Summary: A choppy session for equities yesterday as an intraday rally to new local highs was erased and before futures shot higher in late trading yesterday on surprisingly positive results from Netflix, helping to keep the sharp rally off the recent bear market lows alive for now. Meanwhile, bond yields remain pinned near cycle highs, keeping the pressure on the struggling Japanese yen, while the Chinese renminbi threatens new lows versus a mixed US dollar.
Volatility remains high in the US and equities continued higher yesterday with S&P 500 futures closing at the 3,732 level and pushing higher this morning trading around the 3,747 level. Our view is that the move in US bond yields will dictate direction and with the US 10-year yield pushing higher trading around the 4.05% level this morning we could see a reversal in the equity market. Better than feared results from Netflix also boosted the technology and media segments of the US equity market.
Hang Seng Index fell more than 1% by mid-day, as China Internet stocks reversing the bounce in the past two days, falling from 2% to 4%, and local property developer names paring early gains as the relief for extra stamp duties for non-resident home buyers in the maiden Policy Address of the Hong Kong Chief Executive is less extensive than expected. Sun Hung Kai Properties (00016:xhkg) dropped 1.5% and New World Development (00017:xhkg) plunged 4%. Hong Kong Stock Exchange (00388:xhkg), falling 0.6%, reported a 30% Y/Y decline in EPS in Q3, slightly better-than-feared. Shipping stocks gained, with tanker and dry bulk operator COSCO Shipping Energy Transportation (01138:xhkg) soaring more than 11% and leading the charge higher. In mainland bourses, the CSI300 fell 0.9% while shipping names and educational service providers outperformed.
The US dollar bobbed around in correlation with risk sentiment and is still supported at the margin by US treasury yields remaining near the highs for the cycle, with the 10-year treasury benchmark above 4.00% this morning. The most interesting development is that, despite the somewhat mixed to lower US dollar relative to its recent top, the Japanese yen remains near the lows for the cycle on the ongoing rise in global yields, with USDJPY just shy of the 150.00 level that some believe could bring an official intervention. Likewise, USDCNH saw its highest daily close yesterday just above 7.22 and is looking higher still above 7.2400 this morning, with broad CNH weakness intensifying. Is China looking to take its currency significantly lower?
Crude oil prices traded heavily yesterday as US president Biden said that it would release 15 million more barrels from the US Strategic Petroleum Reserve (SPR) and could possibly release further barrels this winter. Petrol prices are clearly a concern, and the administration is in an all-out effort to suppress prices ahead of the mid-term election early next month, although releases from reserves will do little to relieve the pinch in especially diesel supplies, where inventories are at record lows on shipments of diesel to the even tighter European markets. At some point, the SPR cannot be credibly tapped for further supplies – as the administration has tapped nearly 200 million barrels from reserves this year already, about a third of the total in storage.
US treasury yields remain near the highs, with the 10-year treasury benchmark still above 4.00% this morning, with little incoming data of sufficient importance to prompt volatility until the week after next, which will bring both the next key jobs report as well as the next FOMC meeting. An auction of 20-year T-notes is up later today.
The world’s largest semiconductor equipment maker posts Q3 revenue of €5.8bn vs est. €5.3bn and gross margin of 51.8% vs est. 49.5%. While gross margin beats in Q3 the company’s forecast for Q4 of 49% misses estimates of 50.3% and ASML expects to delay revenue of €2.2bn into 2023. Q4 revenue forecast is €6.1-6.6bn vs est. €6.1bn as the CEO says demand remains strong. The company says that US export rules on semiconductors to have minimal impact on shipments in 2023, but at the same time the company says that it expects to revisit 2025 scenarios and growth opportunities. China is around 15% of sales for ASML.
Netflix surprised investors last night by defying the pessimists that had projected dire subscriber figure, but Netflix reported net change of 2.4mn vs est. 1mn despite price hikes suggesting demand remains strong. The company forecasts Q4 net change in subscribers of 4.5mn vs est. 3.9mn but will not provide future forecasts on paid subscribers after Q4. The company sees worse than expected revenue and EPS figures in Q4 compared to estimates. Netflix also said that it is seeing strong demand for its advertising capacity which is good news for shareholders as advertising is the next big revenue leg for Netflix. Shares were up 14% in extended trading.
Q3 revenue and EPS in line with estimates suggesting low revenue growth of just 2% y/y and the company says it expects FX headwinds on EPS of 6-7% next year and that modest layoffs are likely.
Q3 revenue at $16.6bn was in line with estimates while EPS of $6.87 beat estimates. Backlog increased 4% y/y to $139.7bn but expects a flat revenue growth in 2023 and lower margins indicating that Lockheed Martin is not expecting to benefit significantly from the war in Ukraine. It should be said that the CEO said demand is strong for its Javelin missile system that is being used in Ukraine. Despite muted growth expectations the company’s decision to expand its buybacks lifted shares considerably in yesterday’s session.
… pointing to a rapidly weaking US housing market. The index peaked in late 2020 at a record 90 level and began this year at 83 before the impact of rapidly rising interest rates drove a steep decline in activity. The October level was 38, below expectations of 43 and the September reading of 46. Only two readings since 2012 have come in below the current level, both of which were posted in the panic months during the Covid pandemic outbreak in early 2020. This index has proven a strong leading indicator with a very long and variable lag in past economic cycles, but pointing to headwinds to develop for employment and the broader economy at some point next year.
The Bank of Japan governor said that a stable weak JPY is a net positive for Japan and merely spoke against the negative effects of "excessive” moves. Another BoJ member Adachi spoke in favour of the current policy of negative rates and yield-curve-control, saying that “sticky inflation” would be needed for a shift in policy. USDJPY traded to a new cycle- and 32-year high above 149.30 in early European hours.
… with the headline at +0.5% MoM and +10.1% YoY (matching the cycle high) vs. 0.4%/10.0% expected, and the core YoY at 6.5% vs. 6.4% expected. The latter was the highest for the cycle and highest since 1992.
Mostly weaker than expected quarterly production and outlooks were released today from BHP, Whitehaven Coal, Beach Energy and St Barbara with these commodity giants in coal, oil and gold being hit by poor weather, flooding and labour shortage issues. Whitehaven (WHC) announced production fell 37% last quarter amid poor weather and labour shortages. The Whitehaven Coal CEO says it sees demand for high quality coal continuing to outstrip global supply. That said, the Newcastle Coal price is 3% this month and about 15% lower than its all-time high.
Today’s earnings focus is ASML (see our earnings review above) and Atlas Copco in Europe, and Tesla and P&G in the US. We wrote a preview on Tesla Q3 earnings in yesterday’s equity note but the main focus is the supply situation on lithium and to what extent demand is impacted from higher electricity prices.
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2024: The wasted year
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Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
