Weekly Commodities Update Weekly Commodities Update Weekly Commodities Update

APAC Daily Digest: What is happening in markets and what to consider next – September 12, 2022

Equities 7 minutes to read
APAC Strategy Team

Summary:  Amid depressed sentiment, with Fed officials reiterating their consistent hawkishness, US equities managed to close higher on the week for the first time in four weeks. It comes as technical trading, short-covering is at play. Meanwhile, fuel shortages see more investment moguls buy in, with Occidental Petroleum shares rising after hours. The volatility index, as measured by the VIX index dropped to its lowest level in 10 days (to 22.8), supporting risk-on sentiment, while Bitcoin moved up 10% to $21,704, after breaking above the $20,000 psychological level. However markets are ready to pivot, with a full calendar of data on tap that with provide clues on the Fed's tightening path.


What is happening in markets?

Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) rally amid another bear market bounce

US equities rallied for the third day closing off Friday at the highest level since August 26, while also ending higher over the five days, for the first time in four weeks. S&P 500 gained 1.5% on Friday, 3.7% on the week, Nasdaq 100 2.2% Friday, 4.1% on the week. We think a technical quant rally is at play and short-covering, which is why there is a risk-on mode, in the midst of depressed sentiment, with Fed officials reiterating their consistent hawkish chorus. The last three trading days have also seen dealers report larger buying from long-funds and hedge funds buying into information technology, banks, pharmaceutical, and consumer discretionary (in particular luxury brands), while there has also been unusually large volume in option activity. The volatility index, as measured by the VIX index dropped to its lowest level in 10 days (to 22.8) while Bitcoin moved above the $20k psychological level, after moving up 10% to $21,704.

Companies big moves in the US

The Grocer Kroger (KR:xnys) soared 7.4% after the company updated its full-year EPS guidance to USD4.05 from the previous forecast of USD3.95, citing strong demand for fresh food and a shift to private-label products. RH (RD:xnys) gained 4.5% despite the upscale home retailer lowering its sales and operating income guidance due to weaker demand and delayed store openings. While the CEO of RH said the US it would not lower prices to boost salesas it fears discounting will erode its luxury brand, this is despite saying the US is already in a recession. Shopify (SHOP:xnys) jumped 8.9% following the company appointing a Morgan Stanley investment banker to take up the role of CFO.

Fuel shortages see more investment moguls buy in. Occidental Petroleum shares, one of the hottest shares to watch

After hours one of the biggest movers in the US was Occidental (OXY.xnys) after Warren Buffett increased his stake in the company, pushing up Occidental shares 1.6% to ~$66.68 (after hours). On Friday night, data filings showed Berkshire Hathaway increased its stake to 26.8%, up from the 20% holding the fund held previously (according to Bloomberg data). It comes as Buffett won regulatory approval to buy up to 50% of the stock, after he has been growing his stake in the company over the last three years. So will Buffett take over the oil and gas giant? A Wall Street Journal article quashed such theories, but one thing is certain, Buffett is bullish on energy amid the energy crisis. So why is Occidental attractive to some? Its price to earnings (PE) ratio is 6.2 times, meaning its relatively cheap, and is expected to report another record profit in 2023 (according to Bloomberg data). Plus, its gas production is forecast to rise in the coming years, as the US bolsters LNG exports to Europe who is weaning itself off Russian fuel. Currently Occidental only makes 50% of its revenue from gas. Also note, Occidental is the best performer in S&P500 this year, up 126%, and you’d think if Buffett increases his stake from ~27% up to 50%, this would excite shareholders.

US treasuries (TLT:xnas, IEF:xnas, SHY:xnas)

With another round of fed talks, this time from Fed Governor Waller, St. Louis Fed President Bullard, and Kansas Fed President George reiterating the Fed’s intention to go for another significant rate hike, i.e. 75 basis points on Sept 21, and auctions of USD42 billion 6-month T-bills, USD41 billion 3-year T-notes, and USD32 billion 10-year (fronted loaded) scheduled for Monday, and USD18 billion 30-year T-bonds on Tuesday, the 2-year yield rose 5bps to 3.51%.  The treasury yield curve flattened as the 10-year yield remained unchanged last Friday.  Tuesday’s August CPI will be the last key economic data release before the Sept FOMC meeting.  While traders are eagerly awaiting the CPI report to get some hints about the Fed’s path of rate hikes, Bullard said on Friday that a “good CPI report shouldn’t affect September Fed call”.

Hong Kong’s Hang Seng (HSIU2) and China’s CSI300 (03188:xhkg)

Hang Seng Index soared 2.7% last Friday, snapping a six-day losing streak, following China’s August inflation data surprised on the downside and raised hope for more monetary easing to come from the Chinese policymakers. Mega-cap internet stocks strongly, Meituan (03690:xhkg) +4.9%, Netease (09999:xhkg) +4.8%, Baidu (09888:xhkg)+3.9%, Alibaba (09988:xhkg) +3.0%, Tencent (00700:xhkg) +1.7%.  One notable underperformance in the internet space was Bilibli (09626:xhkg/BILI:xnas) which plunged 16.3% after reporting a larger than expected loss in 2Q2022 on the deterioration of gross and operating margins.  Chinese property names rallied, Country Garden (02007:xhkg) +16.8%, Longfor (00960:xhkg) +7.4% on market chatters about unconfirmed stimulus measures from policymakers to boost the ailing property sector. CSI 300 climbed 1.4%, led by property, dental services, infrastructure, and digital currency.

Ahead of the mid-autumn festival, catering stocks gained, Jiumaojiu (09922:xhkg) +8.9%, Haidilao (06862:xhkg) +2.8%. Lepu Biopharma (02157:xhkg) jumped 284%. After the market closed, the Center for Drug Evaluation posted on their website that a targeted antibody-drug conjugate co-developed by Lepu Biopharma and Keymed Biosciences has obtained breakthrough therapy designation status from the Chinese drug regulator. 

Northbound inflows into A shares reached USD2.1billion equivalent last Friday, the largest inflow in a single day since the beginning of the year.  Hong Kong, Shanghai, and Shenzhen are closed today for the mid-autumn festival holiday.

EURUSD boosted by Ukraine progress

The US dollar ended the week on a backfoot after printing fresh YTD highs earlier in the week. EURUSD took a look above 1.01 once again early on Monday, amid optimism after military progress was made by Ukraine and talks of ECB considering quantitative tightening by year-end (see below). Gains were however reversed later. USDJPY optimism was also braked with the verbal intervention from the authorities getting louder late last week.

Crude oil prices (CLU2 & LCOV2)

Oil prices are lower to start the week with sentiment somewhat supported by Ukraine recapturing some of the key cities from Russia, and making military progress. Still, concerns on Russia’s war tactics getting bigger will continue to underpin caution, and Biden administration is now mulling whether to stop releasing oil from the US Strategic Reserves. WTI in Asian trading hours is 0.5% lower at $86.34/barrel.



What to consider?



Fed speakers stay hawkish before the blackout period begins

Fed rate hike expectations have picked up strongly since Jackson Hole, and we have heard an extremely unanimous voice from the Fed speakers since then. Some of them have clearly made the case for a 75bps rate hike in September, with Bullard on Friday even saying that Tuesday’s CPI report is unlikely to alter the incoming 75bps rate hike in September. Governor Waller leaned hawkish as well, but did not specify the size for September’s decision, but a “significant” hike still points to that. Esther George stayed away from guiding for individual meetings, but made the case for sustained rate hikes.

EU minsters split on Russian price cap

At the EU energy summit that kicked off on Friday, several key issues pertaining to energy supplies and liquidity were discussed, but decisions have been postponed as proposals are only likely to be delivered in the next few weeks. Consensus could not emerge on whether and how to impose a price cap on Russian natural gas, and members differed on whether a price cap should apply only to Russia or to other producers too. Tensions also bristled over proposed mandatory cuts in power demand and German calls for a mechanism to share any excess supply.

India’s rice export ban to aid the galloping global food crisis

After a wheat ban earlier this year, India has now announced restrictions on rice exports, aggravating concerns of a global food crisis. Bloomberg reported India imposed a 20% duty on white and brown rice exports and banned shipments of broke rice -- parboiled and basmati rice were excluded from the export duty and/or trade restrictions. The new curbs apply to about 60% of India's rice exports and go into effect Friday. India’s rice output has been depressed due to the severe heatwaves, but also possibly to cap domestic price pressures. If these measures are duplicated by other key rice exporting countries like Thailand and Vietnam, there could potentially be a severe grain shortage globally, especially weighing on poor rice importing nations. We continue to see a threat of climate change to global agricultural output, which along with a prolonged energy crisis, suggested price pressure will stay in the medium-to-long term despite some cooling off from the recent highs.

Record volumes of Australian wheat go to China

Despite trade disputes over other agricultural commodities, data shows China is importing a record amount of Australian wheat, as farmers gear up for a third consecutive bumper grain harvest. Industry sources estimate China will import about 6.3 million tonnes of Australian wheat for the year to September 30, making China by far Australia’s biggest customer. Indonesia is in second place with 3.7 million tonnes. The trade with China is up 186% from 2.2 million tonnes last year. Australian Federal government forecaster, ABARES expects farmers across Australia will have harvested 32.2 million tonnes of wheat, just shy of last year's record, 12.3 million tonnes of barley and a near-record 6.6 million tonnes of canola. Australian Agricultural stocks to watch include Graincorp (GNC), Elders (ELD), which are trading flat this year.

China’s medium to long-term corporate loans picked up in growth while mortgages remained sluggish

Over the past months, Chinese policymakers instructed policy banks and gave window guidance to commercial banks to extend credits to support infrastructure construction and key industries of the economy.  Some results showed up in the August loan data which recorded a growth of 16% MoM annualized in the outstanding medium to long-term loans to corporate. The amount of new medium to long-term loans to corporate was RMB735 billion in August versus RMB346 billion in July and RMG522 billion in August 2021.  Loans to households however remained sluggish. New medium to long-term loans to households (which were primarily mortgage loans) were RMB 266 billion in August, still much lower than the RMB426 billion level in August 2021.  The outstanding medium to long-term loans to households grew 5.3% MoM annualized in August. Outstanding aggregate financing grew 10.5% YoY in August, slightly below the 10.7% YoY in July. M2 grew 12.2% in August, edging up from July’s 12.0% YoY. 

China’s PPI and CPI surprised on the downside

China’s PPI slowed to 2.3% YoY (Bloomberg consensus: 3.2% ) in August from 4.2% in July.  The deceleration was largely attributable to the base effect and a decline in energy and material prices. CPI unexpected fell to 2.5% YoY in August from 2.7% in July while economists surveyed by Bloomberg had expected a rise to 2.8%.  Rises in both food prices (down to 6.1% YoY in August from 6.3% YoY in July) and the prices of non-items decelerated (down to 1.7% YoY in August from 1.9% YoY in July).  Excluding food and energy, consumer prices were unchanged at 0.8% YoY and Services inflation was also unchanged at 0.7% YoY in August.

China’s central bank and banking regulator issued a list of 19 systemically important banks

The People’s Bank of China and the China Banking and Insurance Regulatory Commission issued a list of 19 systematically important banks.  These 19 banks will face between 0.25% and 1% higher minimum capital requirements and additional leverage requirements.  They are also asked to prepare contingency plans for major risk events.  These 19 banks are Industrial and Commercial Bank of China, Bank of China, China Construction Bank, Agricultural Bank of China, China Minsheng Bank, China Everbright Bank, Ping An Bank, Hua Xia Bank, Ningbo Bank, China Guangfa Bank, Jiangsu Bank, Bank of Shanghai, Bank of Beijing; China CITIC Bank, China Postal Savings Bank, Shanghai Pudong Development Bank, Bank of Communications, China Merchants Bank, and Industrial Bank.

The Communist Party of China (CPC) is set to amend the party constitution at its upcoming national congress

The Political Bureau of CPC Central Committee said in a readout last Friday that the Communist Party of China (CPC) is set to “work out an amendment to the Party Constitution that facilitates the innovative development of Party theories and practices and meets the need of advancing the great new project of Party building in the new era” at the CCP’s national congress to convene starting on October 16.  It further elaborates that “the latest adaption of Marxism to China's context and new circumstances will be fully epitomized and so will the new ideas, new thinking and new strategies of governance developed by the CPC Central Committee since the Party's 19th National Congress in 2017. The amended Party Constitution will also clarify the new requirements for upholding and strengthening Party's leadership and advancing the Party's full and rigorous self-governance under new circumstances, so as to better navigate the great social revolution with vigorous self-reform”.

ECB set to announce Quantitative Tightening by year-end

After the European Central Bank’s 75bps rate hike this month, chatter on quantitative tightening to begin by year-end has gathered pace. Wall Street Journal reported that the ECB members agreed to  start discussions on quantitative tightening in early-October at a non-decision meeting in Cyprus on October 5, and will also likely be debated at subsequent meetings. Decision is expected to be made before year's end and will most likely see the beginning of balance sheet run-off in the first quarter of 2023. Whether the move will tighten financial conditions a lot will depend on details, especially pace of reduction in the €5 trillion balance sheet. Interestingly, ECB President Lagarde said last week that now is not the time for such measures to be implemented

 

For a look ahead at markets – tune into our Saxo Spotlight.

For a global look at markets – tune into our Podcast.


Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)
Full disclaimer (https://www.home.saxo/legal/saxoselect-disclaimer/disclaimer)

Saxo Bank (Schweiz) AG
Beethovenstrasse 33
CH-8002
Zurich
Switzerland

Contact Saxo

Select region

Switzerland
Switzerland

All trading carries risk. Losses can exceed deposits on margin products. You should consider whether you understand how our products work and whether you can afford to take the high risk of losing your money. To help you understand the risks involved we have put together a general Risk Warning series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. The KIDs can be accessed within the trading platform. Please note that the full prospectus can be obtained free of charge from Saxo Bank (Switzerland) ltd. or the issuer.

This website can be accessed worldwide however the information on the website is related to Saxo Bank (Switzerland) Ltd. All clients will directly engage with Saxo Bank (Switzerland) Ltd. and all client agreements will be entered into with Saxo Bank (Switzerland) Ltd. and thus governed by Swiss Law.

The content of this website represents marketing material and has not been notified or submitted to any supervisory authority.

If you contact Saxo Bank (Switzerland) Ltd. or visit this website, you acknowledge and agree that any data that you transmit to Saxo Bank (Switzerland) Ltd., either through this website, by telephone or by any other means of communication (e.g. e-mail), may be collected or recorded and transferred to other Saxo Bank Group companies or third parties in Switzerland or abroad and may be stored or otherwise processed by them or Saxo Bank (Switzerland) Ltd. You release Saxo Bank (Switzerland) Ltd. from its obligations under Swiss banking and securities dealer secrecies and, to the extent permitted by law, data protection laws as well as other laws and obligations to protect privacy. Saxo Bank (Switzerland) Ltd. has implemented appropriate technical and organizational measures to protect data from unauthorized processing and disclosure and applies appropriate safeguards to guarantee adequate protection of such data.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc.