Chief Investment Strategist
Summary: Risk off sentiment broadened after the Fitch downgrade, and higher Treasury yields from Treasury’s quarterly refunding and a hot ADP print brought stocks lower and VIX to early-June highs. Dollar was boosted with AUD and NZD leading the decline. Crude oil prices plummeted despite a large inventory draw. Focus today on BOE decision and Apple and Amazon earnings.
Equity markets plummeted on Wednesday, with NASDAQ 100 leading the losses as it was down 2.2%. S&P 500 was down 1.4% while DJIA was down close to 1%. Fitch’s downgrade of the US to AA+ from AAA, on worries about fiscal deterioration over the next three years. That led to a broader risk-off in markets, and a quarterly refunding as well as hot ADP data further led to a rise in Treasury yields which weighed on growth stocks. VIX returned back to early June highs of over 16. Earnings remained mixed with PayPal and Qualcomm down in post-market as focus turns to Apple and Amazon reporting today.
Hong Kong stocks closed down over 2% and CSI 300 was down 0.7% on Tuesday amid broader risk-off following the Fitch downgrade. Commerce and industry stocks led the decline after China’s Caixin manufacturing PMI dipped into contraction. Services and composite PMI prints will be in focus today.
After some setback in the dollar earlier on Wednesday, USD picked up later in the session amid higher 10-year Treasury yields and a blowout ADP report. AUDUSD extended its post-RBA slide lower to 0.6527, with May low of 0.6458 now in view. NZDUSD also remained under pressure after jobs data yesterday and printed a low of 0.6069 with the 0.60 handle on target. EURUSD still holding up above 100dma at 1.0917 while GBPUSD at 1.2714 may be exposed to more downside if BOE proves dovish today.
Crude oil prices dropped amid a broader risk off tone across markets. This was despite a sharp drawdown in inventories as EIA stockpiles fell 17mn barrels last week, the largest drop on record. The drop was however a broader risk off tone across markets. This was despite a sharp drawdown in inventories. Focus however was on the broader macro concerns after Fitch’s downgrade of the US and Treasury funding which pushed US yields and USD higher.
ADP’s data surprised to the upside, once again, reporting 324k private payrolls were added in July, blitzing through the consensus view of 189. June data was revised marginally lower to 455k from an initially stated 497k. The wages metrics also cooled sharply again, taking the annual rate for Job Stayers to 6.2% Y/Y (from 6.4%), and for Job Changers to 10.2% from 11.2%. Focus remains on NFP data due on Friday as ADP remains less reliable.
Brazil's central bank, Banco Central do Brasil or BCB, has cut its benchmark rate, Selic target rate, by 50bps. The consensus was for a 25bps cut. The Bank says that 25bps was considered but the improvement in inflation dynamics was enough for a 50-point move. The Bank also said that future rate cuts will likely be of the same magnitude. We have noted earlier that Chile’s 100bps rate cut was a start of the EM easing cycle, and with Brazil following up with a rate cut, it further reaffirms that more EM central banks may follow. Uncover the investment implications in this article.
Bank of England policy decision is due on Thursday and expectations are for another rate hike to bring interest rates to 5.25% from 5% and the possibility of a 50bps move has reduced with inflation on the downward trajectory after June CPI came in softer-than-expected albeit still high at 7.9% YoY. But risks remain that the central bank could follow through with another 50bps move as price pressures are proving to be persistent and sticky. The BOE will also publish new forecasts, and investors will be keen to watch whether recession calls return. Medium-term inflation forecasts will also be key as rates are expected to peak below 6% now. Read the full preview here.
Qualcomm shares were down about 7% in choppy extended trading. EPS for fiscal third quarter came in at $1.87, better than the analyst estimate of $1.81. Revenue for the quarter missed expectations as it came in at $8.44B versus the consensus estimate of $8.51B. Guidance for Q4 was also conservative with revenue expectation at $8.10B-$8.90B versus the analyst consensus of $8.70B and EPS of $1.80-$2.00 expected versus the analyst consensus of $1.91. The company would likely cut jobs as consumer spending on gadgets like smartphones remained stubbornly weak amid slowing global economic growth.
PayPal posted revenue of $7.3 billion in the second quarter, compared with $6.8 billion last year, as total payment volume surged 11% in the second quarter to $376.5 billion, benefiting from resilient consumer spending trends. It earned $1.16 per share on an adjusted basis, in line with Wall Street expectations but adjusted operating margin for the quarter came in at 21.4%, missing its forecast of 22%. PayPal expects third-quarter revenue of about $7.4 billion, above analysts' estimates of $7.32 billion with adjusted profit per share for the current quarter to be in a range of $1.22 and $1.24, above analysts' estimates of $1.22.
Occidental missed Q2 profit expectations due to a slide in oil and gas prices and took a writedown to exit some operations. Adj EPS of $0.68 was below $0.71 expected, but it raised the year-end production target by 1% after production in the quarter rose 6% to 1.2 million barrels of oil equivalent per day (boepd), above the company's estimate in May. Warren Buffet holds Occidental, and the stock was down 2.3% post-market.
Singapore's largest bank DBS Group posted 2Q total income S$5.05b beating estimate S$4.82b and net interest margin 2.16% (est 2.1%). Q2 net profit was up 48% and hit a quarterly record high S$2.69 billion compared to S$1.82 billion a year earlier. The board declared an interim dividend of S$0.48 (est S$0.42). The bank sees upside bias to NIM from current level and FY ROE above 17% with continued momentum expected in wealth management. OCBC Bank reports on Friday.
Big tech earnings season rolls forward with Apple and Amazon reporting after-market on Thursday. Apple’s big focus will remain on iPhone sales and targets, while VR headset and Chinese production bottlenecks will also be a focus. Amazon streaming and advertising growth could remain a key focus area, while the impact of cost-cutting on margins and the sustainability of the ecommerce business could also be key.
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Global Head of Macro Strategy
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Chief Investment Strategist
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Global Head of Macro Strategy
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Chief Investment Strategist
Quarterly Outlook
Chief Investment Strategist
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Head of Commodity Strategy
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Global Head of Macro Strategy
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