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Global Market Quick Take: Asia – May 11, 2023

Macro
APAC Research

Summary:  The gains in U.S. stocks after a softer CPI waned initially before excitement from Google’s AI event that showed off the tech giant’s latest AI tools lifted market sentiment and saw the key indices finishing higher for the day. Treasuries gained after the CPI prints despite hawkish Fedspeak, with the 10-year yield falling to 3.44% and short-term interest rate futures pricing in more rate cuts in 2024.


What’s happening in markets?

US equities (US500.I and USNAS100.I): mega-cap tech lead gains as Google shows off AI tools

Key U.S. equity indices ended the Wednesday session higher in choppy trading. The post-CPI gains in the S&P500 and Nasdaq 100 waned towards mid-day before the benchmark indices recovered in the afternoon to finish 0.5% and 1.1% higher respectively, helped by a strong rally in Alphabet (GOOGL:xnas), Amazon (AMZN:xnas), Apple (AAPL:xnas), and Microsoft (MSFT:xnas). Excitements from Google’s AI event help lift market sentiments on techs and saw Alphabet surging 4.1%.

Airbnb (ABNB:xnas) tumbled 10.9% on downbeat guidance. SPDR S&P Regional Banking ETF (KRE:arcx) shed 1% and KeyCorp (KEY:xnys) declined 4.1% as concerns over regional banks lingered. Disney (DIS:xnys) plunged 4.8% in extended-hour trading after reporting a drop in subscribers in the quarter ending April and forecasting a wider loss from its streaming service in the current quarter.

Treasuries (TLT:xnasIEF:xnasSHY:xnas): yields lower on soft CPI prints

The yields on the 2-year and 5-year Treasuries each fell by 11bps to finish the day at 3.91% and 3.38% respectively, on a decline in the headline CPI to 4.9%, softer than expectations. The SOFR interest rate futures jumped (rates down) by around 15bps in the 2024 contract months, pricing in more aggressive rate cuts next year. The SOFR Jun-Dec 2023 spread widened 8bps to -82.5, adding to rate cut expectations for the second half of 2023 as well. The push-back from Richmond Fed president Barkin to the notion of a Fed pause did not have much market impact as investors gave more weight to the softer CPI prints than his comments. The long end of the coupon curve underperformed with the 10-year yield sliding 8bps to 3.44% despite a solid 10-year auction. The 2-10-year curve steepened 3bps to -47bps.

Chinese equities (HK50.I & 02846:xhkg): slid as financials retreat while auto and new energy gain

After the sharp reversal to turn lower on Tuesday afternoon, Hang Seng Index and CSI300 Index extended their losses on Wednesday. Hang Seng Index shed 0.5% driven by losses in Chinese banks, insurers, and property developers. Longfor (00960:xhkg) and China Overseas Land & Investment (00688:xhkg), falling over 3%, were the two largest losers in the Hang Seng Index, followed by ICBC (01398:xhkg), Bank of China (03988:xhkg), and China Life Insurance (02628:xhkg) retreating over 2-3%.

Auto stocks bucked the decline and advanced, led by a 6.1% gain in Great Wall Motor (02333:xhkg). Hang Seng TECH Index managed to claw back early losses and add 0.3% for the day, led by EV, semiconductors, and tech hardware.

In A-shares, CSI300 Index retreated for a second straight day, losing 0.8%. Banks, insurance, and brokerage stocks continued to see weakness. Central SOE names were also among the top losers. Major outperformers were in the new energy space, led by EV supply chain, energy storage, solar, and wind power.

FX: JPY gained on softer US CPI

As a softer US CPI print brought sharp decline in Treasury yields, that benefitted the Japanese yen with USDJPY sliding to 134 levels in the early Asian morning today. Risk sentiment deteriorated later in the session, which further helped the yen even as the dollar recovered. NZDUSD and AUDUSD also gained, with NZD testing the early April highs of 0.6381 while AUD still finding it hard to go above the 0.68 handle with eyes on China’s inflation data today. EURUSD also could not sustain the rally above 1.10 and GBPUSD is quiet ahead of the BOE meeting today.

Crude oil: firming up this morning after a drop overnight on higher inventories

Oil prices were wobbly on Wednesday, rising higher as soft US inflation print helped to ease demand slowdown concerns but dropping sharply later as risk sentiment deteriorated. The EIA weekly inventory report showed a build of 2,951kbbl last week, with stockpiles at the US’ main storage hub, Cushing, rising to its highest level since March. However, a rise in implied gasoline demand by almost 700kb/d drew down inventories nationally. WTI still stuck below $73/barrel while Brent is just above $76.50.

Gold (XAUUSD): post-CPI gains reversed

Gold jumped higher to $2048.2 following the lower-than-expected US inflation print which fuelled further rate cut bets from the Fed for H2. However, resistance at $2050 held up and gains were short lived, with spot prices edging lower to finish the session relatively unchanged. Support remains at $2007 ahead of $1986.

 

What to consider?

US CPI cools, reinforcing market’s view of a Fed pause

Headline April CPI came in slightly cooler than expected at 4.9% Y/Y, the first sub-5% figure since April 2021 and against the expected unchanged pace of 5.0%. The M/M reading rose 0.4%, in line with expectations but accelerating from the 0.1% print in March. The core metrics were in line with expectations with Y/Y at 5.5% cooling from 5.6%, and the M/M rose 0.4%, matching the prior pace. The softening trend continued to keep the door open for a Fed pause in June, although there is a lot of data on watch ahead of the June FOMC, including another CPI print. Powell’s preferred supercore measure, services less shelter, rose 0.1%, accelerating from the prior 0.0% and tight labor markets may continue to create pressure on this segment of the economy. This suggests that market’s pricing of rate cuts, now at 77bps for this year is still aggressive and these need to be justified more from growth and labor market metrics.

China inflation expected to ease further

Bloomberg's survey forecasts that the CPI inflation rate will ease to 0.3% Y/Y in April, reflecting a sustained downtrend in food prices, following March's 0.7% reading. Additionally, the PPI inflation rate is predicted to drop further to -3.4% YoY in April, down from -2.5% in March, largely due to base-effect.

Uranium in an uptrend

Our Technical Analyst has confirmed that Uranium, both physical and Uranium producing companies are on the move after Physical Uranium has confirmed technical uptrend with U308 at a one-year high around $53/lb. Some nuclear companies could benefit too. Canada's Cameco trades up 11.8% mom while the URA ETF and Sprott Physical Uranium Trust both trades up around 8.3%. Nuclear remains one of the key long-term solutions to the energy shortage issues. For inspiration, Saxo’s Nuclear Power equity theme basket is worth a consideration.

Bank of England expected to hike 25bps

The Bank of England’s next policy announcement comes on Tuesday, 11 May and a 25bps rate is expected, which will take the interest rate to 4.50%. Inflation appears to be a bigger problem for the UK compared to US and Europe, and growth is also holding up better than what was previously expected. March core CPI remained firm at 6.2% YoY, disappointing market expectations of a softer print, while the headline remains in double digits. Meanwhile, the services PMI for April has firmed up further to 55.9 from 54.9 previously, with manufacturing PMI having improved as well despite still being in contraction. The improving economic situation should allow the BOE to remove much of its recession forecast as it unveils updated economic forecasts next week. UK also so far remains somewhat isolated from the financial crisis concerns that are hitting the US and have had a go in Europe as well. Still, the BOE’s recent messaging has been mixed, with some saying that the Bank has been warning that past rate hikes are still largely to feed through to the economy. Further tightening, it said, was contingent on signs of "more persistent" inflationary pressures. This suggests that split in the committee could potentially widen, and a data-dependent approach will likely be maintained. It will be key to monitor the new inflation forecasts, particularly for 2 years. Key scenarios for BOE today and potential reaction from sterling can be summed up as:

  • 25bps rate hike and a neutral /data-dependent signal: GBPUSD stays around 1.26
  • 25bps rate hike and a hawkish signal: GBPUSD could rise to 1.27
  • 25bps rate hike and a dovish signal, indicating end of tightening: GBPUSD could fall to 1.24
  • No rate hike: GBPUSD drops to 1.22

Disney reports a larger-than-expected drop in subscribers

Disney reported a 4 million decline in paid subscribers to its flagship Disney+ service while analysts were expecting an increase of 1.7 million. While the loss in streaming business came in at USD659 million, much smaller than the consensus forecast for the Q2F23 ending April, the entertainment giant said in the conference call that it expects the loss from streaming to increase in the current quarter.

Google shows case of integrating AI into its products

Google showed developers and journalists at its input/output event its application of AI in search, email and other services. It introduced a new large language model, PaLM 2. The technology giant is under pressure to catch up with competition in the race to develop AI capability.

JD.COM reports today

JD.COM (09618:xhkg) is scheduled to report Q1 results today. Since the beginning of thee year, investors’ concerns about intensifying competition faced by the ecommerce giant from other ecommerce platforms weighed on its share price.

 

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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