Financial Markets Today: Quick Take – August 15, 2022

What is our trading focus?

Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I)

S&P 500 futures ended sharply higher on Friday closing at 4,281 gaining further momentum in what seems to be a push back to the 200-day moving average at around the 4,324 level. The 4,200 level is the line in the sand for upside momentum and as long as S&P 500 futures are trading above this level the short-term momentum is in tact. Investors are still overwhelmingly betting on a soft-landing and inflation easing, and with the weaker than expected economic figures out of China this morning the narrative has been bolstered. Rising unemployment rate in China will increase slack and therefore lowering prices for goods. The China PPI y/y has come down from 13.5% in November to 4.2% in July. The counter argument is that wages and rents in the US and Europe will add price pressure in the services sector and thus keep inflation elevated. 

Hong Kong’s Hang Seng (HSI.I) and China’s CSI300 (000300.I)

Hong Kong and mainland Chinese equities tried to move higher in early trading but soon reversed and turned south.  Both benchmarks are flat to last Friday’s close as of writing. The People’s Bank of China cut its 1-year Medium-term Lending Facility Rate by 10bps to 2.75% from 2.85% and the market reaction to the move was muted as credit demand, as reflected in the aggregate financing and loan growth data, was weak in China.  SMIC (00981:xhkg) dropped more than 5% on analyst downgrades.  Meituan (03690:xhkg) rallied 3% ahead of reporting Q2 results.  Li Auto (02015:xhkg/LI:xnas), also reporting today, declined 1.3%.

USD: trades sideways even as financial conditions continue to ease

The US dollar firmed further Friday after catching a bid the prior day on a surge in long US treasury yields. The Friday move lacked any notable supportive development for the greenback, but EURUSD and GBPUSD have rolled over and threaten to reverse back lower after threatening resistance and even an upside break last week on the softer than expected US July CPI data. A close back through 1.0250 in EURUSD and perhaps 1.2100 in GBPUSD suggest the USD will hang in there for now. USDJPY has yet to follow through lower after it sold off sharply on that US CPI data. The pair needs to pull well back clear of 135.00 or follow through below 132.00 again to choose a direction. AUDUSD rallied smartly above the 0.7000 area last week, which is now the key support for keeping the focus higher toward the 0.7258 next resistance level.

Copper and Iron ore lower on weak China data

Copper and iron ore trade lower with focus on China after its industrial production rose by less than expected in July. In addition, the PBoC delivered a surprise interest rate cut to support a sluggish recovery that may curb demand for key raw materials at a time where the country is facing a persistent property industry crisis. Crude steel production dropped around 6% year-on-year last month, its weakest July in four years, thereby weighing on iron ore prices in Singapore. Top miner BHP report results on Tuesday, and the industrial metal market will be looking for more clarity on the outlook. 

Crude oil

Crude oil futures (CLU2 & LCOV2) trade lower after China’s economic recovery unexpectedly weakened in July on renewed Covid lockdowns and after data from Bloomberg showed an apparent 10% year-on-year drop in oil demand last month. In addition, some speculation that an EU proposal to revive the 2015 Iran nuclear deal could be agreed thereby raising the prospect for more Iranian supply. However, crude oil prices made a strong recovery last week as US demand concerns were somewhat eased with better-than-expected data, lower gasoline prices and a weaker dollar all adding price support to a market where speculators have cut bullish bets to a pre-pandemic low.

US crop futures all trade lower after Friday’s WASDE report

Friday’s WASDE report for August raised the country’s production forecast for soybeans (SOYBEANNOV22) while wheat (WHEATDEC22) and corn (CORNDEC22) prices were weighed down by easing concerns of Black Sea supply with expectations for cooler and wetter US weather this coming week also adding a bearish factor. One cautionary note is the fact that a lot of heat and dryness may have hurt production potential since August 1 when the report was compiled. Cotton (COTTONDEC22) meanwhile ended limit up bid on Friday to record a 13% weekly gain after a very bullish WASDE report saw the US crop being slashed by 19% to 12.6m bales, a 12-yr low. Driven by a high level of abandonment of fields in the drought-stricken Southwest. World stocks cut by 2% to 82.3m bales

US Treasuries (IEF, TLT) see long-end yields surging

After yields at the long end of the US yield curve jumped higher last Thursday, taking the 10-year benchmark yield clear of the local range into 2.87%, treasuries have found support and yields are fading, so the early part of this week looks important for establishing whether yields will churn back into the lower range and prove a non-story or whether a new surge in yields grabs the markets attention, as any such rise would likely challenge the recent powerful easing in market volatility and financial conditions. The highlight of the US economic data calendar this week is perhaps the Wednesday US Jul. Retail sales report

What is going on?

China surprises with rate cut. In a move that is particularly jarring, given the focus on the scale of rate hikes elsewhere, the Chinese central bank cut the main one-year policy rate by 10 basis points to 2.75%  as the latest industrial output and retail sales data fell short of estimates amidst the country’s strict zero tolerance policy toward Covid and a vicious recession in the property sector, where activity has declined in the wake of a crackdown on leverage in the sector and now many homebuyers are refusing to services mortgages on uncompleted projects.

Japan’s Q2 GDP unimpressive. Japan reported Q2 GDP this morning, which came in below expectations at 2.2% q/q sa annualized (vs. 2.6% expected) but higher than Q1’s -0.5% amid relaxation in Covid curbs helping to spur a recovery in consumption. This run-rate of growth may however remain tough to maintain given the fresh surge in pandemic cases in Japan, even though the government has stayed away from announcing any major further restrictions. Soaring inflation is also curtailing the spending power of households, as energy prices continue to surge, and yen remains near its record lows.

Aramco profits soar on higher oil prices. State oil giant Saudi Aramco reported a soaring 90% rise in second-quarter profit on Sunday, beating analyst expectations and propelled by higher oil prices, volumes sold and refining margins. The company expects "oil demand to continue to grow for the rest of the decade, despite downward economic pressures on short-term global forecasts”. This further pushes up the performance of the energy sector in the Q2 earnings season, even as the technology earnings faltered.

University of Michigan’s positive surprise aided the risk-on sentiment on Friday after the headline rose to 55.1, well above the expected 52.5 and prior 51.5, while expectations also topped consensus, bouncing to 54.9 from 47.3 (exp. 48.4), but conditions dropped to 55.5 from 58.1 (exp. 59.0). Regarding consumer inflation expectations, encouragingly, the year-ahead metric eased for a second consecutive month, falling to 5.0% from 5.2%, which is the lowest level since February. Still, the 5-10yr measure of expectations rose to 3.0% from 2.9%, consistent with its range over the past year despite remaining high relative to its pre-pandemic pattern. The report isn’t a complete surprise, given lower gasoline prices are helping to improve sentiment.

China’s aggregate financing and loan data decelerated. China’s growth rate of outstanding aggregate financing slid marginally to 10.7% YoY from 10.8% in June.  Outstanding loan growth fell to 11.0% YoY from 11.2% YoY in June.  When looking at the sequential changes of new aggregate financing and new RMB loans made in July, the deceleration was more remarkable.  New aggregate financing dropped to RMB756 billion in July from RMB5,173 billion in June and new RMB loans fell to RMB679 billion in July from RMB2,810 billion in June.  The decline of household medium-to-long-term loans to RMB149 billion in July from RMB417 billion in June or RMB397 billion in July 2021 reflected a weak property sector.  Corporate loan demand was still weak.  New loans to corporate sector in July plunged to RMB288 billion from June’s RMB2,212 billion. 

What are we watching next?

President Xi is expected to meet with President Biden in November The Wall Street Journal, citing officials involved in the preparation, says that President Xi and President Biden will meet on the sidelines of either the G20 meeting in Bali, Indonesia or the Asia-Pacific Economic Cooperation summit in Bangkok Thailand in November. 

China’s response to another trip to Taiwan by US lawmakers. After US House Speaker Nancy Pelosi’s recent visit to Taiwan triggered an enormous response in the form of military drills that circled the island, which a local official even called the rehearsal for an invasion. Yesterday, a US congressional delegation led by Senator Ed Markey arrived in Taiwan for a two-day visit that will included talks with Taiwanese president Tsai Ing-wen.

Five central state-owned Chinese enterprises applied for voluntary delisting from the New York Stock Exchange. After the Hong Kong market close, PetroChina (00857:xhkg/PTR:xnys), China Petroleum & Chemical Corporation, also known as Sinopec (00386:xhkg/SNP:xnys), Sinopec Shanghai Petrochemical (00338:xhkg/SHI:xnys), Aluminum Corporation of China, also known as Chalco (02600:xhkg/ACH:xnys), and China Life Insurance (02628:xhkg/LFC:xnys) announced that they had notified the New York Stock Exchange (“NYSE”) that they will apply for delisting of their American depository shares (“ADSs”) from the NYSE. It is expected that the American Depository Receipt (“ADR”) programs will be terminated between September 1 and October 16, 2022, and the ADSs issued under these ADR programs can be surrendered for their underlying H shares, which will continue to trade in the Stock Exchange of Hong Kong (“SEHK”). More details can be found in our recent article.

US Housing Data this week – in particular, the July NAHB Survey of home builders today, which has often proven a leading indicator of the direction of US home prices (these were still advancing at a modern record clip of 20+% as recently as May). In June, the NAHB survey registered it lowest reading, at 55, since 2015 if one does not include the chaotic early-2020 months of the pandemic outbreak. Tomorrow, we’ll have a look at the July Housing and Building Permits data, where levels have also come off the fastest pace for starts since 2006.  Measures of US housing affordability are scraping all-time lows due to the rise in long yields taking mortgage payments higher for new mortgages.

Earnings to watch

This week earnings focus shifts to China with many notable names reporting earnings. On Tuesday, earnings from Walmart and Home Depot will put the US consumer in the spotlight.

• Monday: China Construction Bank, Agricultural Bank of China, Meituan, China Life Insurance, China Shenhua Energy, China Petroleum & Chemical, BHP Group, COSCO Shipping, Li Auto, Trip.com Group, DiDi Global

  Tuesday: China Telecom, Walmart, Agilent Technologies, Home Depot, Sea Ltd

  Wednesday: Tencent, Hong Kong Exchanges & Clearing, Analog Devices, Cisco Systems, Synopsys, Lowe’s, CSL, Target, TJX, Coloplast, Carlsberg, Wolfspeed

  Thursday: Applied Materials, Estee Lauder, NetEase, Adyen, Nibe Industrier, Geberit

  Friday: China Merchants Bank, CNOOC, Shenzhen Mindray, Xiaomi, Deere

Economic calendar highlights for today (times GMT)

• 0800 – Switzerland SNB Weekly Sight Deposits
• 1230 – US Aug. Empire Manufacturing
• 1230 – Canada Jul Existing Home Sales
• 1400 – US Aug. NAHB Housing Market Index
• 2000 – USDA's Weekly Crop Conditions Report
• 0130 – Australia RBA Meeting MInutes

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