Summary: US equity markets soared over 2% as President Biden and House Speaker McCarthy's conciliatory remarks raised hopes for a debt ceiling resolution. US financials led the rally, fueled by deposit growth at regional bank Western Alliance. Hong Kong and mainland Chinese equities extended losses as the renminbi weakened, breaching the 7-handle. Japanese yen weakened to 137.50 against the US dollar as US bond yields rose. Crude oil and copper rallied over 2%, while gold retreated. Target beat Q1 EPS expectations with expanded margins but expressed caution for Q2. Tencent surpassed revenue expectations but fell short in advertising and EPS.
A broad-based rally swept across equities on Wednesday, as both the S&P 500 and Nasdaq 100 surged by 1.2%. Financials emerged as the top-performing sector in the S&P 500, enjoying a robust gain of 2.1%. This positive sentiment was sparked by Western Alliance's (WAL:xnys) update of growing deposits this quarter, triggering a 10.3% surge in the regional lender's shares. PacWest Bancorp (PACW:xnas) also experienced a significant upswing, with its stock soaring by 21.7%. The SPDR S&P Regional Banking ETF (KRE:arcx) demonstrated notable strength, rallying strongly by 7.4%.
Energy and consumer discretionary sectors also outperformed, each posting gains exceeding 2%. Investors further embraced the risk-on sentiment fueled by the prospect of a debt ceiling agreement potentially being reached this week (more details below).
On the individual stock front, Target (TGT:xnys) witnessed a 2.5% increase as investors found solace in the company's margin expansion, despite a less optimistic guidance for Q2 EPS.
The front end of the Treasury yield curve faced selling pressure on a positive day for risk sentiment, as President Biden expressed confidence and House Speaker McCarthy indicated that an agreement on raising the debt ceiling this week was “doable”. A rally in the regional bank stocks contributed further to the positive sentiment for risk assets at the expense of the safety of the short-term Treasury securities. Corporate supply remained active, with an additional $11 billion in new issuances on Wednesday. The 2-year yield increased by 7bps to reach 4.15%. In the futures market, SOFR interest rate futures experienced a decline, resulting in an 11 basis points rise in rates for the 2024 contracts. Conversely, the long end of the Treasury yield curve remained relatively stable, with the 10-year note yield climbing 3 basis points to 3.56%, while the 30-year bonds remained unchanged. The long end's resilience was supported by a robust auction of 20-year bonds.
Hong Kong stocks witnessed a significant surge in selling pressure during the final hour yesterday, resulting in a sharp decline of 2.1% for the day. Various sectors, including China property, solar energy, sportswear, electric vehicles, Chinese insurers, and Chinese banks, endured notable losses. Country Garden Services (06098:xhkg) and Longfor Group (00960:xhkg) both experienced substantial declines, surpassing 7%. Recent data released by the National Bureau of Statistics highlighted a growing number of China's 70 major cities experiencing a decline in residential property prices, indicating a slowdown in the housing market's recovery momentum.
China's internet companies relinquished their early gains and closed the day in negative territory. Bilibili (09626:xhkg) experienced a significant drop of 5%, while Meituan (03690:xhkg) plunged by 3.2%. Baidu (09888:xhkg) concluded with a loss of 0.4% as post-earnings gains dissipated. Investors expressed some disappointment regarding the lukewarm comments made by the National Development and Reform Commission (NDRC) during a press conference on consumer price disinflation. Moreover, the market sentiment was further dampened by the renminbi's weakening, breaching the 7-handle.
In A-shares, the CSI300 index dipped by 0.5%, primarily driven by declines in the telecommunication, non-bank financials, and coal mining sectors. However, amidst the overall decline, companies in the defense, machinery, and computing sectors managed to buck the trend and ended the day with gains.
As US Treasury yields rose further, the Japanese yen came under heavy pressure. USDJPY rose above 137.50 into the Asian open and is on its way to test the strong resistance at 137.85, break above which could bring 140 in sight. Broad dollar momentum was maintained and the next key catalyst could be the potential geopolitical sparks from G7 meetings that begin on Friday. AUDUSD stuck around 0.6650 ahead of the jobs data out today, but downside bias has returned in AUDNZD. EURUSD broke support at 1.0850 bringing EURGBP downside in focus again.
The positive sentiment around a possible debt ceiling deal turned markets to a risk-on mood overnight, and that also brought some gains in crude selling after heavy selling over the last several weeks. The strong inventory report was also ignored. The EIA weekly data saw an unexpected build of 5.040mln in crude (exp. -0.92mln), larger than the surprise build seen in the private inventory metrics. However, gasoline stockpiles fell by 1.381mln barrels, raising hopes of stronger demand. Meanwhile supply disruptions in Canada continued, and focus turns to G7 meeting where any additional sanction on Russia could bring export cuts. WTI prices are now above $72 while Brent is approaching $77.
HG Copper bounced higher after a sharp decline following the downside surprise in China’s activity data earlier this week. At the current level above $3.743 it will create a bullish engulfing candle, potentially signaling a reversal with focus on the 200 DMA at $3.80 next. As we have highlighted earlier, Copper remains the king of green transformation, and with supply remaining tight, these low levels can indicate attractive LT entry points.
Meanwhile, Gold (XAUUSD) is running out of momentum below $2000 and now testing key support at $1981 as US Treasury yields continue to climb. We maintain a bullish outlook, writes our Head of Commodity Strategy Ole Hansen, with the biggest short-term challenge being the risk of long liquidation from momentum-focused hedge funds, a group of speculators that have been strong buyers in recent months.
There was some optimism on the debt ceiling after President Biden said he was confident the US will not default and the meeting on Tuesday was productive, he noted talks will be continuing throughout the week whilst he is at the G7 and he will stay in close contact with negotiators during his time away. Republican House Speaker McCarthy also reaffirmed that a debt ceiling by Sunday is doable and that he is optimistic about their ability to work together. Biden has also continued to highlight that leaders have agreed that there will be no default, and the negotiations are on the budget outlines. This suggest bonds can rally as an agreement is announced.
The USD/CNH currency pair, for the first time this year, surpassed the critical threshold of 7, reflecting mounting concerns fuelled by a series of lacklustre economic data from China. Market sentiment has been increasingly inclined towards the likelihood of a reserve requirement ratio (RRR) reduction as well as cuts in key policy interest rates. Moreover, foreign investors withdrew approximately USD6 billion from Chinese domestic bonds in April, channelling their funds out of the country.
Adding to the prevailing unease, the approaching months of June and July mark the dividend payment season for mainland Chinese companies listed in Hong Kong, with estimated payouts nearing USD8 billion. These combined factors have set the stage for a downward trajectory in the renminbi's value, potentially pointing towards a weakening trend with a target of around 7.20.
Tencent (00700:xhkg) unveiled its Q1 financial results, showcasing a noteworthy 11% year-on-year increase in revenues, reaching RMB149.99 billion. The reported figures surpassed market expectations, which had anticipated a more modest 8% growth rate. This strong performance was primarily attributed to the better-than-expected revenue generated from online games. However, the company's advertising revenues slightly missed consensus estimates, amounting to RMB20.9 billion instead of the anticipated RMB21.3 billion.
During the first quarter, Tencent witnessed an expansion in gross margin, rising to 45.5% from the previous quarter's 42.6%. Additionally, the non-GAAP operating margin demonstrated growth, reaching 29% compared to 24.5% in the previous quarter. Despite these positive developments, the earnings per share (EPS) came in at RMB3.35, falling 2% short of the consensus forecast. This outcome can be attributed to lower-than-expected non-operating income.
Tencent’s ADR gained 1.8% overnight.
Target (TGT:xnys) released its 1Q23 financial results, reporting revenue of USD24.95 billion, slightly below the consensus estimate of USD25.01 billion. However, the company exceeded expectations on Q1 EPS, posting $2.05 compared to the consensus of $1.77. This outperformance can be attributed to improved gross margin of 26.3% and EBIT margin of 5.2%, surpassing the consensus figures of 26.2% and 4.6% respectively. Notably, Target experienced a significant decline of 16% in inventory year-over-year.
The management highlighted strong performance in the food and beverage, beauty, and household essentials sectors, while observing weakness in discretionary categories. Target reaffirmed its previous guidance for the second quarter, projecting low single-digit growth in same-store sales. However, they anticipate softer EPS of USD1.30-1.70, which falls short of the consensus range of USD1.91-1.93.
Alibaba (09988:xhkg) is anticipated to unveil its Q4 FY23 financial results, with revenues of RMB210.2 billion, a 2.5% year-on-year growth, as per Bloomberg consensus. Despite hurdles encountered by Alibaba's e-commerce segment, AliCloud revenues are projected to exceed expectations. Adjusted net income is predicted to rise by 14.5% to RMB24.56 billion, showcasing a year-on-year expansion in operating and net profit margins, although a sequential contraction is anticipated.
The landscape of AI technology leadership is witnessing a fierce showdown between industry giants Google (GOOGL:xnas) and Microsoft (MSFT:xnas), with recent developments from Google's upgraded chatbot, Bard, reshaping perceptions. While initial notions positioned Google as trailing behind Microsoft, the latest update has sparked speculation that Google may indeed be spearheading the race in AI technology. This clash between the two tech behemoths promises to be a monumental contest, captivating industry observers and enthusiasts alike. In an insightful article penned by Peter Garnry, various streams of opinion surrounding AI technology and its regulatory landscape are thoroughly examined.
Thursday’s jobless claims will be key to watch after last week’s higher-than-expected print which showed jobless claims reached highest levels since October 2021 at 264k. This sparked concerns of a cooling in the labor market, and another high print of 252k is expected as per Bloomberg consensus. While this indicates that the labor market is cooling, it still remains tight. If the trend extends further, we could see a material shift in next month’s non-farm payroll expectations due on June 2.
Japan’s Q1 GDP outperformed expectations and provided another boost to Japanese equities. Nikkei 225 is now above its key 30,000 level. April CPI will be on tap on Friday which will likely confirm that price pressures remain concerning. Tokyo CPI for April had come in above expectations despite the falling commodity prices and the base effect. Bloomberg consensus expects national CPI to come in at 3.5% for the headline from 3.2% previously while the core-core measure (ex-fresh food and energy) is expected to rise to 4.2% from 3.8% in March. High inflation will continue to spook expectations about a tweak in BOJ policy, although policymakers remain focused on seeing wage growth.
The heads of the G7 will convene for a summit held from May 19-21 in Hiroshima, Japan. The leaders are expected to deliberate on a range of topics, including the health of the global economy, risks of a recession and persistent inflation. Global food security and geopolitics will also be a key focus as the war in Ukraine rages on, along with the escalating tensions between US and China. There is considerable anticipation that the meeting could produce major geopolitical signals related to the nature of the nations’ relationship with China. Bloomberg reported that G7 finance heads will propose a new partnership on supply chains that will only allow participation if certain minimum standards are met on human rights and environmental policies. The statement will be scrutinized by China in case it feels targeted, after China last month called a G7 statement "full of arrogance, prejudice against China," and lodged complaints with this year's G7 host, Japan.
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Chief Investment Strategist
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Chief Investment Strategist
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Chief Investment Strategist
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Chief Investment Strategist
Quarterly Outlook
Head of Fixed Income Strategy
Quarterly Outlook
Head of Commodity Strategy