Why Why Why

China easing saves the day for Asia even as US indices on the verge of a bear market

Equities 8 minutes to read
APAC Strategy Team

Summary:  China’s cut to 5-year loan prime rate brings a relief to Asian markets on Friday and will likely boost industrial metals and commodities in general. Japan’s inflation touched new highs but BOJ remains in a position to shove it off amid growth pressures and an improving positioning in the yen. Our cybersecurity theme is reaffirmed by strong Palo Alto earnings.


What’s the big picture?

The outlook for broad equities remains dim in 2022 and 2023, as financial conditions tighten, logistics issues continue, and commodity prices remain elevated. Investors return to safety in bonds, sending bond yields lower, yet yields remain elevated. The US dollar index trades at close to its highest levels since 2003, with investors bunkering in the safe haven currency. Overnight Goldman said there’s a 35% chance the US economy will enter a recession in the next two years.

What’s happening in markets?

The S&P500 remains pressured and has now fallen 18% from last year after falling back to its lowest level in a year overnight. Further falls are likely ahead as company earnings weaken, and financial conditions are set to get tighter, plus we will likely see company earnings downgrades, reflecting weaker fundamentals. Okay so the S&P500 trades at 16.5 times 12-month estimated earnings and is below its 10-year average, but we don’t think we have seen the bottom of US equities yet - the technical indicators suggest further downside is ahead too. 

Nasdaq has now lost 27%, but some of the stay home economy names (Netflix, Docusign, Zoom, Paypal are down 60-70%) and further selling is likely ahead, while business spending linked companies like IBM and Cisco are guiding for weaker outlooks. The technical indicators suggest further downside is ahead for tech too.

Hong Kong and mainland China equity markets rallied over 1% on improvement of sentiment towards China internet companies overnight in New York trading and this morning’s larger than expected 15bps cut in Chinese banks’ 5-year Loan Prime Rate (5yr LPR) from 4.6% to 4.45%. Coal mining stocks surged 5% to 7% following Premier Li Keqiang vowed to ensure no disruption to electricity supply.  Xiaomi (01810) reported revenues in line with market expectations but operating income and EPS disappointed due to higher operating expenses and losses in investments.

Asian equity markets rejoice China’s big LPR cut. After a mixed US session overnight, Asian equities were relieved from China’s LPR cut that exceeded market expectations and may provide support to the ailing property sector. Tech stocks got a boost as well. Japan’s Nikkei (NI225.I) was in gains of over 1% as consumer discretionary made a comeback as well and Fast Retailing (9983) rose over 2.5%. Singapore’s STI index (ES3) rose 1.5% as Chinese EV maker Nio rose at its debut in Singapore.

USD makes a recovery in Asia mainly on the back of AUD. AUDUSD unable to find a firm direction and was seen struggling even after the PBOC rate cut. USD was heavy overnight as the longer end of the US yield curve is struggling to go back above 3% amid recession concerns and risks of an inversion are increasing again. This, along with the yen’s appeal as a safe haven returning, make a case for a stronger rebound in JPY. John Hardy’s piece highlights how market positioning is also stretched for the yen.

Block (SQ, SQ2) – a proxy for both Bitcoin and tap and go – saw its shares rise 6.1% in NY overnight, but they are still down 70% from their high. Meanwhile on the ASX, Block rose 9% today. Block held its investors day; giving hints of long-term profitability and expanding opportunity to drive growth. Its stock was upgraded by several investment banks.  We like Block’s business model and note it is a profitable business. The market also thinks its gross profit, earnings and income will all see growth margins rise in 2022. The technical indicators suggest Block faces long-term indicators as does the entire tech sector. However, over the short term, the technical triggers (MACD, RSI) suggest short term buying could pick up.

SQM – another lithium company shines – putting a spotlight on the sector. Lithium and agricultural company giant SQM shone overnight 5.6%, taking its yearly gain to 87% after delivering stronger than expected results and guidance. But we are also seeing most lithium stocks rally on their strong outlook. As mentioned this week and previously, SQM looks poised to deliver stronger than expected results, following peers Albemarle and Livent. And it did. Overnight, SQM, a top lithium producer delivered stronger than expected revenue and income results. What’s also exciting for shareholders is it estimates lithium demand to grow 30% in 2022 and said it would lift resources spending in Chile and abroad. SQM’s sales hit a record high, and income rose 12 times the profit over last year’s record. The company makes 41% of its profits from lithium and 59% from fertilizers and plant nutrients including potassium.

Palo Alto earnings reaffirm our cybersecurity theme. PAW Q3 FY2022 earnings delivered a beat with EPS $1.79 vs. $1.68 expected on a revenue of $1.39 billion vs.  $1.36 billion expected. Outlook was upbeat as well and the stock jumped higher by 11% in after hours trading to 484.50. Other cybersecurity firms like Crowdstrike (CRWD) and Zscaler (ZS) got a lift as well in the post market session. The evolution in global digitalisation demands an equivalent increase in cyber protection, and with the growing volume and complexity of cyberattacks, we expect the cybersecurity industry to continue to show high growth numbers relative to the general equity market.

Gold (XAUUSD) resumed its downtrend after hitting a one-week high. Gold prices gained upward momentum on Thursday amid the weakness in US dollar and the slide in yields, and as it bounced off the psychological $1800 levels. But the yellow metal has lost momentum again in Asia and sideway trading between $1780 and $1883 is likely to continue. We still remain bullish long term on gold as noted by Ole here, and a move above $1868 will be key to reverse the bearish momentum.

What to consider?

Weak US data but Fed speakers remain hawkish. Existing home sales in April fell to 5.61m annualised (est. 5.65m, prior 5.75m), the lowest reading since June 2020 but still above pre-pandemic levels. The Leading Index for April fell 0.3% m/m (est. flat, prior revised lower to +0.1% m/m) amid weak consumer expectations. Weekly initial jobless claims were 218k (est. 200k, prior revised from 203k to 197k). The Philadelphia Fed business survey for May disappointed as well at 2.6 (est. 15.0, prior 17.6). FOMC member George reiterated what Powell said about raising rates till inflation backs down even if that means soft landing, and that they won’t back off due to the slide in equities.

The Australian Federal election is being held at the weekend. But both parties, Labour and Liberal don’t have a policy to reduce carbon emissions from coal, and both have not pledged large scale funding for clean energy. This continues to support our view that Australian large producers in oil, gas, and coal stocks like Whitehaven Coal (WHC), Worley (WOR), Woodside Petroleum (WPL), Beach Energy (BPT) will likely be supported higher. These stocks have momentum and are the best performers on the ASX this year.

Japan’s headline inflation at 7-year highs. Japan April CPI accelerated at the steepest rate since October 2014, up 2.5% y/y from 1.2% y/y in March. Core inflation (ex food) increased to 2.1% y/y, the highest since March 2015 from 0.8% y/y last month. This was above the BOJ target of 2% for the first time since 2015, and reflected gains in energy prices especially as cheaper phone fees faded away. Pent-up demand may shield the economy from the impact of rising prices for now, and provide room for the BOJ to stay accommodative especially as trade data and private investment hint at a slow Q2 GDP growth as well.

Potential trading ideas to consider?

Commodity stocks and ETFs will likely garner increased attention, especially those in industrial metals, after China cut its interest rates again (the biggest cut to its 5-year rate since 2019) – to stoke fire into its economy. The largest commodity companies to look would be BHP (BHP), Rio Tinto (RIO) as example, which would you assume could see increased orders in iron ore (essential for steel) and copper for construction works as well, as well as aluminium. You can also look at commodity ETFs like BetaShares Australian Resources ETF, VanEck Australian Resources ETF, and SPDR ASX200 Resources given Australia is the largest exporter of iron ore and coal to China and China relies heavily on coal for its electricity.

Indonesia lifts palm oil ban as expected. We had noted in this piece earlier that Indonesia’s palm oil ban is unlikely to extend beyond a few weeks given their production levels exceed the local consumption. Indonesia has now resumption of palm oil exports from May 23 and this suggests palm oil prices may have further downside. Prices for other edible oils such as soybean may also see a relief. While the move maybe a positive for Asian food makers like Singapore’s Wilmar, Malaysia plantation stocks like will suffer.

 

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.