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Global Market Quick Take: Asia – March 28, 2023

Macro 6 minutes to read
APAC Strategy Team

Summary:  With scant eco data and no further reports of banking sector stress, there was a calm in the overnight markets. First Citizens Bank purchased some of Silicon Valley Bank's mortgage assets. That helped to push up the shares of First Republic and other regional banks, and the KBW regional bank index rose 0.6%. But US and UK hearing on SVB collapse will be in focus today and may expose the market’s nervousness. Treasury yields rose, with the 2-year touching 4% levels again as Fed rate hike bets picked up again. USD was broadly weak but yen strength reversed and oil prices were firmer.


What’s happening in markets?

U.S. equities ended mixed as the fears of regional bank contagion subsided

US equities ended mixed, with energy and financials advancing communication services and information technology retreating. The S&P 500 edged up 16bps but the tech-heavy Nasdaq 100 shed 0.7%.

The headline of the day was that First Citizen Bank (FCNCA:xnas) acquired USD 56.5 billion in deposits and USD 72 billion in loans at a discount of USD 16.5 billion from Silicon Valley Bank in an auction. The North Carolina-based regional bank is getting a USD 35 billion 5-year loan and a USD 70 billion credit line from the FDIC to facilitate the deal. First Citizen Bank soared 53.7%. The KBW Bank index rose 2.5%. The SPDR S&P Regional Bank ETF (KRE:arcx), however, failed to sustain its early gain of more than 4% and finish the session only 0.9% higher.

Energy topped the 11 sectors within S&P 500 with a gain of 2.1%, following an over 5% jump in crude oil price on Monday. Oil field services giant Schlumberger (SLB:xnys) surged 4.9%. Occidental Petroleum (OXY:xnys) climbed 2.5% as Berkshire Hathaway added to its stake in the oil major. Disney (DIS:xnys), up 1.7%, started the first round of layoffs in a 7,000 job-cut plan.

European equities rebounded

Euro Stoxx 50 climbed 0.8% and the Stoxx Europe 600 advanced 1.1%. The Stoxx Europe 600 Banks sub-index bounced 1.4% and Deutsche Bank (DBK:xter) rallied 6.2%.

Yields on Treasuries jump on Silicon Valley Bank sale

Fears of contagion across U.S. regional banks eased after First Citizen Bank acquired large parts of the failed Silicon Valley Bank in an auction. The odds priced in for a 25bp hike for the May FOMC increased to 50% and the implied terminal rate increased to 4.95%. The USD42 billion 2-year auction went relatively poorly, stopping at 2.8bps cheaper than the market level at the time of auction and a below-average bid-to-cover ratio of 2.44. The 2-year yield surged 23bps to 4% and the 10-year yield climbed 15bps to 3.53%. The 2-10 year curve bear flattened 7bps to 47bps.

Hong Kong and mainland Chinese equities retreated on growth concerns

The fall in China’s industrial profits by 22.9% in the first two months of the year from the same period last year weighed on the already fragile confidence about the strength of China’s economic recovery since the reopening. The warnings from Greenland (00337:xhkg) of a decline in the Chinese property developer’s 2022 earnings and a “two to three trillion” yuan decline in new home sales in China this year further dampened market sentiment. Hang Seng Index shed 1.8%. Property, material, and technology stocks slid. Guangzhou R&F Properties (02777:xhkg) tumbled 5%. China Hongqiao (01378:xhkg), falling 8.1%, was the biggest loser within the Hang Seng Index. Angang Steel (00347:xhkg) and Maanshan Iron & Steel (00323:xhkg) dropped 2-3%. While European banks recovered in general, Standard Chartered (02888:xhkg) plummeted 5.8%.

Hang Seng TECH Index plunged 2.8%. Meituan (03690:xhkg) dropped by 6.3% post-results. Alibaba (09988:xhkg) swung widely, falling at the open on a Bloomberg story saying its founder Jack Ma resisted calls from the Chinese authorities to return to China and jumped before noon on the SCMP’s report that Ma had returned to China. Shares of Alibaba slid once again in the afternoon to finish the session nearly unchanged.

CSI300, down 0.4%, continued to trade lacklusterly within a two-week-long narrow range. Property, construction materials, and textile names slid while computing, electric equipment, farming, and fishery gained.

Australia’s share market rises 1.1% on Tuesday after the world’s biggest lithium company lobbed a takeover bid on an Australian counterpart

The Australian share market rose above its 200-day average on Tuesday with lithium stocks surging across the board, after Albermarle offered $3.7 billion to takeover Australian lithium company Liontown. Although Liontown rejected the offer, it propelled lithium stocks higher, on renewed positive sentiment in the industry, despite prices being depressed. Liontown shares surged 56% to a brand new record high, Pilbara Minerals shares rose 14%, Allkem rose 12% and Mineral Resources gained 7%. In other news, United Malt shares jumped 35%, the most on record, after the malt producer also received a takeover offer from Malteries Soufflet for A$5 a shares, with values the company at A$1.5 billion ($1 billion).

FX: Higher yields reverse JPY strength, CAD led gains on firmer oil prices

USDJPY rose back above 131.50 on Monday amid the gains in Treasury yields as Fed rate hike bets started to get priced in again. Weakness in the yen came despite lack of a broad strength in the US dollar, but USDJPY was again seen reversing lower to 131.20 in early Asian trading hours. Our head of FX strategy John Hardy notes that the lack of the Japanese yen’s ability to catch a firmer bid on the latest interest rate turmoil is noteworthy, but does suggest that we need to see a more determined fall in yields – and one that is combined with broader sentiment hitting the skids – for the JPY to sustain a rally.

Meanwhile, EURUSD is seen making a fresh stride above 1.08 and GBPUSD making another attempt at 1.23. AUDUSD above 0.6650 but eyes on February CPI due tomorrow where a big slide can mean a further dovish shift for RBA. USDCAD back below 1.3700 amid firmer oil prices.

Crude oil prices firmer

Oil nudged up for the second session on renewed supply fears, rising back above $72 for the first time in 11 days after Russia's seaborne crude flows slid to 3 million b/d, while European natural gas prices rose following strikes in France, while oil refining is also barely running. Meanwhile, Australia joined a host of countries in planning to reduce emission and is discussing putting caps on production in LNG (and coal) to reduce emissions from July. This could support prices later this year, at a time when demand is expected to pick up ahead for northern hemisphere winter. For more on oil, refer to Ole Hansen’s commitment of traders report.

Gold reverses on improving risk sentiment

Gold prices were down over 1% on Tuesday as Treasury yields rose following the easing concerns on a banking crisis, however sustained dollar weakness provided an offset. The recent recovery in equities also trimmed safe-haven buying, and gold reversed lower to $1950/oz after making another attempt at $2000 on Friday. Support at $1930 may be tested if inflation data this week from US PCE to flash March CPI in Eurozone may bring the focus back on price pressures from banking turmoil, but the outlook for gold and silver remains supportive, buoyed by falling yields and safe-haven demand.

 

What to consider?

ECB still worried about inflation, flash March CPI due this week

ECB’s Schnabel noted that it is not easy to say how restrictive rates are, noting that there is no sign of weakening in the labour market, whilst also saying there are no real concerns about financial stability risks although the situation remains fragile. He had pushed to include guidance for a further rate hike at the last ECB meeting. Meanwhile, ECB's Nagel said QT should be accelerated from the summer and inflation is still too high. Focus will be on regional and Euro-wide inflation prints in Europe this week to see if inflation cools beyond the impact of energy on the headline.

China's industrial profits slumped in January and February

Industrial profits in China fell by 22.9% Y/Y in the first two months of 2023. Falling producer price inflation may have significantly contributed to the decline in profits. Auto manufacturing was hit hard, with profit growth falling to -41.7% Y/Y in January and February, and the manufacturing and processing of ferrous metals also saw a decline in profit growth. Additionally, the global industrial cycle downturn may have dragged down the electronic products manufacturing sector, with its profits falling to -77.1% Y/Y in January and February. Nonetheless, industrial profits grew 5.9% sequentially in January and February after seasonal adjustments, reflecting production resumption after reopening from pandemic containment.

Carnival Q1 earnings top estimates, boding well for our Travel and APAC Tourism theme baskets

Cruise operator Carnival reported first-quarter fiscal 2023 results, with earnings and revenues beating estimates. The company reported adjusted loss per share of $0.55, narrower than -$1.66 in the same period last year. Revenue jumped 173%, improving to 95% of 2019 levels due to strong bookings in the quarter for the North America and Australia and Europe segments. However, the outlook was conservative, and that saw the stock turn lower after over 18% gains YTD. The strong earnings performance of Carnival is reflective of a pickup in travel demand, and bodes well for our Travel and APAC Tourism equity theme baskets.

EV competition pulse check, from China’s EV industry giant BYD’s Q4 results

After EV purchase subsidies expired in China, at the end of last year, and amid an intensifying price war among EV manufacturers, coupled with a strong drop in the lithium price, it has been somewhat difficult for investors to navigate the EV sector. BYD’s (01211:xhkg) Q4 results and outlook guidance, as the EV industry leader in China, will be closely watched by investors, to gauge sales trends in the industry and see if the falling prices of commodities has benefited its bottom line. BYD is reportedly going to cut prices in new models by RMB 60-80K and older models by more than RMB 150K. For more on other EV names to watch this week, read/watch our report.

Ahead, Chip maker Micron and drug story giant, Walgreens outlooks are on watch, as a proxy for what to expect from both industries this year

Chip maker, Micron Technology shares have been outperforming the Nasdaq 100, and are up 21% this year, ahead of the company reporting quarterly results after market Tuesday. Its outlook will be watched closely following the memory chipmaker’s cost-cutting efforts, from headcount reductions to executive compensation cuts, which take hold this quarter. That said, consensus expects further YoY declines in both EPS and revenue. Meanwhile, drug store giant, Walgreens Boots reports before the bell Tuesday and could see restructure and capital plans scrutinized, while investors could also react to the drugstore halting the sale of abortion-pills in several US states. Walgreens shares are down 14% this year.

Monthly Australia CPI; the next catalyst for the Australian dollar, local gold price and real estate linked stocks

The February CPI report is expected to show inflation fell in the month, from 7.4% YoY to 7.2%, which would support the case for the Reserve Bank of Australia to pause rate hikes at its April board meeting. This could spell further downward pressure on the Australian dollar which has been range bound for weeks. That said, if we do see a drop in inflation, Australian bond yields will likely continue to fall and that would underpin higher prices in Australian dollar gold. This scenario supports further upside in Australian gold miners shares, with Newcrest Mining shares already up 27% this year. The drop in Australian bond yields from a smaller CPI print, also support property facing companies shares continuing to rebound; with Domain, and REA already over 20% this quarter.  

 

For a detailed look at what to watch in markets this week – read or watch our Saxo Spotlight.

For a global look at markets – tune into our Podcast.

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