Summary: Markets await the key US March CPI report, while they continue to price in the Fed will cut rates this year. We still believe a cut is not likely. Buffett shows interest in Japanese equities. Western Australia braces for the biggest cyclone in a decade. And Gold stories continue to glisten. Newcrest Mining receives a beefed up $19.5 billion takeover offer from Newmont. Australian dollar gold trades at its highest level in history. China Australia relations could reach a potential break through. Crude oil rips higher and Chinese credit data shows its economy's outlook is looking brighter.
The S&P500 closed steady on Tuesday but holds a 17% gain from its October low, while the Nasdaq 100 lost 0.7%, but remains up ~24% from its October low, with market participants hoping the Fed will cut rates this year. That said, although both indices seem to be remaining in uptrends, we think the market has perhaps incorrectly priced in that the Fed will be cutting rates this year. On Tuesday, New York Fed President John Williams said Fed officials still have more work to do to bring down prices, echoing remarks from his colleagues in recent days, and suggesting they will stay the course with rates, despite the uncertainty amid the banking sector turmoil.
Tesla (TSLA) shares gained 1.2%, moving up off almost four-week lows. Tesla shares have fallen about 10% from the cycle high hit on March 31, of $207.79. That said, Tesla shares are holding a gain of about 81% from its January lows, with the market seeming to be pricing in that gross profit margins, EPS and EBITDA will all improve across Q2, Q3 and Q4, according to consensus.
The Hong Kong equity market returned from the Easter holiday with a strong open but paring all gains by mid-day before rallying in the late afternoon to finish a choppy session with the Hang Seng Index o.8% higher. The rally was led by Chinese developers and pharmaceutical names. Country Garden (02007:xhkg) surged 14.1% and Longfor (00960:xhkg) gained 7.5% on the notion that the Chinese property market might have bottomed. Sino Biopharm (01177:xhkg) and Wuxi Biologics (02269:xhkg) rose around 6%.
Chinese brokers gained following the Chinese regulator lowered the margin ratio for brokers and therefore their costs in market making and refinancing. Alibaba (09988:xhkg), shared rose 1.6%, announced that the tech giant is adding its ChatGPT-style AI generative content system to its workplace-messaging app and smart speaker system. The news in the afternoon that the Cyberspace Administration of China rolled out a consultation paper on the regulation of AI-generated content weighed on the China Internet space, seeing Baidu (09888:xhkg) slid 5.4%.
In A-shares, CSI300 edged down as white liquor and solar stocks led the decline but the media space gained.
We noted earlier that Japanese equities have a number of tailwinds playing out at the same time. Domestic relaxation of pandemic restrictions, along with China’s reopening, bring a potential wave of consumption rebound. Range-bound oil prices have reduced input price pressures, while a still-weak yen keeps export prices competitive. Another push has now come from Warren Buffett showing interest. Berkshire has kicked off a yen bond sale and Warren Buffett recently said that he had increased his equity allocation in Japanese equities to 7.4% from 5%.
Japanese equities trade at a significant discount to global equities and Japanese companies have in aggregate terms a negative net debt position (more cash than debt) and is priced at a 12-month forward dividend yield of 2.7%. Our equity strategist writes why the sun may be rising over Japanese equities here, also noting some of the largest stocks in the Japanese equity market which include the likes of Toyota and Sony.
The benchmark index, the S&P/ASX 200 Index opened 0.7% higher on Wednesday in the first 20 minutes of trade with miners shares rising the most.. Miners shares pushed higher for two major reasons. Firstly there are concerns that commodity supply will thin out, and push commodity prices higher, as Western Australia is expected to be hit by the biggest cyclone in almost a decade. On top of that, Chinese credit improved more than expected, showing Chinese firms are borrowing more than expected. BHP shares are up 2.3%, Rio Tinto trades 2.5% higher and Fortescue follows. The Australian share market has not only continued to move up off its March low and is up ~6% since then, while the market has moved further above its 50-day moving average, suggesting buying momentum is picking up. Sentiment has also increased on the back of Australian-Chinese relations improving, M&A activity picking up and higher oil prices.
Australia’s biggest gold company, Newcrest Mining, received a new sweeter takeover offer from US rival Newmont Corp. The new offer values Newcrest Mining at A$29.4 billion ($19.5 billion). Two months ago, Newcrest rejected Newmont’s $17 billion all-stock takeover offer as the firm said it undervalued the Aussie gold company. If the deal goes through, it will mark the largest gold mining takeover ever, and extend Newmont’s lead over other bullion mining rivals such as Barrick Gold Corp. Moreover, Newmont’s exposure to copper will dramatically increase, with copper being a key material in the clean energy transition, with shortages of the wiring metal expected to remain until 2040. Newcrest is aiming for copper to make up 50% of its revenue by the end of the decade, up from about a quarter now.
The USD remained resilient on Tuesday despite dovish comments from Fed’s Goolsbee as the odds of a May rate hike didn’t budge. EURUSD was however seen climbing straight above 1.09 before stalling, with bigger gains in EZ yields compared to US yields amid better-than-expected EU retail sales and Sentix Index. GBPUSD also rose to 1.2456 before some easing later. Kiwi was the underperformer as NZDUSD slid below 0.62 even as AUDUSD rose to 0.6680 on improving relations with China, before reversing to 0.6650 subsequently. USDJPY trades in range around 133.50 ahead of US CPI and FOMC minutes due today.
The Australian dollar against the Kiwi (the AUD/NZD pair) snapped its downtrend that prevailed since February and looks ahead to a likely period of Aussie strength in the near term. This is because there is an improving outlook for China’s economy, which was highlighted by a stronger-than-expected credit expansion. Secondly, Australia and China’s relations seem to be improving. Australia temporarily suspended a World Trade Organization (WTO) case against China over tariffs on barley, while Beijing reviews its restrictions on Australia, which seems to be a potential breakthrough, to the long-standing disputes between the two nations. It’s hoped that a similar agreement might occur for Australian wine in the future. China imposed trade restrictions on Australian imports in 2020, including tariffs on barley and wine, after Australia said it would investigate the origins of Covid-19 in Wuhan.
The Australian dollar gold price is trading at A$3,014, and is being supported by the Australian 10-year Government bond yield continuing to fall. The benchmark bond yield has fallen about 0.84% from its cycle high, and now trades at 3.249%. Bond yields have an inverse relationship to gold, meaning as bond yields continue to remain pressured, gold is able to theatrically move up. This is one of the many reasons Australian dollar gold is holding at record highs and moving higher. We think 2023 could be a glory year for gold, and explore the five factors that potentially support this case. Not only has the safe-haven gold price generated a better return than the S&P500 and the ASX200 this year, but Australian gold producers earnings are expected to rise 20% on average in Australia, which could perhaps support further share price growth for Aussie gold miners shares. We explore 10 potential Australian gold producers shares to watch this year.
WTI prices were up over 2% on Tuesday to $81.50/barrel while Brent rose above $85.50 after an initial drop to sub-84 levels. Supply issues were in focus as shipments from Russia showed a weakness as Russia had warned earlier to curb oil production by 700kb/d. The EIA estimated a slower oil production growth for the US and reduced global oil production to 101.3 mb/d from its March estimate of 101.47mb/d, while downgrading its demand forecast for this year to 100.87 mb/d from 100.9 mb/d. Investors will be watching two monthly reports from the IEA and OPEC to get more clarity on demand prospects. Meanwhile, US CPI report also remains in focus today to assess if another Fed rate hike could be seen in May.
After the nonfarm payroll data on Friday failed to allow markets to put inflation concerns completely on the backburner, focus will shift to the March CPI release today for further light. Investors continue to assess whether the Fed can squeeze in one more rate hike in May before pausing to take stock of the financial sector concerns. After Friday’s NFP release, Fed Funds futures have again gone back to pricing in a higher chance of a rate hike coming through and disinflation will have to be significantly pronounced to reverse that.
Bloomberg consensus expects headline inflation to ease to 5.1% in March from 6.0% in February, but the core measure is still expected to remain firm. With OPEC+ production cut announcement last week also sending fears of a rebound in inflation prints again, the disinflation will have to come noticeably from the services side too for investors to really take inflation concerns off the table. We don’t think we are there yet. With oil prices rising again and labor market cooling only gradually, risk remains tilted for core inflation to remain elevated for longer. Our CIO Steen Jakobsen wrote yesterday in his Macro Digest that we continue to expect sticky inflation.
While Fed member Williams has remained hawkish, saying earlier that financial crisis was not a result of the Fed’s rapid tightening and yesterday he noted that inflation remains too high. He said that core services inflation ex-housing has not budged yet, so the Fed has its work cut out, while noting it is too soon to see changes in credit conditions and availability, saying one more hike is a reasonable starting place, but hikes will be data dependent. However, voter Goolsbee was relatively dovish in his latest remarks. He noted the right monetary policy approach calls for "prudence and patience" and the Fed needs to assess the potential impact of financial stress on the real economy. Patrick Harker was also more cautious as he said that the FOMC needs to be careful that we don't overdo it.
As the Fed continues to try and achieve a balance between inflation and financial risks, minutes from the Fed’s March 22 meeting will be released today and assessed for any commentary on how the balance will be achieved. The dot plot at the meeting didn’t change significantly from the December one, but views of the committee members on terminal rate will be key as well.
Analysts expect the BoC will hold rates at 4.50% after signalling a conditional pause at the March meeting. Recent inflation data saw headline CPI falling by more than the consensus was expecting, owing to lower energy inflation, while the BoC core measures also showed improvement. Meanwhile, Canada’s labor data has stayed strong last week, as it added 34.7K jobs in March smashing expectations of 7.5K gain. As economic momentum continues to remain strong and oil prices recovery continues, commentary around the money market pricing of a rate cut this year will be key to monitor. Fresh economic projections are also to be issued at the April BOC meeting.
China’s CPI growth fell to 0.7% Y/Y in March from 1.0% in February, below the 1% consensus estimate. The fall in PPI accelerated to -2.5% Y/Y in March from -1.4% in February.
On the other hand, credit data came in stronger than expected, with new aggregate financing at RMB5,380 billion and new RMB loans at RMB3,890 billion. These bring the growth in outstanding aggregate financing to 10.0% Y/Y in March from 9.9% Y/Y in February and outstanding RMB loans to 11.8% Y/Y in March from 11.6% Y/Y in February. The bright spot in the March credit data is the RMB 1,245 billion in new loans to the household in March, much higher than the RMB 208 billion in February and the RMB758 billion in March last year. Looking at the breakdown, new medium-to-long-term loans to the household (mainly mortgage) were RMB645 billion in March, much better than RMB86 billion in February and RMB374 billion in March 2022.
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Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Head of Fixed Income Strategy
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Head of Commodity Strategy
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Head of Fixed Income Strategy
Quarterly Outlook
Head of Commodity Strategy