Q2 2023 Outlook: The Fragmentation Game
Saxo’s quarterly outlook is out, and it looks at global fragmentation and how it will impact a variety of asset classes, geographical regions and macroeconomic topics in Q2 and beyond. Discover how it challenges the outlook for equities, creates discrepancies between forex pairs, shapes intriguing investment opportunities in different Asian regions, and how commodities and interest rates may affect and be affected by the Fragmentation Game. Get our in-house analysts' views on the investment landscape in a tough macroeconomic world and plan your investment strategy for Q2 2023 and beyond.
What’s happening in markets?
US equities (US500.I and USNAS100.I) retreat on oil, banks and high PE names seeing pressure
Softer US jobs data bolstered bets the Fed can dial back tightening, which saw the US dollar index slip and gold move back above $2,000. However, the S&P500 erased the prior session’s gains, with banks stocks dropping and dragging the broader S&P lower. S&P 500 lost 0.6% and Nasdaq 100 shed 0.4%. SPDR S&P Regional Banking ETF dropped by 2.2%.
Oil stocks also pressured the market after the oil price eked out a small gain; and gaps were closed in oil stocks, with Marathon Oil and Valero Energy falling 7%. Profits were also taken in semiconductor gains, such as NVIDIA and AMD, as investors also de-risk ahead of other key jobs reports out later in the US week. Micron said its shipments were unaffected by the cybersecurity probe in China but the share price slipped 3.9%.
Chinese equities (HK50.I) and (02846:xhkg): weighed down by internet and EV names
While CSI 300 edged up 0.3%, Hang Seng Index dropped by 0.7 dragged down by weaknesses in the internet and EV space. Hang Seng TECH Index slid 1.6%. Nio (09866:xhkg), XPeng (09868:xhkg), and Li Auto (02015:xhkg) plummeted 3 to 8% as the three EV makers disappointed investors with Q1 sales at the low end of guidance. Car dealers were also under selling pressure. China Meidon (01268:xhkg) plunged 11.2%.
China internet stocks were also among the laggards, with Alibaba (09988:xhkg), Meituan (03690:xhkg), and Bilibili (09626:xhkg) falling 2.9 to 5.6%. Naspers has reportedly transferred 250 million shares of Meituan to a leading U.S. investment bank, potentially for divesture.
Semiconductor stocks continued to outperform as investors expected domestic chipmakers to gain market shares from foreign suppliers in China. SMIC (00981:xhkg) surged nearly 6% and rose for the 4th day in a row.
China infrastructure names surged following mainland state-owned media saying infrastructure spending increased about 10% in Q1. China Rail Group (00390:xhkg) jumped 7.9% and China Communications Construction (01800:xhkg) climbed 5.5%.
Australia equities move up; but what is the market contending with?
The ASX200 has risen for the 8th day, hitting a one month high after the RBA kept rates on hold yesterday. Gold miners are leading the advance today after the gold price surged to its highest level since March 2022 on softer US-job opening data. De Gray Mining trades up 5%, with Silver Lakes Resources up 4%, followed by Gold Road resources. As for the benchmark index, the ASX200, buying is picking up, as Australia’s PMIs today showed the services and manufacturing sectors have remained in contractionary mode, according to Judo’s indicators. And this supports the RBA continuing to keep rates as they are. However, we are cautious that inflation could pick up, contrary to what the RBA has previously said. This is because inflationary pressures are picking up, not only in rents, but property prices too. Australia’s home-rental vacancy rate is approaching a record low, and this is driving rents higher, amid the lack of supply, combined with increasing immigration. The national vacancy rate fell to 1.1%, and rents climbed 2.5% in the Q1, according to CoreLogic. Sydney is Australia’s most expensive city to rent, with an average price of A$699 ($472) a week.
FX: Kiwi at its highest since mid-Feb into the RBNZ decision
Despite RBA’s pause yesterday, the RBNZ is still expected to hike rates by 25bps today. NZDUSD has inched back above 0.63 to be at its highest levels since Feb 15, but a dovish surprise from the central bank today signalling an openness to pause as rates reach 5% could mean a quick reversal from these levels. AUDNZD slid from 1.0780+ levels to sub-1.07 levels and RBA’s Lowe speech and RBNZ meeting will be on watch today. Meanwhile, GBPUSD reached 1.25 handle to 11-month highs as economic optimism sustained. Haven currencies CHF and JPY also gained as US jobs data disappointed. USDCHF sliding below 0.9060 from 0.92 at the start of the week and USDJPY testing a break below 131.50 as Treasury yields slip.
Crude Oil: OPEC-driven rally running out of steam
Crude oil prices saw some further gains yesterday as the OPEC+ decision to cut output continued to reverberate through markets, but priced slid lower as weaker US job openings data underpinned concerns of a slowdown in economic momentum. The White House also said that the US will continue to work with producers, and others, to ensure energy markets and lower prices for the American consumer. However, a weaker dollar provided support, as did the draw in API inventories which showed US crude inventories falling by 4.3mn barrels last week. Official EIA inventory data will be on tap today. WTI holding up above $80/barrel and Brent finding support at $84 for now.
Iron ore and coal prices bounce - but mind the gap
The iron ore (SCOA) price initially moved up off its six-day low, supported by the US dollar index falling for second session, however market participants quickly took the day’s profits off the table, and the gain turned to a loss. And this is causing Fortescue, BHP and Rio Tinto to trade 1-2% lower. On one hand the iron ore market is grappling with Chinese regulatory concerns, increased supply, combined with recessionary risk, while China vowed to implement steel output cuts for the third year, which means less iron ore would be required. The steel production cut announcement last month, caused the iron ore price to correct - losing 10% from its high, before falling to a new low. But on the other hand, iron ore traders and companies are hopeful that buying may pick up, which is causing volatility in the iron ore price. After China’s spring ends, there is typically a lull in demand. Then iron ore stocks are typically replenished again ahead of September-October construction. So that’s what market is weighing up.
Meanwhile, the Newcastle coal price moved up off its year-low, on hopes that demand will increase from China. The coal price is down 57% from its high but broke above its 21-day moving average and is ~8% under its 50-day moving average, which is the next level it would need to cross to potentially suggest buying is gaining momentum. It’s worth keeping an eye on Whitehaven Coal, which is Australia’s largest coal producer. Its shares moved above its 21-day moving average, while NewHope Corp trades above its 21-, 50-, 100- and 200-day moving averages which implies buying is mounting in the stock and NHC shares could head to higher ground, with the MACD suggesting buying could pick up.
Gold (XAUUSD) and silver (XAGUSD): strong rally as Treasury yields slip
The precious metals saw a broad rally on Tuesday as US job openings fell, escalating concerns of a growth slowdown and bringing Treasury yields lower. Rate cuts of 75bps were fully priced in for this year. Both gold and silver rose to its highest levels in a year, with gains of 1.8% in gold and over 4% in silver. Gold prices pierced through $2000 level to reach a high of $2020, being up over 25% from the lows in September and the previous high of $2078 will be in focus with $2000 serving as a support now. Silver touched $25 levels, and strong resistance is seen in the 25.85-26.45 area.
What to consider?
US job openings tumble, weakening Fed tightening bets
Job openings in the US fell to 9.93mn from 10.56mn (revised lower from 10.82mn), more than the expected decline to 10.5mn and also outside of the range of analyst expectations (10.2-10.7mn). The latest print is the lowest since May 2021, and has prompted traders to pare bets for Fed’s tightening. Expectations of a 25bps rate hike in May have dropped from 57% to 45% as per the CME FedWatch. The ratio of unemployed per job opening fell to 1.7, the lowest since November 2021, while the Quits Rate rose to 2.6% from 2.5%. Attention now turns to the NFP on Friday to further help shape Fed expectations, although CPI, PPI and PCE and retail sales data will also be key ahead of the Fed's May meeting.
The RBA pauses rates hikes, keeping the door opening to start hiking again. But we don’t think they will raise again
The RBA held rates at 3.6% yesterday but hinted further tightening may be needed to bring inflation to target. However, we think the RBA may go lightly with rates ahead, given it sees substantial slowing in household spending. The RBA previously noted, Aussies will experience a cash flow shock when 900k mortgages roll over to variable from fixed this year. On top of that Roy Morgan suggest 25.3% of mortgages are deemed ‘at risk’. Given economic indicators such as PMIs are still in contraction, household spending is slowing, and the RBA sees GDP grinding down this year, we think the RBA will dig its feet in the ground and keep rates as they are. This is despite inflation creeping higher, with rents and Sydney’s property prices rising.
RBNZ up next – 25bps rate hike is expected
The RBNZ is expected to hike 25 basis points to bring the rate to 5.00%, taking its rate back to the highest among G10 currencies. The market has priced in another 25 basis points of further tightening beyond today’s decision, but there could be the risk that the RBNZ feels it has done enough for now and would like to indicate that it may pause its tightening (like the RBA yesterday and Bank of Canada recently) after this decision after decelerating from a 75 basis point hike in November to a 50 basis point hike in February.
China-Japan tensions on the rise
Last week, Japan announced plans to expand curbs on exports of 23 types of chipmaking equipment to countries including China as early as July. Together with measures from US and Netherlands, this is another step in the chip wars and more broadly, the fragmentation game. China has expressed “grave concern” and warned of “decisive measures” to safeguard its concerns. China is the world’s largest semiconductor market and Japanese companies that could get affected by these curbs include Tokyo Electron, Nikon Corp, Screen Holdings, or Lasertech Corp.
Taiwan’s president to meet US House Speaker McCarthy today
Taiwan’s president Tsai Ing-wen is swinging back through the US on her return journey to Taiwan and will meet with US House Speaker Kevin McCarthy and a bipartisan group of lawmakers tomorrow despite stern warnings against doing so from China. A trip by then House Speaker Nancy Pelosi last year to Taiwan drew intense criticism from China and a series of extensive military exercises around the island. The Taiwanese president’s office has pushed back against China’s warnings with blunt language: “It is the right of the 23mn people of Taiwan to have exchanges with democratic nations, and there is no room for China to comment...”