APAC Daily Digest: What is happening in markets and what to consider next – August 30, 2022
APAC Strategy Team
Summary: The rise in U.S. treasury yields pressured growth stocks with the Nasdaq 100 falling below its 50-day average, which puts it back in a precarious position. Fed Kashkari said he was glad to see the markets fell after Chair Powell’s Jackson Hole speech to tighten financial conditions. Global equity markets have certainly got the message and are in a risk-off mood.
What is happening in markets?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I)
US Stocks fell for the second day, but modestly compared to Friday’s sell-off that was triggered by Fed Chair Powell vowing rates will stay higher for longer to cool runaway inflation while suggesting there will be no pivot to cutting rates in 2023, S&P 500 -0.7%, Nasdaq 100 -1%. Minneapolis Fed president Kashkari said that “he certainly was not exited to see the stock market rallying” after the last FOMC meeting and “people now understand the seriousness of our commitment to getting inflation back down to 2%.”
Tech stocks dragged the markets lower, Nvidia -2.8%, Tesla -1.1%. Twitter (TWTR:xnys) dropped 1.1% after Elon Musk ad subpoenaed a Twitter whistleblower to share information. Meanwhile, gains in value stocks somewhat held up the market last night, with the oil, gas, and agricultural sectors rising 1-2%. It comes as Oil prices rose 4% on Monday as potential OPEC+ output cuts and conflict in Libya helped to offset a strong U.S. dollar. While the Ag sectors were supported higher after the wheat price jumped 4.9% and corn rose 2.2% (at its highest level in 2 months) after heat damage worsened US crops more than expected. As such it appears markets are back to their risk off modus operandi, selling down growth names (which are based on future earnings which gets diminished amid higher rates), and instead, buying value (commodities), with rising cashflows.
U.S. treasuries (TLT:xnas, IEF:xnas, SHY:xnas)
US treasury yield rose across the curve. The 2-year yield rose to as high as 3.48% during the day, the highest level since November 2007, before paring the rise to settle 3bps higher at 3.42%. The 10-year yield rose 7bps to 3.11%, taking the 2-10 year curve steepened by 3bps to -32bps.
Hong Kong’s Hang Seng (HSIQ2) and China’s CSI300 (03188:xhkg)
Hong Kong and mainland China equities traded relatively calm in the midst of a large post-Jackson Hole selloff in the U.S., Hang Seng Index -0.7%, CSI 300 -0.4%. The deal made between the U.S. and China regulators last Friday regarding access to audit work papers did not trigger much new buying in China internet stocks on Monday as it had already been well wired before the official announcement. Further, there is much remained to be seen if the agreement will be implemented to the satisfaction of both sides as the U.S. and China regulators seem to differ in their interpretation. Meituan (03690:xhkg) gained 2.6% after reporting solid Q2 results, which Hang Seng Tech Index dropped 1.2%.
China’s industrial profits slumped to contracting 14.5% YoY from (v.s. +1.1% in June) and a fall of 11.3% sequentially from June. The weakness was mainly driven by upstream sectors. Coal mining stocks initially slumped but rallied later in the days and finished higher in Hong Kong and mainland bourses. Geely (00175:xhkg) rose 1.7% as the automaker’s Zeekr line of EVs will be the first to use a new battery from CATL that provides over 1,000km range per charge. SMIC (00981:xhkg), -2.1%, announced spending USD7.5 billion to build a plant in Tianjin to make 12-inch wafers. Chinese banks traded weak as Reuters reported that China’s central bank and bank regulators had been making calls to banks to push them to make more lending to support the real economy than put their funds in financial investments.
USDJPY weakness to bring back pressure on Bank of Japan
USDJPY is back to testing its record July highs despite little change in money market pricing of the Fed rate path following Powell’s hawkish speech at Jackson Hole. The peak Fed funds rate is still priced in at 3.8%, while some of the Fed speakers have started to suggest 4%+ levels that may be needed to combat inflation. This brings the September dot plot in focus, but we get the jobs and CPI data before that as well. Any further upward re-pricing of the Fed path, if resulting in gains in US 10-year yields, could very well take USDJPY to new highs with Japanese yields still remaining capped due to the Bank of Japan’s yield curve control policy. If however, US data underwhelms, the room on the downside for USDJPY is tremendous.
USDCNH made a new high at 6.9327
Wider interest rate differentials between the U.S. dollar and the renminbi and a weaker economic outlook in China continued to pressure the renminbi weaker. USDCNH surged to as high as 6.9327 on Monday during Asian hours before paring it as the greenback fell against most of the G10 and emerging market currencies in London hours. In Asia this morning, USDCNH is trading at 6.9066.
Crude oil prices (CLU2 & LCOV2)
Crude oil prices saw their best day in a month amid threats of a decline in supply from OPEC cuts and production outages in Libya. Brent futures rose above $105/barrel although some softening was seen in the Asian morning, while WTI rose to $97/barrel. This follows news from last week that Kazakhstan’s exports of crude may be impacted for months because of damage to its port facility. Meanwhile, negotiations between Iran and the US over the revival of the 2015 nuclear deal could drag on for weeks, easing fears of an imminent surge in supply.
What to consider?
The volatility index rises to its highest level in 9 weeks, suggesting more volatility is coming. And the fundamentals back this up with US yields spiking
After the Fed’s 8-minute Jackson Hole speech, the volatility index surged to its highest level in 9-weeks, forming an uptrend pattern, suggesting more market volatility is ahead. We believe the market is only just beginning to price in higher for longer interest rates and inflation. The bond market is affirming this with yields spiking again. But what is also alarming, is that the futures market is still pricing in that the Fed will cut rates in 2023. This is despite the Fed suggesting it won’t pivot to cutting rates. The other issue is keeping markets on notice is that; if the Fed makes more hawkish remarks and hikes rates more than expected, then the market will face further volatility, and selling in growth sectors and names that are interest rate sensitive, are likely to come under pressure.
Shell CEO cautions against a prolonged European gas crisis
Shell CEO Ben van Beurden gave comments from Norway’s ONS conference, suggesting that Europe could face gas shortages for a number of winters. This disproves reports suggesting that Europe has already built reserves for the winter demand, and reaffirms our belief that a move to broad-based energy supply will continue to be top of mind in the long run. In the near term, demand destruction appears to be the only possible solution, and Van Beurden stressed need for efficiency savings as well as rationing.
Eurozone inflation and Nord Stream maintenance will be key for the ECB
There is no question on the direction in Eurozone inflation, given the extensive reports on gas prices and power costs in the region over the last few days. However, some softening may be warranted after an all-time high of 8.9% was reached on the Eurozone inflation print in July, given the easing in pump prices in August. Still, gas supply concerns continue to remain top-of-mind for Germany with Gazprom announcing another leg of maintenance for the Nord Stream pipeline this week. Food prices are also seeing another pickup, and further gains in the headline print in Q4 cannot be ruled out. Calls for a 75 basis points rate hike by the European Central Bank have already picked up, and these could gain further traction if we see a strong CPI print this week. However, if Nord Stream supply comes back on time after its 3-day scheduled maintenance, and with some potential increases in capacity as has been hinted, that could mean a substantial decline in European gas prices and relief in utility costs in the months to come.
ECB Lane tones dials back on jumbo rate hike expectations
ECB chief economist Lane was on the wires on Monday, and hinted at a more steady pace of rate hikes in a “step-by-step” manner rather than jumbo rate hikes. This appears to be a pushback against calls for a 75bps rate hike at the September meeting, as he made the case to allow the financial system to absorb the rate changes. Moreover, on inflation, Lane said long-term inflation expectations remain close to the two per cent target, while near-term inflation expectations are quite elevated.
BYD reported 1H earnings at the high end of the preannounced range
Chinse auto maker BYD (01211) reported 1H revenues growing 66% YoY to RMB 151 billion. In terms of segments, auto revenues surged 130% YoY while mobile handset revenues contracted 4.8% YoY. Net profits jumped 206% to rMB3.595 billion, at the top end of the preannounced range of CNY2.8-3.6 billion. Volume growth (353K new energy passenger vehicles in 2Q, +265% YoY) beat market expectations despite two rounds of price increases in 2022 and supply chain disruptions. The company’s EV market share rose to 29% (vs 17% in 2021).
Pinduoduo delivered Q2 results showing stronger than peer sales growth
Pinduoduo (PDD:xnas), a leading eCommerce platform with strong penetration into agricultural products and online shoppers from rural areas., reported 1H total revenue growing at 36% YoY, far exceeding the 3% YoY consensus estimate. The company attributed the revenue growth to a recovery in consumption since mid-May, successful promotion campaigns, and 48-hour daily necessity supply packs for people facing lockdown. The company’s strong market position in rural areas and agriculture-related products also help it stand out from its rivals. In Q2, the company achieved a 20 percentage point improvement in margins, reaching 33.5%, but the management cautioned investors that the margin compression was attributed to temporary cost savings early in the quarter and spending had increased since mid-May. Non-GAAP EPS came in at Rmb7.54, +161%
Uranium companies and other nuclear-related companies are back in the spotlight
Elon Musk said countries should not shut down existing nuclear power plants as Europe grapples with an energy crisis “If you have a well-designed nuclear plant, you should not shut it down - especially right now”, said Musk during an energy conference in Norway. That resulted in the Global X Uranium ETF climbing 7.4% on Monday to its highest level since June 8, supported by US uranium stocks rising. Uranium stocks in the Asia-Pacific region to watch include Australia’s Paladin, Deep Yellow and Boss Energy, as well Japan’s Kansai Electric Power and Tokyo Electric Power, as well as Mitsubishi Heavy Industries. In South Korea watch Doosan Enerbility, Kepco. And in Europe, monitor Yellow Cake and Kazatomprom.
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