APAC Strategy Team
Summary: Equity and commodity markets seem to be on a risk-on frenzy for now, supported by the surprise weaker US CPI print, as well as China introducing 16 property stimulus measures at the weekend, following the easing of some Covid restrictions. However the market doesn’t have too far to look for the next catalysts that could continue the rally, stunt it, or see it take a haircut. Up next we watch US producer prices, and US retail sales, which may give the Fed further ammunition to slow down its pace of tightening if the numbers show the US economy is continuing to crack. UK’s outlook, Japan’s Q3 GDP growth rates, as well as China’s industrial production, retail sales, and fixed investment data are also key to watch. As well as corporate earnings from Nvidia and the Aussie dollar.
Investors will be looking for further signs that point to a slowdown in inflationary pressures. In the October CPI release last week, we saw a fall in health insurance costs due to technical factors, which added to the slowing of the service component of core CPI. This is important to the calculation of core PCE, which the Fed watches most closely. As a result, this week investors will pay more attention to the October producer prices index (PPI) numbers on Tuesday, as they try to gauge if the service component of core inflation is slowing. Bloomberg consensus estimates PPI will rise 8.4% Y/Y and +0.3% M/M for core PPI or +7.2% Y/Y. If the numbers are weaker than this, it could provide further support to the equity market rally, as the Fed would garner more catalysts to slow its pace of hikes. Then on Wednesday, retail sales are on watch and are expected to have rebounded, rising 1% in October after stagnating the month earlier. On top of that, a bevy of large retailers, report earnings including Home Depot, Walmart, and Target, which will help investors gauge the health of the world's largest economy. Elsewhere in America, Canada will release inflation and housing starts data.
Investors will get to gauge what the Fed’s latest thinking is, as we hear from a number of Fed officials this week, who will likely focus on the softer CPI print last week and if it’s changed their assessment of inflation and interest rate rates. Remarks from Fed Governor Christopher Waller will likely be a focus as Waller previously proposed not to pause, until core PCE falls below 3% on a monthly annualized basis. On top of that, speeches will be made from Neel Kashkari and Loretta Mester on Thursday
G-20 leaders will be meeting Bali, Indonesia this week on Tuesday and Wednesday, and the agenda is likely to be centered around geopolitical tensions and financial market risks. It is interesting to note that China has signaled the easing of its zero covid policy ahead of this event, despite the recent surge in cases. The meeting between Biden and Xi today will be key in the current cold war environment, especially with respect to the US tech controls and the stance on Taiwan. Other key areas of focus will be the Ukraine war, despite Putin’s lack of attendance at the event, as well as the global inflation concerns and what the global tightening wave means for financial markets. Lastly, climate change is likely to remain on the agenda, with progress stalling over the year as the focus shifted to meeting the world’s energy needs.
Japan reports preliminary Q3 GDP on Tuesday, followed by the October CPI print on Friday. Growth is likely to weaken in the third quarter, with Bloomberg consensus looking at 1.1% QoQ print from 3.5% previously, mainly driven by a drag from net exports due to the surge in import prices. However, some support may be seen from private consumption with labor cash earnings and retail sales having stayed upbeat in the quarter. Meanwhile, business investment also likely improved, as suggested by large manufacturer’s Tankan report for the third quarter. The outlook also remains supported by the series of fiscal measures announced by the government, along with increased tourism. October CPI is likely to surge to fresh highs of 3.7% from 3.0% previously, with the core measure seen at 3.5% from 3.0% in September, but the outlook is likely improving as the Japanese yen recovers.
The UK updates markets on its fiscal plans in a week of reckoning following the collapse of Liz Truss’s administration. Chancellor of the Exchequer Jeremy Hunt on Thursday presents the medium-term outlook accompanied by updated economic forecasts. He’ll try to further restore investor confidence after his predecessor’s announcement of unfunded tax cuts created panic in markets, but spending cuts and tax rises remain on the horizon. While fiscal consolidation is still needed, excessive frontloading will mean more economic pain and backloading could impinge on government credibility. It’s a delicate balance, especially with double-digit inflation and recession concerns also on watch.
October retail sales in China are expected to decelerate to +0.7% Y/Y according to the Bloomberg survey from +2.5% Y/Y in September as the surge in COVID cases and pandemic control restrictions took their toll on consumption. Industrial production is estimated to slow to +5.3% Y/Y in October from +6.3% Y/Y in September, amid Covid-related restrictions, slower auto production, and weak exports.
Nvidia (NVDA) is set to release third-quarter earnings on Wednesday, November 16 with analysts expecting revenue of $5.84bn down 18% y/y and EBITDA of $2.1bn down from $3.2bn a year ago and EPS of $0.71 down 30% from a year ago. Nvidia shares appear to be gaining traction of late, so its results will be watched closely, especially its outlook. If they are better than expected, you could see sentiment remain supported and it shares could continue to rebound. NVDA shares have risen about 40% in four weeks, but its shares are still down 52% from its high. Nvidia has been suffering amid restricted chip sales to China and declining PC demand. Pay close attention to if its results meet or exceed expectations, its outlook and what it sees as the potential full effects on the US/China chip restrictions. For detailed analyst, refer to Saxo’s Head of Equity Strategy, Peter Garnry’s note.
The Aussie dollar is gaining on the back of China's property sector rescue package. China introduced 16 property measures to address the developer liquidity crisis; from blanket debt extensions, to loosening down-payment requirements for homebuyers. On top of that that, China’s eased covid restrictions; shortening to five-day quarantines, which is aimed at reducing the economic impact of Covid Zero, rather than relaxing restrictions. While the market still awaits further easing developments, the market is buoyed on forward looking hopes that the AUD will continue to be bid on commodity demand picking up. As commodity hope-demand picks up, so have respective commodity prices; the iron ore (SCOA) price is back above US$90 after rising 6% last week, the copper price lifted about 5% last week, and the lithium price is also higher, with carbonate prices up 118% year-to-date. The next key event to watch for the Aussie dollar is the RBA meeting minutes; released Tuesday November 15, which should give more clues on the course of the central bank’s hikes after it made a lower-than-expected 25bps rate hike this months.
Meituan (03690:xhkg) kicks off the busy earnings calendar of China Internet companies on Monday, followed by Tencent (00700:xhkg) on Wednesday, Alibaba (09988:xhkg) on Thursday, and JD.COM (09618:xhkg) on Friday. Analysts estimates for top line growth in Q3 are subdue on weak consumption recovery and macro environment. Slow gross merchandize value (GMV) growth during the Singles’ Day festival may point to sluggish Q4 outlook. Alibaba's GMV growth during the Singles' Day festival was flat. JD.COM has not yet announced its numbers except saying GMV had positive growth Y/Y during the period (from Oct 31 evening to Nov 11 end of day). According to estimates, eCommerce platform GMV grew about 14% Y/Y but the large traditional eCommerce platforms were estimated to see GMV growth at just around 3% Y/Y.
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2024: The wasted year
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.
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.