Global Market Quick Take: Asia – August 22, 2023

What’s happening in markets?

US equities (US500.I and USNAS100.I): Nasdaq 100 ends losing streak with 1.7% rally, fueled by Nvidia and Tesla gains

Despite experiencing significantly higher bond yields, the Nasdaq 100 managed to break a four-day losing streak and surged by 1.7% to reach 14,936. This boost was primarily attributed to an impressive 8.5% surge in Nvidia (NVDA:xnas) and a 7.3% increase in Tesla (TSLA:xnas). The surge in Nvidia's stock came ahead of their scheduled results announcement later this week. The upward momentum in Tesla's stock was largely driven by the anticipation surrounding the impending Cybertruck launch and the planned upgrades to the Model 3 in the Chinese market. The broader S&P 500 index also recorded gains, adding 0.7% during this period. Notably, the information technology sector and the consumer discretionary sector emerged as the leading contributors to this positive movement in the S&P 500.

Treasuries (TLT:xnas, IEF:xnas, SHY:xnas): 10-year yield closed at the highest level since 2007

In an otherwise quiet session, traders focused on the message in the article by the Wall Street Journal’s Nick Timiraos, reporting that some Fed officials’ estimates of the neutral rate of real growth were above the long-held median of 0.5%. A higher neutral real growth rate suggests that the Fed may have to keep interest rates higher for longer and cannot cut as much even if inflation falls. Market observers are expecting that Fed Chair Powell will address on the topic of the neutral rate of real growth in his speech this Friday at the Jackson Hole Symposium. The 10-year Treasury note yield ended the session 8bps higher at 4.34%, reaching the highest level since 2007. Selling concentrated in the long end of the curve. The 2-year yield added 6bps to close at 5%.

Hong Kong & Chinese equities (HK50.I & 02846:xhkg): China's Loan Prime Rate cut disappoints

The Hang Seng Index and the CSI300 Index dropped for the 7^th consecutive day, financials were notably weak as investors were worried about the spillover damages from the property and shadow banking sectors to commercial banks and insurance companies. The Hang Seng Index tumbled by 1.8% while the CSI300 declined by 1.4%. China Insurance (02628:xhkg) and Ping An Insurance (02318:xhkg) fell more than 3%. Container liner OOIL (00316:xhkg) plunged 5.6% after reporting earnings plummeting 80% Y/Y in H1. Lenovo (00992:xhkg) gaining 2.2%, was the best-performing within the Hang Seng Index. Sinopharm (01099:xhg) added 2.4% following its inclusion into the Hang Seng Index to take the place of Country Garden (02007:xhkg) effective Sep 4. Southbound flows from the mainland registered a net buying of HKD9.6 billion.

In the A-share market, Northbound flows net sold RMB6.4 billion. Financials, transportation, properties, and electric equipment led the decline of the market while environment protection and communication gained. Contrary to market expectations, China left the 5-year loan prime rate unchanged and cut the 1-year rate by a smaller-than-expected 10bps.

FX: USDJPY back above 146 on higher US yields

While the rise in US 10-year yields to take out the 2022 highs could not help the US dollar much, it did weigh on the yen. Dollar gains were offset by a stronger EUR as EURUSD attempted to regain 1.09 but so far remains unconvincing. USDJPY rose back above 146 from lows of 145.15 despite Japanese press Kyodo reporting that due to rising yields after the BoJ policy tweak, Japan's MOF has raised the assumed long-term interest rate to 1.5% in FY24/25 (prev. record low 1.1% in FY23/24). Chinese yuan made some recovery, and USDCNH dropped back below 7.30. PBoC underwhelmed on the rate cuts on Monday, but CNH weakened after the data only to recover later on reports China's major state-owned banks were reportedly seen mopping up offshore Yuan liquidity.

Crude oil: lower on supply tightness concerns easing

Crude oil prices started the week in the red on signs that supply tightness could ease. Iraq’s oil minister, Hayyan Abdul Ghani, is reported to be planning the resumption of oil exports through the Ceyhan terminal. Output has been curtailed by a dispute over payments between Iraq and Turkey over the past few months. Prior to this, it was exporting around 500kb/d. This was exacerbated by data showing exports from Iran surged to 2.2mb/d this month, levels last seen prior to the US pulling out of the 2015 Iran nuclear deal and re-imposing sanctions on its oil industry. With demand outlook also deteriorating, the downside in oil prices could become more pronounced unless OPEC+ cuts are expanded or monetary policies turn accommodative. Focus this week remains on Powell’s comments at Jackson Hole.

What to consider?

China keeps the 5-year Loan Prime Rate unchanged while cutting the 1-year rate only by 10bps

The National Interbank Funding Center, under the supervision of the People’s Bank of China (PBoC), cut the 1-year Loan Prime Rate by 10bps to 3.45%, less than the 15bp reduction anticipated. Contrary to the expectation of a 15bp cut, the 5-year Loan Prime Rate stayed unchanged. The underwhelming actions may reflect the PBoC’s concerns about a further squeeze on banks’ net interest rate margins. The PBoC however may guide the commercial banks to lower deposit rates in the coming weeks and cut the 5-year Loan Prime Rate next month.

Softbank’s Arm set to be the biggest US IPO of the year

Arm, the chip designer owned by Japan’s SoftBank, has filed a preliminary prospectus for a Nasdaq listing set to take place early next month, starting the final countdown to the biggest US initial public offering in almost two years. A successful debut by Arm would provide a windfall for SoftBank founder Masayoshi Son, whose Vision Fund lost a record $30 billion last year. Arm plans to start its roadshow the first week of September and price the IPO the following week and is expected to seek a valuation of $60 billion to $70 billion.

BHP earnings: Profits plunge on cost pressures and China slowdown

Mining giant BHP Group reported full year earnings this morning, missing revenue and profit expectations. Full-year revenue came in at $53.82 billion, down 17% YoY primarily from falling iron ore, metallurgical coal and copper prices. FY underlying profit of $13.42b, -37% YoY and cost pressures were highlighted amid inflation and labor issues. Final dividend was $0.80/share taking the full-year payout to $1.70/share, down 48% from last year’s $3.25. The miner reported caution on China’s growth trajectory but was optimistic of India’s buoyant construction activity underpinning an expansion in steelmaking capacity.

Zoom Video reports earnings beat and upbeat outlook

Zoom Video Communications (ZM:xnas) revised up the company’s revenue guidance for the year ending in January 2024 to USD4.48 billion from previous forecasts of USD4.25-4.31. For the last quarter, revenue increased 3.6% to USD1.14 billon, better than the USD1.1 billion anticipated. Adjusted EPS, excluding some one-off items, grew 28% to USD1.34, surpassing consensus by 27%.

Ukraine finalising a deal to insure grain ships, but US wheat crop conditions worsen

Ukraine is finalising a scheme with global insurers to cover grain ships travelling to and from its Black Sea ports. The deal could be in place as early as next month for about 30 ships. This could bring hopes of a revival in commercial shipping activity and lower the risks of food security issues. Meanwhile, the USDA’s weekly crop progress and conditions report said wheat crop conditions worsened in the week to August 20, adding to concerns about production shortfalls in key growing areas such as Canada and the European Union. Corn ratings also declined while soybean ratings held steady.

BRICS summit could be a headwind for the dollar

The leaders of BRICS – Brazil, Russia, India, China and South Africa – are scheduled to hold talks this week Tuesday to Thursday. Key agenda is expected to center around the group’s expansion, with some 40 other nations lining up to join including Indonesia, Saudi Arabia, Argentina and Egypt. This could mean internal conflict as South Africa seems open to the idea but Brazil is worried about its influence getting diluted. Meanwhile, Russia is attempting to ward off currency pressures at home and Xi is trying to find the most appropriate response to pressures on China’s property sector and economy at large. But a larger group could mean more opposition to the West and a larger pursuit against the dominance of the dollar. This could, however, be positive for Gold which acts as an alternate store of value and central banks continue to ramp up Gold purchases in order to hedge against the dollar. Russian invasion of Ukraine and food security issues could also be discussed.

Baidu’s earnings in focus amid cautious sentiment

This week, several large China Internet companies are reporting their earnings, starting with Baidu (09888:xhkg) today. The surveyed consensus forecast expects a 12.3% Y/Y revenue growth to RMB 33.3 billion for Baidu's 2Q, driven by healthcare, travel, and business service advertising. Cloud revenue likely grew 5% Y/Y to RMB 4.5 billion, a quarter of AliCloud's and half of Tencent Cloud's. The projected adjusted net profit is a 50% YoY increase to RMB 5.8 billion. Investors are keen on Baidu's online advertising and AI cloud business outlook, along with updates on Ernie Bot.

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