Saxo Spotlight: Global market sentiment shaped by Jackson Hole Symposium and China shadow banking – Aug 21-25 Saxo Spotlight: Global market sentiment shaped by Jackson Hole Symposium and China shadow banking – Aug 21-25 Saxo Spotlight: Global market sentiment shaped by Jackson Hole Symposium and China shadow banking – Aug 21-25

Saxo Spotlight: Global market sentiment shaped by Jackson Hole Symposium and China shadow banking – Aug 21-25

Macro 8 minutes to read
APAC Research

Summary:  The upcoming Jackson Hole symposium tests Powell's dovish stance, while China tackles shadow banking and property risks. US-China economic concerns persist. Potential shifts in US monetary policy are explored, impacting fiscal dynamics. Eurozone PMIs could pressure the EUR, while BRICS summit might attempt to challenge the dollar's dominance. Japan's inflation eases, impacting the JPY. Nvidia's earnings reveal AI stock trends. Baidu and Meituan earnings in China reflect cautious sentiment amid recovery concerns

Jackson Hole will be Powell’s test on dovishness rather than hawkishness

Risk sentiment took a beating last week on China concerns, but US inflation risks were also back on the radar amid strong economic data. While both of these themes will be put to further test in the markets this week, US focus primarily turns to Fed Chair Powell’s comments at the Jackson Hole symposium. The Federal Reserve’s Economic Policy Symposium in Jackson Hole, Wyoming, is scheduled for August 24-26 and Chair Powell speaks on Friday, August 25 at 10am ET. This year’s theme is "Structural Shifts in the Global Economy". From recent commentaries, it appears that central bankers will keep the flexibility to hike rates further, while clearly avoiding committing to cut rates soon. However, a hawkish shock remains unlikely at this point and there will be little new signals for the September rate hike, given that there is more key data due ahead of that meeting. July PCE inflation data comes out on August 31 and nonfarm payrolls are reported on September 1, and these will hold the key to whether we get a September rate hike or not. Rather, the Jackson Hole symposium will be key to assess Powell’s dovishness meter. If he raises concerns on the economic momentum or the rising credit risks, that may prompt the markets to price in rate cuts to start earlier, and could be dollar negative.

China to focus on cleaning up the shadow banking, property, and local government debts

The persistent stress in the Chinese property sector and the shadow banking sector, as well as local government financial vehicles, continues to cast a shadow over market sentiments. The Chinese authorities are seemingly inclined towards a strategy of deleveraging and restructuring rather than bailing them out. This approach aims to proactively tackle potential issues and brace for impactful headlines that could potentially trigger market volatility. Nevertheless, it's important to recognize that concurrently addressing the solvency concerns within these sectors and enhancing the overall allocation of capital across the economy could yield positive outcomes in the long run.

Exploring a potential paradigm shift in  US monetary policy

Could discontinuing interest payments on reserve balances while raising reserve requirement ratios be the Fed's answer to mounting federal debts? In this Saxo article, we delve into this potential paradigm shift in monetary policy. The piece explores the implications for fiscal dominance and the intricate interplay between central banks and fiscal authorities. Delving into the complexities of rising US debt and seigniorage dynamics, it underscores the importance of coordinated efforts between monetary and fiscal policies. The proposed shifts might not only increase demand for Treasury securities but also impact the US's ability to service its growing public debts. However, raising the reserve requirement ratio significantly above its current zero percent could deal a blow to the profitability of US banks.

Could Eurozone PMIs bring in further pressure for EUR?

EURUSD has dropped below 1.09, having closed lower for five weeks in a row. EURGBP has also drifted below 0.86 to come back to one-month lows. Flash August PMIs for the Eurozone will be out this week on Wednesday and provide further input on how activity levels are developing amid concerns of increasingly tighter bank lending standards. Manufacturing PMI for EZ fell to 42.7 in August with Germany concerns underpinning, while services PMI also slowed to 50.9 and risks slipping into contraction. Further weakness will keep ECB’s September rate hike in question. UK’s flash PMIs are also due on the same day and stronger figures may be needed for the Bank of England to hike rates by 50bps at the September meeting.

BRICS summit could be a headwind for the dollar

The leaders of BRICS – Brazil, Russia, India, China and South Africa – are scheduled to hold talks this week Tuesday to Thursday. Key agenda is expected to center around the group’s expansion, with some 40 other nations lining up to join including Indonesia, Saudi Arabia, Argentina and Egypt. This could mean internal conflict as South Africa seems open to the idea but Brazil is worried about its influence getting diluted. Meanwhile, Russia is attempting to ward off currency pressures at home and Xi is trying to find the most appropriate response to pressures on China’s property sector and economy at large. But a larger group could mean more opposition to the West and a larger pursuit against the dominance of the dollar. This could, however, be positive for Gold which acts as an alternate store of value and central banks continue to ramp up Gold purchases in order to hedge against the dollar. Russian invasion of Ukraine and food security issues could also be discussed.

Japan’s Tokyo inflation could ease but will that help JPY?

Japan’s Tokyo inflation for August is scheduled to be released on Friday, and Bloomberg consensus hints at some easing of inflation pressures. Headline CPI is expected to come in at 3.0% YoY from 3.2% while ex-fresh food core measure is seen at 2.9% YoY from 3.0% YoY in July. The core-core measure (ex-fresh food and energy) is still seen to be firm at 4.0% YoY and wage pressures are also seen rising with reports suggesting that a subcommittee of Japan's Central Minimum Wages Council (an advisory body to the minister of Health, Labor, and Welfare) has decided to raise Japan’s weighted average minimum hourly wage by ¥41 in fiscal 2023 amid inflation concerns. It is the largest increase since the current method was adopted of indicating wages on an hourly basis, and is well above the ¥31 increase the previous fiscal year, bringing the minimum wage to ¥1,002. However, despite these wage increases and persistent inflation pressures, Bank of Japan is unlikely to announce any major tweaks to its yield curve control policy and that could signal some further weakness for the Japanese yen until Fed expectations can turnaround.

Nvidia's Upcoming Earnings Report: A Crucial Juncture for AI Stocks Amidst Soaring Demand

This Wednesday's earnings from Nvidia after the close of the US market are poised to serve as a pivotal moment for the markets, particularly for the cluster of AI-related stocks that have experienced substantial gains throughout this year. Analysts are anticipating revenue to reach $11 billion, marking a remarkable 65% year-over-year increase. Additionally, the projected EBITDA stands at $6.3 billion, a significant jump from the $924 million reported a year ago. This surge in financial performance can be attributed to the skyrocketing demand for AI research and implementation, which has surged following the successful launch of OpenAI's ChatGPT.

It is worth noting that the driving force behind this demand surge appears to be primarily Chinese technology companies. This trend has gained prominence due to China's recognition of its lag in the AI sector. Fearing potential future export restrictions imposed by the Biden administration, Chinese tech firms are currently amassing modified GPUs from Nvidia. This proactive measure is an attempt to secure a stable supply of crucial components for their AI endeavors.

As the earnings report approaches, the central question revolves around whether Nvidia can sustain its fiscal year outlook. This pivotal moment will unveil whether the initial rush of demand remains consistent or if there are signs of cooling. The market will be closely observing these results to gauge the trajectory of AI-related sectors and the extent of Nvidia's influence within this evolving landscape.

China's Baidu and Meituan earnings in focus amid cautious sentiment

This week, several large China Internet companies are reporting their earnings, with Baidu (09888:xhkg) and Meituan (03690:xhkg) drawing significant attention. Investor sentiment in the China internet sector remains cautious due to concerns about the slow pace of economic recovery post-China's reopening, property market distress, and shadow banking risks.

The surveyed consensus forecast expects a 12.3% Y/Y revenue growth to RMB 33.3 billion for Baidu's 2Q, driven by healthcare, travel, and business service advertising. Cloud revenue likely grew 5% Y/Y to RMB 4.5 billion, a quarter of AliCloud's and half of Tencent Cloud's. The projected adjusted net profit is a 50% YoY increase to RMB 5.8 billion. Investors are keen on Baidu's online advertising and AI cloud business outlook, along with updates on Ernie Bot.

The consensus forecast for Meituan's 2Q predicts a 31.9% revenue growth to RMB 67.2 billion, and adjusted net income to turn profitable at RMB 4.5 billion from a RMB 0.9 billion loss last year. Investors will focus on the impact of competition with Douyin on Meituan's operating margins.


Earnings this week:

MON: BHP, Zoom Video, CICC, Postal Savings Bank of China, Han’s Laser, Inovance, China Overseas Property, KE Holdings

TUE: Woodside Energy, Medtronic, Lowe’s, Baidu, Kuaishou, iQIYI, Kingsoft, Sunny Optical, Geely, Kingsoft Cloud, Anta Sports, Jiumaojiu

WED: Nvidia, Snowflake, Autodesk, Analog Devices, Splunk, China Construction Bank, China Life Insurance, Ping An Bank, Wuxi Bio

THU: Workday, Marvell Technology, Intuit, Meituan, NetEase, Weibo, ÁAC Technologies, AIA

FRI: Wesfarmers, Royal Bank of Canada, Toronto-Dominion Bank, CRH, Bank of Communications, China Merchants Bank, Sinopec, China Shenhua Energy, Zijin Mining, Wuliangye


Key economic events this week:

MON: PBoC LPR, German PPI (Jul)

TUE: US Richmond Fed Index (Aug), New Zealand Retail Sales (Q2); BRICS Summit (22-24 Aug)

WED: Singapore CPI (Jul), EZ/UK/US Flash PMIs (Aug), Canadian Retail Sales (Jun), US New Home Sales (Jul)

THU: Fed's Jackson Hole Symposium (24-26 Aug), CBRT Announcement, US Durable Goods (Jul)

FRI: Japan's Tokyo CPI (Aug), German Ifo Survey (Aug), German GDP Detailed (Q2), Uni of Michigan Final (Aug)


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