing results from Foot Lockers (FL:xnys).

Treasuries (TLT:xnas, IEF:xnas, SHY:xnas): sold off on Biden-McCarthy meeting and hawkish Fedspeak

Investors sold Treasuries on the news that US President Biden was meeting House Speaker McCarthy to negotiate on the debt ceiling. In the midst of a series of hawkish-leaning Fedspeak, traders took note in particular of Bullard’s need for two more rate hikes comments and added to the selling pressure to the front end. The 2-year yield rose 5bps to finish at 4.32% and the 10-year yield climbed 4bps to 3.71%.

Chinese equities (HK50.I & 02846:xhkg): China Internet and EV stocks rally 

Hong Kong equities, ensnared within a confined trading range, exhibited resilience as they mounted a rally from the lower echelons of said range. Driving this resurgence were China Internet companies and EV stocks. The Hang Seng Index advanced 1.2% and the Hang Seng TECH Index gained 2.6%. In anticipation of imminent earnings announcements, Kuaishou (01024:xhkg) surged 6.9%. Further uplifting the market, notable gains were observed in Alibaba Health (00241:xhkg), Baidu (09888:xhkg), and Meituan (03690:xhkg), all of which recorded gains surpassing 3%. Within the EV sector, NIO (09866:xhkg) led the pack, adding 5%.

In A-shares, the CSI300 Index gained 0.6%, led by consumer names. Following the news of China banning the country’s critical infrastructure operators to buy Micron’s products, some Chinese chip makers opened higher but quickly pared gains and most A-share semiconductor names retreated.

FX: Dollar range-bound as hawkish Fedspeak returns

Dollar traded only modestly higher on Monday amid hawkish comments from Fed members Bullard and Kashkari but Bullard is a non-voter and market pricing for June is still under 20% probability of a 25bps rate hike. Jitters around the debt ceiling also remained in the US session, although comments from McCarthy hinted at positive talks. Weakness in Japanese yen, given the further rise in Treasury yields, mainly supported the dollar. USDJPY rose to 138.80 in early Asian session. Japan’s machinery orders for March hugely missed consensus. AUDNZD below 1.06 with RBNZ expected to hike rates again this week.

Crude oil: gaining on lower inventories

While the broader macro conditions remained complex as hawkish Fedspeak and debt ceiling deadlock weighed, crude oil prices managed to inch higher and start the week on a positive note after heavy selling both in paper and physical market over the last few weeks. But fundamentals continue to support prices with inventories across key regions starting to fall, just as OPEC’s 1.1mb/d production cut starts to take effect. Extreme heat across Asia has ramped up demand for fuel oil to run air conditioning and lights. WTI prices were above $72/barrel in Asia morning while Brent was at $76.

Copper and iron ore: sliding on China weakness concerns and debt ceiling risks

Even as debt ceiling deadlock may be overcome, a deal has still not been reached. Even with a deal, the expected cut in spending will likely weigh on economic momentum, and a drag on liquidity could potentially result in a credit crunch. This keeps base metals in check, with iron ore down 3% yesterday and copper down ~1.5%. Iron ore is also weighed by the winding down of China’s construction season. Meanwhile, iron ore stockpiles at Chinese ports are in a decline. Copper prices are also sliding lower amid lack of stimulus in China. Key levels to watch are $3.60 in copper and $100 in iron ore.

 

What to consider?

Fed split emerging

Fed members are showing a clear divergence in stance for the June meeting. James Bullard (non-voter) said the Fed may still need to hike another 50bps this year. He said that the FOMC's SEP median of 5.1% was based on slow growth and inflation improvements that have not occurred. Minneapolis Fed President Kashkari (voter) the Fed could need to go north of 6% as he is not yet seeing evidence that the banking stress is doing the Fed's inflation-fighting work for it. With the committee being split in June, it is likely that we will get a hawkish rate guidance if the Fed does hold in June. Mary Daly (non-voter) was more balanced, but declined to endorse a June pause, emphasized that monetary policy operates with a lag, and said tighter credit conditions could be worth "a couple" of hikes. Raphael Bostic backed holding next month.

China loan prime rates unchanged

As widely expected, the leading commercial banks in China kept the 1-year loan prime rate unchanged at 3.65% and the 5-year loan prime rate at 4.30, also unchanged.

Zoom earnings beats estimates, boosts FY guidance

Zoom Video Communications (ZM:xnas) beat Q1 estimates on double-digit growth in enterprise revenues, even as online sales fell. Revenues rose 3% to $1.11bn and adj. EPS rose to $1.16 in the quarter ending April 30, from $1.03 a year earlier. The solid start to the year underpinned a higher outlook for fiscal 2024 while investments in AI were also raised. Zoom raised its annual revenue forecast to $4.47-4.49 billion, from $4.44-4.46 billion earlier. It now expects annual adjusted profit per share between $4.25-4.31, compared with an earlier estimate of $4.11-4.18. Shares were up 5% in extended trading.

Meta fined in EU over US data transfers

The Irish Data Protection Authority imposed an EUR1.2 billion fine on Meta Platforms Ireland for transferring personal data collected on the basis of standard contractual clauses to the U.S since July 2020. The fine was the largest on record under the EU General Data Protection Regulation (GDPR) and the EU data protection regulators also ordered Meta to ensure compliance with the GDPR in data transfers.

Kuaishou announces revenue and earnings beat and share buyback

Kuaishou announced a better-than-expected 20% Y/Y increase in Q1 revenue and non-GAAP net profit of RMB 42 million, versus a RMB3.7 billion loss n Q1 last year and the consensus estimate of a RMB 457 million loss. The Chinese social platform operator also announced a plan to purchase HKD 4 billion (around 2% of market cap) of its shares.


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