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Global Market Quick Take: Asia – March 16, 2023

Macro
APAC Strategy Team

Summary:  After the sharp selloff of major banks shares, highlighting a major liquidity risk to markets, our CIO Steen Jakobsen points out that one of the largest long-position in markets right now is to European banking shares, and this is a concern. European banking stocks tumbled 7%, marking their worst session since Russia launched a full-scale invasion of Ukraine. So all eyes will be the ECB meeting ahead. The Dow Jones wiped out 2023s gain. While in the Australian market was hit by China cutting steel output for the third year, in a bid to hit its green goals now down 1.4%. The dollar rallies, while the JPY remains a safe-haven play, along with gold.


What’s happening in markets?

Global volatility shakes markets, sending a message, to be on your toes

The volatility index traded around fourth month high neighbourhood, with investors on edge, worried about a potential major liquidity risk in indebted banks. As our Chief Investment Officer Steen Jakobsen points out, the largest long-position in markets right now, is to European banking shares and the sharp sell off of is major liquidity risk to markets. What occurred on Wednesday, has already sent reverberations though markets.

The S&P500 initially fell over 2%, then on the news of a potential lifeline coming through for a major bank, the benchmark index erased some losses before ending 0.7% down on Wednesday. The fall in bond yields and the speculation on the Fed pausing supported technology stocks. The Nasdaq 100 advanced 0.4%, with Google (GOOGL) rising 2.3% and Netflix (NFLX) up 3%. Over in Europe, their market was hit the hardest by the Credit Suisse slump, with shares in BNP Paribas and Deutsche Bank among the biggest decliners. This resulted in the pan European Stoxx 600 shedding 3% with sentiment flowing to all sectors, which closed in the red. European banking stocks tumbled 7%, marking their worst session since Russia launched a full-scale invasion of Ukraine on Feb 24 2022. 

Treasuries surged again with yields on the 2-year plummeting to 3.89%

After the statement from the National Bank of Saudi Arabia, the largest shareholder of Credit Suisse saying it could not add to its 9.88% stake in the Swiss lender due to a regulatory limit of 10% caused European bank shares to tumble and credit default swaps blow out, yields on U.S. Treasuries dived. The 2-year yield plummeted to as low as 3.71%, before bouncing to finish the session at 3.89%, 36bps richer from the previous close. A statement from the Swiss National Bank and the Swiss Market Supervisory Authority pledged to provide Credit Suisse with liquidity if necessary. 

Markets were extremely volatile. The September SOFR contracts once soared 100bps and triggered a 2-minute trading halt. At the close of trading, markets are pricing in a terminal Fed Fund rate of around 4.8% at the FOMC next week before falling to around 3.9% by the end of this year. 

Yields on the 10-year dropped 23bps to 3.46%. The 2-10-year curve bull steepened 12bps to -43bps.

Hang Seng Index bounces while CSI 300 traded sideways

Hang Seng Index rallied 1.5%, driven by Chinese property, insurers, and internet names. Market sentiment stabilized somewhat on Wednesday after U.S. bank stocks as well as the broad U.S. benchmark indices recouped some ground the previous day. The February economic activity data from China lent support to the recovery case, with growth in retail sales, industrial production, and fixed asset investment picking up, broadly in line with expectations. The unexpected increase in the jobless rate to 5.6% in February dampened sentiment somewhat. 

Infrastructure investment picked up notably, rising 12.2% Y/Y in the first two months of the year. A-share infrastructure stocks advanced. China Aluminum International Engineering (601068:xssc) was limit-up (10%). Brokerage stocks gained. Holly Futures (001236:xsec) surged 10%, hitting the daily price limit. 

The Australian share market, now one of the worst performers this year. But its gold sector shines   

Golds stocks are once again in vogue as investors turn to safe havens, with Gold Road Resources, Evolution Mining, Regis Resources, Newcrest Mining rallying. However, the Australian share market, as measured and usually traded by the ASX200 is now one of the worst performing equity markets this year, down 1.5%, with Brazil’s market down the most 3.7% after volatility in the iron ore market continued. Today’s news of China cutting its steel output for the third year, in a bid to hit its green goals is also reverberating through the Aussie share market with BHP, Rio and Fortescue Metals shares down 3-4%. One report suggested China could be banning new steelmaking capacity, although that has not been verified.

FX: Dollar recovery takes hold, but JPY’s safe-haven status at play

The US dollar charged higher as the Swiss Franc and Euro slumped amid rising concerns on European banks (read below). US data failed to take the limelight away but softer February PPI and downward revisions in the previous print again lowered the probability of a Fed rate hike next week. USDCHF surged back above 0.93 after touching lows of 0.91 earlier this week on CHF’s safe-haven demand which has come under question due to concerns on Credit Suisse and Swiss banking sector. EURUSD plunged over 200bps

to 1.0550 ahead of the ECB decision

today where a 50bps rate hike may look too bold now. Yen’s perceived safe-haven status coming under focus amid the banking crisis, and USDJPY slumped below 133 from 135. AUDUSD surged to 0.6637 from sub-0.66 levels overnight as the AU jobs report came in better than expectations with unemployment rate down to 3.5% (vs. 3.6% expected and 3.7% prev.)

Crude oil slumps another ~5% as banking crisis concerns broaden

Crude oil prices tumbled further on Wednesday, sliding below the range seen since November and printing 15-month lows. The US banking crisis is now spreading to Europe and sentiment deteriorated, sparking a wave of technical selling.
This comes amid renewed fears of weakness in the physical market. The International Energy Agency warned that higher-than-expected Russia exports will keep the market in surplus for the first half of the year. US inventory data was given little focus, with crude oil inventories jumping by 1.6mn barrels last week. WTI touched lows of $66 before a rebound to $68 while Brent dipped to $72 before closing at ~$74


Copper fell below $4 despite with China wanting to curb emissions 

Copper extended losses as the risk-off tone across market triggered further selling. Not only is the looming banking crisis spreading to Europe, sparking global growth concerns, but China is once again trying to reduce emissions. Copper prices broke below the key $4 mark, and slumped to $3.89, bringing the 200DMA in $3.76 in focus. This was despite positive signs in China in the Jan-Feb activity data. Growth in fixed asset investment picked up as projects commenced in the New Year following policy support. Property investment also rose more than expected in the first two months of the year. 

What to consider?

US PPI and retail sales comes in cooler than expected

February PPI and retail sales came in softer-than-expected after the in-line CPI report a day before, and a marked revision lower in the January PPI print added to the relief. Headline PPI fell 0.1% MoM (vs. +0.3% exp) while the January figure was revised lower from +0.7% to +0.3%. The YoY print also fell to 4.6% from the downwardly revised 5.7% for January (initially 6.0%), well beneath the expected 5.4%. Core PPI was flat (vs. exp. +0.4%; prev. revised to +0.1% from +0.5%), with the YoY falling to 4.4% (exp. +5.2%; prev. revised to +5.0% from +5.4%).

February retail sales data was dovish as well, declining 0.4% MoM, worse than the expected -0.3% MoM. But the January print was revised higher to 3.2% MoM from 3.0% previously. Still, the control group measure, which is a signal on consumer spending, rose 0.5%, a big surprise against the -0.3% forecast, while the January reading was also revised up to 2.3% from 1.7%. The repot may signal that the consumer and growth are holding up well, but the story has turned since the banking crisis unfolded and little conclusions can be drawn from any backward looking data. Expectations of a Fed rate hike next week have dropped back to 25bps with the concerns now seen in European banks, but the Fed may need to preserve its inflation-fighting credibility and can still go for a 25bps rate hike if no further market disorders are seen. 

European banks come under pressure with Credit Suisse concerns - highlighting the fragility of markets

As the collapse of three small US banks, contagion fears have persisted, despite authorities stepping in. Our Chief Investment Officer Steen Jakobsen writes in his Macro Digest article that interbank market banks are causing liquidity to drying up, after Credit Suisse shares tumbled, triggering closer monitoring by regulators. This comes after its largest shareholder said it would not provide further support to the Swiss lender, while the cost of insuring its one year defaults, known as one-year credit-default swaps (CDS) spiked to distressed levels. SNB and FINMA also issued a statement on market uncertainty. As market fears linger, Saxo provides a range of options, on how to protect your portfolio, such as reducing overall risk exposure, which might mean including short-term bonds or holding cash, as well as including some exposure to safe-havens such as gold and Japanese Yen. For more on potential options, read Saxo article here.

The energy crisis is back on the agenda 

Oil and coal demands don’t usually peak until later in the year, ahead of Northern Hemisphere winter, however, today Australia put the energy crisis back on the agenda. Over the past year Australian authorities have warned that the country does not have enough gas and coal to meet energy demands in 2023, and for several years. And today, the Australian Energy Regulator (AER) warned electricity prices in Australia, will rise up to 22%, right though to July next year. Recall that about 60% of Australia’s energy needs are met by fossil fuels. 

The Australia-to-Singapore $20 billion solar power project receives multiple bids 

By May this year, the solar project could be taken over, which aims to export Australian renewable energy to Singapore, via cable. The project has been in administration since January, after key investors, Fortescue Metals chairman, Andrew Forrest and Atlassian CEO disagreed on whether the project should maintain its original plan to export solar power to Singapore through a giant cable, or instead use it to create green fuels. Andrew Forrest’s Squadron Energy has been studying options to take control of the project; however the bidders of the $20b solar cable plan, are now known.  

China activity data for January & February are broadly in line 

China’s headline retail sales grew 3.5% Y/Y in the first two months of 2023. Excluding autos, which suffered from the expiration of government subsidies, retail sales grew strongly at 5.0% in January-February from a year ago. Auto retail sales fell 9.4% Y/Y following the expiration of the vehicle purchase tax reduction. As people’s mobility increased, sales in catering services grew 9.2% Y/Y. 

Meanwhile, industrial production grew 2.4% Y/Y as the manufacturing sector picked up steam. Fixed asset investment, rising 5.5% Y/Y, was better than expected, with acceleration in infrastructure as well as manufacturing investment.

Separately, China’s jobless rate rose 0.3 percentage points to 5.6% in February. 

UK budget – no recession and inflation halved in 2023

Chancellor of the Exchequer Jeremy Hunt set out major changes to the UK tax and benefit system to encourage businesses to invest, entice people back into work and to pull the economy out of stagnation. Overall, a significant fiscal easing was delivered alongside improved borrowing, and Hunt said the economy would only contract by 0.2% in 2023, compared to the OBR’s previous forecast of shrinking by 1.4%. The OBR also sees inflation falling to 2.9% by end-2023 from current over 10% levels. 

ECB meeting on the agenda today

The ECB is still expected to hike the deposit rate by 50bps to 3.0% today, given what was said in the February meeting and recent commentaries. Focus will be on the guidance for the path of interest rates from here, as well as on the comments around the risks of a financial contagion spreading from the SVB collapse. Recent data such as an upside surprise in core inflation has prompted ECB pricing to shift to a terminal rate of 4% by July, suggesting a lot of room for give back if financial risks broaden. If the central banks stays away from guiding for another 50bps in May, that could come as a dovish surprise for markets. The latest inflation forecasts will also be key, with core inflation expectations likely to be revised higher for 2023 after strong reads in January and February. Read our full preview here

For 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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