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Markets Today: US retail sales soar in another sign of a hot economy – 16 February 2023

Equities 6 minutes to read
APAC Research

Summary:  In yet another sign of likely re-acceleration in cyclical growth, US retail sales surprised on the upside. Although Fed rate pricing was unchanged with terminal rate above 5.25%, US equities reversed early losses to close in some gains after a strong European session. Dollar rose to fresh highs before softening later, as AUD was troubled by tumbling metal prices and GBP took a hit with cooler inflation print. Crude oil prices still depressed despite IEA raising the demand outlook, and Gold is close to testing key support levels.

What’s happening in markets?

Nasdaq 100 (NAS100.I) and S&P 500 (US500.I) advanced despite rate fear

U.S. equities declined initially following a strong retail sales report that further reduced the probability of any rate cut in 2023 and to the contrary, increased the odds that the Fed may need to hold rates higher for longer. Nonetheless, the stock market was able to walk away from the good-news-is-bad-news script and spent the rest of the day clawing back the early losses and finishing the session higher.  The S&P500 gained 0.3% and Nasdaq 100 advanced 0.8%.

Communication services and consumer discretionary, each rising 1.2%, led the advance in the S&P 500. Airbnb (ABNB:xnas) jumped 13.3% after reporting an earnings beat. Devon Energy (DVN:xnys) was the worst performer within the S&P500. The oil and gas producer plunged 10% after reporting a decline in Q4 earnings.

The ADR of Taiwan Semiconductor Manufacturing (TSM:xnys) lost 5.3% following filings showing that Warren Buffett’s Berkshire Hathaway reduced its stake in the chip maker. Cisco (CSCO:xnas) gained 3.5% in the extended-hour trading after reporting quarterly revenues and earnings beating estimates and raising guidance for the rest of the year.

Yields on US Treasuries (TLT:Xmas, IEF:xnas, SHY:xnas) rose further on solid retail sales

Yields on the 10-year Treasury notes jumped 6bps to 3.8% following a stronger-than-expected retail sales report and a rebound in the Empire State Manufacturing Index. Headline retail sales jumped by the most in almost two years. While the 20-year Treasury bond auction received decent demand with bid/cover ratio at 2.54, new issuance of around USD30 billion from corporate, including USD24 billion from Amgen weighed on the market. Yields on the 2-year climbed 2bps to 4.63%.

Hong Kong’s Hang Seng (HIG3) and China’s CSI300 (03188:xhkg) dragged by property stocks

Hang Seng dropped 1.4% on Wednesday to levels last seen on January 4 and pared its 2023 gain to only 5.2%. The aggregate balance held by banks at the Hong Kong Monetary Authority, a proxy of interbank liquidity, fell to HK80 billion, following HKMA’s intervention to sell USD against HKD to cap the USDHKD from going above 7.85 the upper limit of the special administrative region’s link-exchange-rate regime.

State-owned Economic Daily in the mainland warns about the re-emergence of speculative activities in properties in some cities and calls for more targeted approaches in support of genuine household demand for housing. Chinese developers retreated, with Country Garden (02007:xhkg) falling 5.6%, China Overseas Land & Investment (00688:xhkg) losing 4.6%, and Longfor (00960:xhkg) down 3.5%.

Sportswear company Anta (02020:xhkg) dropped 3.6% on speculation of majority shareholders moving shares to the CCASS clearing system to get ready for a sale. Baidu (09888:xhkg) bucked the market decline and rallied over 3.8% supported by the somewhat return of the hype on the AI-generated content concept. In A-shares, CSI300 fell 0.5%. AI-generated content concept stocks advanced while real estate, domestic consumption, financial, healthcare, and non-ferrous metal names retreated.

Australia equities (ASXSP200.I) moved lower to one-month lows, weighted by CBA. Gold miners and coal companies' results ahead

Yesterday Commonwealth Bank, Australia’s largest lender, issued a cautious outlook as its customers are feeling ‘significant strain’. Its shares sank about 6%, falling from their record highs to $103, while also dragging down the broader Australian share market (ASXSP200.I). Australia’s biggest bank and lender reported disappointing profit results and guided for a challenging year ahead - putting aside more capital for bad debts, as higher price pressures continue to hurt consumers, along with falling home prices. Its net interest margin came in at 2.1%, which was on par with expectations, but its cash profit missed expectations, despite rising 8.6% YoY to $5.15 billion (vs $5.17 billion Bloomberg consensus). The big Bank announced a $1 billion share buy-back and consensus expects 2023 profits to hit another record, and for margins to improve – that’s good to know for long term investors. However, for potential traders, it’s worthwhile noting, yesterday CBA shares gapped down, meaning the market may fill that gap and buy the dip today or in coming days.

Today we will be watching NAB’s quarterly results as well as results from miners, coal giant Whitehaven Coal and gold company Evolution Mining with the market expecting strong results.

FX: AUD and GBP lagged, JPY rallies at Asia open

Further gains in the dollar were seen last night as yields continued to surge, albeit at a softer pace, after US retail sales also surprised to the upside. AUDUSD was the biggest loser on the G10 board amid tumbling metal prices and RBA governor Lowe refusing to step down. AUDUSD dropped 40bps as January employment data disappointed with a fall of 11.5k vs. expectations of +20k. GBPUSD plunged below 1.2100 on the cooler-than-expected inflation data. EURUSD also touched lows of 1.0660 despite Lagarde reiterating that the ECB intends to hike by another 50bps next month. JPY gains returned in Asia after USDJPY rose to 134+ levels overnight, with Japan export data surprising to the upside with a rise of 3.5% YoY vs. -1.7% expected.

Aussie dollar falls as AU jobs data misses. Watching AUDUSD and AUDGBP

The Aussie dollar stumbled again, falling 0.4% after Australian employment data came out weaker than expected, with the unemployment rate surprisingly rising to 3.7% (vs the market expecting a steady rate), while jobs surprisingly fell 11,500 when the market expected 20,000 jobs to be added. We saw the AUD lose its footing yesterday after CBA guided for a cautious outlook, setting to the tone for a pull back on spending in Australia. Also consider watching the AUDGBP after the UK received slightly softer than expected UK CPI, which allows the bank of England to sit on their hands for a little longer, while the RBA can keep hiking following hotter than expected CPI. 

Crude oil (CLH3 & LCOJ3) lower on inventory build despite IEA’s bullish demand outlook

A series of signals from US CPI reported on Tuesday to retail sales print out last night suggest more ammunition for the Fed to raise rates. This has boosted the market pricing of the Fed terminal rate, and dollar strength is back in focus, weighing on commodity prices. Crude oil prices extended their losses after US oil inventories rose 16.3mn barrels to 471mn barrels against expectations of 1.17mn. WTI prices were still below $79/barrel while Brent stayed close to $85. The International Energy Agency (IEA) raised its demand growth estimates by 0.1mb/d to 2mb/d for 2023, but this was overshadowed by swelling US oil inventories.

Gold (XAUUSD) close to testing key support

Gold prices fell further to $1830/oz as US yields surged higher after the January CPI print, and a hawkish tilt was also seen in Fed commentaries. Last night, US retail sales was also hot suggesting more room for the Fed to hike rates, which boosted the USD. The next important levels include the 1,829 level, which is the 38.2% retracement of the rally off the November lows, the 1,809 area which was broken on the way up, and then the 200-day moving average, currently coming in just above 1,775. Pressure on gold miners to do more deals is rising, despite Newcrest’s rejection of the takeover bid from the world’s biggest gold miner Newmont (more below).


What to consider?

US retail sales jump higher

January retail sales in the US jumped higher by the most in almost two years, in another signal that the US consumer demand is holding up strongly despite high inflation and interest rate pressures. Retail sales were by 3.0% from a decline of 1.1% in December and above the 1.8% expected. Strength was broad-based, with ex-gas/autos rising 2.6% from the prior -0.7%. The control group, which is a useful gauge of consumer spending data, rose 1.7%, also beating expectations of 0.8% and above the prior -0.7%. Factory output also beat estimates, rising 1.0%, although industrial production was flat vs. +0.5% gains expected, mostly weighed by reduced heating demand in January.

Geopolitics on watch keeps Saxo’s Defense basket in focus

Russia said its troops had broken through two fortified lines of Ukrainian defenses on the eastern front, as the one-year mark of the invasion approaches. The advances come as Western allies announced more military aid for Kyiv including artillery rounds. The situation may continue to become more tense as Ukraine forces take the time to get trained with the new US equipment. Meanwhile, China is warnings retaliation against US entities involved in the shooting of the balloon. Biden is considering a public address on the downing of an alleged Chinese spy balloon and other unidentified objects. With geopolitical tensions continuing to be on a rise, Saxo’s equity theme basket on Defense remains worth a consideration. Teher were also reports that Germany is poised to increase its defense budget by as much as €10 billion next year, which continues to suggest strong defense focus in the coming years.

Newcrest rejects Newmont's takeover bid 

Newcrest Mining (NCM) rejected the takeover by Newmont saying it undervalues the company, but kept the door open to a revised offer. Australia’s biggest gold miner reported broadly stronger than expected results – given the rise of the gold price. Half year earnings (EBITDA) hit US$919m, that was 4% above consensus. And the gold giant declared stronger than expected dividends of $0.15 per share for the half-year and a $0.20 special dividend. However, net debt rose far more than expected. NCM retained expectations for a strong 2H operational performance.

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