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Global Market Quick Take: Asia – May 25, 2023

Macro
APAC Research

Summary:  U.S. equities retreated as uncertainties over the debt ceiling and the Fed’s interest rate path lingered. Nvida reported strong Q1 revenue and earnings and topped it with a Q2 sales guidance 52% above expectations. Mainland China and Hong Kong equities extended losses to new lows. U.K. inflation came in hotter than expected. The Reserve Bank of New Zealand had a dovish hike. Fitch Ratings placed the triple-A rating of the US on negative watch for a possible downgrade.


What’s happening in markets?

US equities (US500.I and USNAS100.I): key indices retreat, Nvdia jumps in extended trading

The S&P500 Index shed 0.7% and the Nasdaq 100 edged down 0.5% in the midst of uncertainty over the debt-ceiling negotiations which showed no progress and the next move of the Fed in interest rates as officials pushed back to the market anticipation of a pause in June. Energy, helped by a 1.3% advance in the crude price, was the lone gaining sector within the S&P 500.

Real estate, financials, ad industrials were the top losers in the benchmark index. Travel names also lost ground notably. In the apparel space, Abercrombie & Fitch (ANF:xnys) soared 31.1% and Urban Outfitters (URBN:xnas) jumped 17.6% after beating earnings estimates.

In the extended trading, Nvdia (NVDA:xnas) surged as much as 29% at one point on a beat in Q1 revenue and earnings and an upbeat forecast for Q2 sales.

Treasuries (TLT:xnas, IEF:xnas, SHY:xnas): lose ground on hawkish Fedspeak

Treasuries ended Wednesday weaker with the 2-year yield rising 6bps to 4.38% and the 10-year yield climbing 5bps to 3.74%. The FOMC minutes which showed a divided committee over the next move in rates (see below) had little market impact. Traders did however took note of Fed Governor Waller’s comment that it would be premature to declare the hiking cycle over, and added to the selling pressure. Also on Treasuries was the spike in U.K. Gilt yields after hotter than expected U.K. inflation prints (see below). The 10-year Gilt yield at one point surged 22bps to as high as 4.37%, the level last seen in October, before moderating to close at 5.5bps higher at 4.21%. The 5-year notes auction met with decent demand. There was no meaningful progress in the debt-ceiling negotiations. Treasury Secretary Yellen reiterated the supposed June 1 X-date and House Speaker McCarthy was optimistic about a deal being reached in time despite currently both sides were still far apart.

Chinese equities (HK50.I & 02846:xhkg): extend losses to new lows

The Hang Seng Index declined 1.6% and breached the lower bound of the trading range of the past two months while the CSI300 slid 1.4% to the worst level in five months. U.S. debt ceiling, Japan’s additional curb on the export of chip-making technology to China, and lack of confidence about the Chinese economic recovery weighed on stock prices.

Chinese property developers, tourism, China consumers, Internet, and computer hardware led the decline. Longfor (00960:xhkg) plunging 7.9%, was the biggest loser with the benchmark Hang Seng Index. The other top loser was Lenovo (00992:xhkg) which reported a worse-than-expected 72% plunge in its March quarter net income, declining 7.7%. A larger-than-expected weekly decline in Macao’s gross gaming revenues weighed on casino operators, seeing Sands (01928:xhkg) and Galaxy (00027:xhkg) down 5.4% and 4.3% respectively. The three Chinese airlines listed in Hong Kong dropped by 3% to 4%. China consumer names retreated, with Haidilao (06862:xhkg) down 5.6%, Xiabuxiabu (00520) falling 3.9% and Tsingtao (00168:xhkg) down 4.1%. Alibaba (09988:HK) dropped by 2.3% as the Chinese tech giant planned to lay off 7% of its employees in the cloud division.

Xinyi Solar (00968:xhkg) bucked he decline to rise 4.2% and was the top winner in the Hang Seng Index. A-share solar names also gained.

FX: NZD plunge and sustained debt ceiling drama drives dollar higher

The USD remained on the front foot on Wednesday as debt ceiling talks still failed to take a material positive turn. The shocking dovish turn from the RBNZ as it indicated an end to its tightening cycle saw AUDNZD back above 1.0600 and even well above 1.0700 in a huge bullish reversal, and the bottom dropped out of NZDUSD – with the lows for the year suddenly not far away in the just below 0.6100 range. AUDUSD also accelerated move below 0.66 to reached new YTD lows Another shock came from firmer UK core inflation which, along with hawkish BOE expectations shift, should have pushed sterling higher but it had the reverse effect. GBPUSD plunged below 1.24 and 100DMA at 1.2286 is on watch. EURUSD now toying with 1.0745 support as USDJPY marched above 139.

Crude oil: extended gains on inventory drawdown

Crude oil prices extended gains further by about ~2% after Saudi Minister’s stern warning a day before to short-sellers. U.S. commercial crude oil inventory posted a deep week-on-week drop of 12.5 million barrels in the week ending May 19 in contrast with expectation of slight rise, according to data issued by the U.S. Energy Information Administration (EIA) on Wednesday. Moreover, U.S. gasoline and distillate fuel inventories decreased by 2.1 million barrels and 0.6 million barrels last week, respectively. This signalled stronger demand, and saw WTI prices rise to $74.50 while Brent rose to $78.50.

Copper and iron ore: selloff accelerated on sustained China slowdown concerns

The selloff across copper and the rest of the base metals complex accelerated on fears of weaker growth in China. Copper prices at the London Metal Exchange fell below $8,000/t in the face of disappointing economic data last month, including weak construction activity. Demand in Europe has also been lacklustre, leading to inventories on the LME rising nearly 80% over the past month. Meanwhile, USD has been stronger amid a weak risk sentiment as debt ceiling talks prolong. HG copper broke below key support at $3.56 and next key level of support is $3.45, the 76.4% retracement. Iron ore futures were also weaker amid signs of weakening steel demand and falling industrial production levels in China. Prices dropped below $100/ton this week and are now testing early May lows of $94.50.

 

What to consider?

Fitch places USA on rating watch negative

US credit rating may be at the risk of a downgrade amid the debt ceiling deadlock. Fitch Ratings today placed the triple A rating of the US on negative watch for a possible downgrade as talks to resolve a looming fiscal crisis dragged on without a deal nearly a week before a possible default. While Fitch still expected a deal to be reached, it said the risks have risen that the government could miss payments on some of its obligations.

FOMC May meeting minutes continued to highlight the Fed split

The May FOMC minutes from the Federal Reserve showed that officials are somewhat split on support for more rate hikes. Where several said if the economy evolved along the lines of their outlooks, further policy firming might not be needed, but some said with inflation expected to take a while to return to 2%, additional firming would likely be appropriate. There was also high uncertainty on the banking sector outlook but almost all officials saw upside risks to inflation. The only consensus appeared to be on a data-dependent approach, and forecast for a mild recession in 2023 was maintained. Overall, there is a leaning for a pause in June but it does not signal the end of the tightening cycle yet. Fed Governor Waller, a notable hawk, also took a data dependent approach for the June meeting, although he made it clear that he Is not in favor of a pause.  

UK core CPI sees a new high

UK’s inflation remained stubbornly high in April, with the headline CPI at 8.7% YoY (vs. 8.2% exp), somewhat cooler than 10.1% YoY in March but the core measure jumped to a new cycle high at 6.8% YoY from 6.2% in March and expectations of that remaining unchanged. The 2-year rates jumped higher by 30bps after the release, before pulling back, and hawkish bets for Bank of England have picked up as well. June meeting now sees some chance of a 50bps move, and terminal rate pricing rose from 5% to 5.4%. Sterling however was weaker on the report and our Head of FX Strategy John Hardy notes that the set up looks ugly for sterling and it “is back on negative watch.”

RBNZ shocks dovish with end-of-tightening message

The RBNZ administered a shocking message yesterday by suddenly declaring that its rate tightening cycle is over after hiking the expected 25 basis points, a profound dovish shock that puts an emphatic end to the recent bout of kiwi strength as the market had to neutralize the forward expectations for further hikes. AUDNZD ripped higher while NZD dropped close to year-lows. The RBNZ is solidly optimistic on outcomes for the economy, not ratcheting up concern levels in rolling out this now more dovish forward guidance, but simply declaring that it is confident that has done enough now for the time being.

Meituan expected to deliver stellar Q1 results with robust revenue growth and profit turnaround

According to Bloomberg consensus, expectations are high for Meituan, with a projected 24% year-on-year surge in Q1 revenues, totalling RMB57.5 billion. In addition, the company's non-GAAP net profit is anticipated to soar to RMB1.9 billion, a remarkable turnaround from the RMB3.6 billion loss reported in the corresponding period last year. These impressive gains are forecasted to stem from solid growth in food delivery order volume, registering low-double-digit expansion, as well as substantial margin improvement within this sector. Furthermore, an upward trajectory is anticipated in in-store service revenue, with a projected year-on-year increase exceeding 20%, propelled by heightened demand for in-person services subsequent to the easing of Covid restrictions.

Nvidia earnings: a complete blowout with 50% higher guidance

Nvidia’s Q1 revenue declined 13.3% Y/Y to USD7.19 billion but it was 10.4% above consensus estimate. The decline in revenue was driven by slower sales in graphics chips used for videogames. Non-GAAP net income increased 26.1% Y/Y to USD2.04 billion, 38% higher than the consensus estimate surveyed by Bloomberg. The semiconductor giant is upbeat in business outlook and forecasting a record USD11 billion sales for Q2. The company says that it is well-positioned to benefit from the AI opportunities.

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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