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Global Market Quick Take: Asia – May 15, 2023

Macro
APAC Research

Summary:  The Michigan survey brought both consumer and inflation concerns on the table, which together with the unresolved debt ceiling talks continued to underpin a risk off sentiment. Meanwhile, China’s reopening story took another plunge as credit data disappointed. The US dollar was bid on safe-haven demand, while yield differentials are also into play with more central banks likely looking at a pause. Turkey elections look to be heading to a run-off while Australia’s Newcrest agreed to takeover bid by Newmont to create gold giant.


What’s happening in markets?

US equities (US500.I and USNAS100.I): sentiment reflects a risk-off stance

Equities retreated on the back of mounting investor concerns over the unresolved debt ceiling issue and a surge in bond yields which was driven by higher surveyed inflation expectations. The S&P500 recorded a 0.2% tick down, while the Nasdaq 100 shed 0.4%. The market sentiment reflected a risk-off stance as investors shifted from cyclical to defensive stocks. Utilities and consumer staples gained traction, while consumer discretionary and financials experienced a pullback.

On single names, First Solar (FSLR:xnas) witnessed a staggering 26.5% surge after announcing the acquisition of Evolar, a European thin film company. Meanwhile, fresh guidelines from the US government, providing clarity on clean energy tax credit eligibility, drove up solar stock prices. Additionally, Newscorp (NWSA:xnas) experienced an 8.5% boost after reporting higher-than-expected revenue and earnings.

Treasuries (TLT:xnasIEF:xnasSHY:xnas): sell off on higher inflation expectations

U.S. Treasuries experience a sell-off (yields higher) as the 5-10 Year Inflation Expectations reported in the University of Michigan Consumer Survey rose to 3.2%, a level last observed in March 2011. The increase in inflation expectations was unlikely to be driven by outliners within the distribution as a greater number of participants expected 3-4% inflation, whereas those predicting 1-2% declined in number. Yields on the front end and the belly of the curve soared 9bps, with the 2-year yield closing the session at 3.99%. The 10-year yield rose by 8bps to 3.46%. Red-month (2024 contracts) SOFR futures took a hit with rates moving higher, plummeting by around 12bps, led by significant selling in the Dec 2024 contract (SR3Z4).

Chinese equities (HK50.I & 02846:xhkg): markets suffer losses as credit data disappoints, while JD.COM leads e-commerce stocks higher

The Hang Seng and CSI300 indices suffered yet another bout of losses, as both benchmarks shed 0.6% and 1.3% respectively, resulting in weekly losses of 2.1% for the Hang Seng Index and 2% for the CSI300 Index. In China, the April data for aggregate financing and RMB loans painted a dismal picture, as both new aggregate financing and new RMB loans fell substantially and below market expectations.

Chinese banks, property developers, materials, automakers, and industrial stocks were the primary drivers of the decline in Hong Kong, while media, non-ferrous metal, construction, and electric equipment makers lagged behind in A-shares. Despite the downturn, the Hang Seng TECH Index surged in value, fueled by rallies in e-commerce platforms, following JD.COM's (09618:xhkg) better-than-anticipated Q1 results and consequent 7.3% upswing.

On the mainland bourses, textile and electric utilities stood out as the lone survivors of the downturn, alongside Chinese traditional medicine and household appliance stocks.

FX: Dollar bid on safe-haven flows and pause from other central banks

While economic indicators stay away from signalling a clear collapse in growth, conditions and sentiment are taking a turn for the worse as risks from the banking sector and debt ceiling linger. The Michigan survey on Friday showed that sentiment is weakening while long-term inflation expectations are looking entrenched. This leaves little room for the market to understand the Fed’s next move, and resulted in a safe haven bid for the USD which shot up to 102.70. Meanwhile, other central banks are expected to follow the Fed pause as well, which means yield-driven pressure on the dollar could start to weaken. NZD was the underperformer on Friday after NZ inflation expectations eased to 2.8% in Q2 from 3.3% in Q1, coming within the bank's target of 1-3%. Higher US yields also brought weakness in yen with USDJPY seen rising further towards 136 in thin Asia morning trade.

Crude oil: fourth weekly decline amid demand concerns

While the growth outlook for the US isn’t yet taking a steep turn for the worse, sentiment indicators are easing to suggest that consumers could pull back on spending amid the banking sector concerns and debt ceiling risks. Michigan survey on Friday drove out some of the rate cuts from the pricing for Fed this year. But more importantly, China economic data last week poured water on the reopening trade, adding to the demand concerns. Meanwhile, low refining margins for diesel and gasoline continues to suggest weakening industrial demand. WTI prices slid to $70/barrel while Brent reached $74. The decline has remained somewhat in check due to supply issues mounting last week from wildfires in Canada to Iraq’s exports. OPEC increased its outlook for China’s 2023 oil demand, thereby supporting expectations for a rise in global demand of 2.33mb/d, a prediction that contradicts the current downward trend in oil prices. If IEA also confirms this demand outlook, then that will reflect a clear gap between the market’s and forecasters’ demand expectations.

 

What to consider?

May Michigan survey brings double whammy of worries on growth and inflation

The prelim UoM survey for May saw sentiment fall to 57.7 from 63.5, well beneath the expected 63.0, printing the lowest since July 2022. Current conditions and forward-looking expectations also disappointed falling to 64.5 (exp. 67.0, prev. 68.2) and 53.4 (exp. 59.8, prev. 60.5), respectively. Meanwhile, 1yr inflation expectations slightly fell to 4.5% (prev. 4.6%), but the longer term 5-10yr rose to 3.2% (prev. 3.0%), the highest since 2011. Survey results reflected consumers’ concerns about the economy and the tightening in lending standards due to the recent stress in the banking system, as well as worries on the debt ceiling. Meanwhile, inflation concerns seem to be easing only in the short-term, which suggests that consumers may be pull back on spending. Equities slumped and bond yields rose after the report.

Fed speakers remain focused on inflation risks

Fed member Bowman (voter) was on the wires on Friday and she said additional rate hikes are "likely appropriate" if inflation stays high and labour market stays tight. She also said recent CPI and jobs reports have not provided persistent evidence that inflation is on a downward path. Bowman said Fed policy rate will need to remain sufficiently restrictive for some time, and while policy is now restrictive, it is uncertain if it is sufficiently restrictive to bring down inflation. Jefferson also said that progress on core inflation is ‘discouraging’.

Meanwhile, President has nominated Philip Jefferson to the position of vice chair, US World Bank representative Adriana Kugler as a member of the Fed board and also nominated Lisa Cook to serve 2nd full term on the Feb board. Book Cook and Kugler add a slight dovish bent to the Fed board.

Turkey elections heading for a runoff

President Recep Tayyip Erdogan’s share of votes in Turkey’s presidential election fell to 49.9% with more than 99% of the ballot boxes opened. Key rival Kemal Kilicdaroglu got 44.9% and Sinan Ogan, the third candidate, got 5.3%. If results hold and no candidate wins more than half of the total ballots, Turkey will be headed for a runoff election on May 28. This means there could be more volatility in store for the Turkish Lira, despite reports that Turkey's state banks were buying TRY to support the currency.

Australia’s Newcrest agrees to takeover by Newmont to create gold giant

Australian gold miner Newcrest Mining (NCM:xasx) said it would back Newmont Corp's (NEM:xnys) A$26.2 billion ($17.8 billion) takeover offer in one of the world's largest buyouts so far this year. The deal will lift Newmont's gold output to nearly double its nearest rival, Barrick Gold (GOLD:xnys), further solidifying Newmont's position as the world's biggest gold producer. In addition, it will also boost Newmont’s copper resources. Newcrest shareholders would receive 0.400 Newmont share for each share held, with an implied value of A$29.27 a share, higher than a previous exchange ratio of 0.380 that Newcrest's board rejected in February. Newmont is also offering a franked special dividend of up to $1.10 per share on the implementation of the deal.

PBOC likely to maintain status quo on benchmark rates despite weak credit data

China's central bank is scheduled to reset the 1-year Medium-term Lending Facility Rate (MLF rate) today, the key gauge for banks' loan prime rates. The recent disappointing figures for aggregate financing and loans, much weaker than anticipated, have raised expectations of further monetary easing by the People's Bank of China (PBOC). However, market economists are largely anticipating targeted policies and "window guidance" rather than a reduction in the MLF rate, which is projected to remain unchanged at 2.75% for the time being. While the data may be a result of front-loading credit expansion in Q1, the PBOC is expected to take a cautious and targeted approach over drastic measures.

Meituan expected to report strong Q1 results today

According to a Bloomberg consensus, Meituan (03690:xhkg) is expected to report a 24% YoY increase in Q1 revenues, reaching RMB57.5 billion, with non-GAAP net profit surging to RMB1.9 billion from a loss of RMB3.6 billion in the same period last year. These robust figures are anticipated to be driven by low-double digit growth in food delivery order volume, accompanied by substantial margin expansion in this sector. Moreover, in-store service revenue is predicted to rise by more than 20% YoY, due to the surge in demand for in-person services following the reopening from Covid-zero restrictions.

 

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