Tough day for retailers and Tesla in the US, and Tencent broadens the rout in Asia

What’s happening in markets?

Wall Street stocks hit new lows as the market anticipates earnings declines and further slowdowns in consumer spending, amid tighter financial conditions. This is what’s dragging tech and consumer spending stocks (ex-reopening stocks) to new lows. The S&P500 fell 4% on Wednesday, eroding most of its recent gains. The Nasdaq fell 4.7%, taking the top 100 stock index to its lowest level since November 2020. We think the market is not yet at capitulation point - further selling is ahead. The extra risk now is that volatility, is causing boutique investment managers to be on the brink of margin collapse, which could add to further selling pressure in markets and stocks that are down heavily.

Asian equity markets join the global sell-off. Japan’s Nikkei (NI225.I) was down over 2.5% led by tech such as Tokyo Electron (8035) and consumer discretionary with Fast Retailing (9983) down over 3%. Singapore’s STI index (ES3) also dropped close to 1% on Thursday morning after Singapore Airlines reported earnings with a narrower loss and an upbeat outlook.

Hong Kong and mainland China equity markets gapped down but losses narrowed at mid-day.  Following overnight US equity market’s worst sell-off since June 2020, Hang Seng Index (HSI.I) slumped as much as 3.5% in the morning. Tencent’s (00700) over 8% plunge in share price after reporting Q1 results below market expectations dampened sentiment further. Tencent’s Q1 revenues and EPS coming at flat and -23% YoY respectively and both were 4% below consensus estimates. Online games revenues (PC + mobile) declined 2% YoY and online advertising revenue dropped 18% YoY. Investors were also troubled the management’s remarks saying support initiatives from the Chinese Government to the tech industry takes time and will not benefit the Company much in near-term.  By mid-day, Tencent is down 6.6% and Hang Seng Tech Index (HSTECH.I) is down 3%.  Hang Seng Index and CSI300 (00300.I) fell 2% and 0.3% respectively.

Tesla (TSLA) shares slide 7%, more selling to come as S&P500 boots it out of ESG Index, at a time when market anticipates earnings growth to fall and costs to rise. S&P explained why it kicked Tesla out of its ESG index saying Tesla’s “lack of a low-carbon strategy” and “codes of business conduct,” along with racism and poor working conditions reported at Tesla’s factory in Fremont, California, affected the score. Separately, new research suggests battery cell prices will surge 22% from 2023 to 2026 amid the scarcity in raw materials needed to make EV batteries. This is why we continue to advocate that clients would be better served in commodity companies who are benefiting from price inflation, rather than commodity consumers (EV makers).

Cisco (CSCO) – a proxy for business IT spending, guides for weaker earnings. Cisco is of the largest IT and networking businesses in the world (catering to a 1/3 the world’s market). It reported its Euro and Asian sales fell 6%. But the real story is its weak guidance. Cisco CEO guided for a drop in revenue ahead, expecting a 1-5% revenue decline for Q4, at a time when the market expected revenue growth of over 5%. This reflects that businesses are not willing to open up their pockets, at a time when inflation (wages, energy) is rising and interest rates are going higher.

Consumer spending retail proxies hugely disappoint - as their profit outlooks dim. Target (TGT) shares fell 25% (biggest drop since Black Monday). Walmart (WMT) fell almost 8% as both retailers cut their forecasts for profit amid a slowdown in home-good sales at a time when they’re guiding for rising costs pressures (fuel, freight costs, rising wages). Target and Walmart make $600 billion in combined revenue, that’s double the size of the biggest company on the ASX. So given that both the retail giants are proxies for consumer spending, their demise could translate to other companies.

What to consider?

US retailer earnings signal shifting consumer spending patterns. We have seen a number of weak retailer/ecommerce earnings from the US now starting with Amazon (AMZN) to Walmart (WMT) to Target (TGT) reporting a 52% decline in profits overnight. While US retail sales show that the consumer is still resilient, there is certainly a shift in spending patterns away from home appliances that were the most sought after during the pandemic to reopening and travel related items such as luggage and services. But it is also important to note that inventory levels are building up, which may mean more write downs or a mark down in prices to sell off. Higher costs are also weighing and only likely to get worse in the second quarter. This means retailers will continue to face the brunt for now.

Offshore investors were net seller in onshore RMB bonds for the 3^rd consecutive month.  In April, foreign investors sold RMB88 billion (USD13.3bn equivalent) worth of onshore RMB bonds.  The amount of selling moderated somewhat from March’s RMB98 billion.

Net inflow of foreign currency from China’s trade settlement declined. In April, net trade settlement was only 42% of China’s trade surplus of that month, below the 2021 average of 58%.  The key driver for the low net inflows seems coming from higher than usual demand from importers to buy foreign currencies, staying at escalated level of 65.1% in April versus 2021 average of 55.8%.  Exporters repatriated 60.8% of the total goods exports in April.  It was down from March’s 65.8% but still well above 2021 average of 54.6%. 

Dollar trimmed gains in Asia. The USD moved higher as risk sentiment was eroded overnight, but trimmed gains in Asia. GBPUSD rose back towards 1.2400 while EURUSD was seen back above 1.0500. UK inflation shot up to 9% y/y in April from 7% previously, continuing to complicate the task for the BOE. Yen weakened in Asia, but the cap in 10-year yields as equities lose momentum is suggesting yen weakness has mostly run its course, at least on the crosses.

AUDUSD rises 0.9%, off its low as Australian unemployment fell to a new historical monthly low (3.9%). This is the lowest reading for the survey. Unemployment was lower in 1974 when survey was quarterly. However, the AUD rose modestly off low, up 0.9% today to 0.7020, as the strong employment data gives the RBA more ammunition to raise rates - given Australia’s economy strengthened. China’s reopening theme also adds to upside for the AUD. However, longer term, as the Fed raises rates, this strengthens the USD, will likely cut the AUD’s grass.

Japan imports swell on energy and weak yen. April trade deficit was seen at 839 billion yen as exports grew 12.5% y/y but imports rising 28% on higher energy prices and the drop in yen to two decade lows. Following a negative GDP print for Q1 reported yesterday, the impeding trade position is adding to Q2 risks and pent up demand remains the key to provide an offset in order to avoid a technical recession. Rising inflationary environment may however weigh on consumer spending and Japan’s April CPI will be on watch tomorrow. Consensus expects a rise to 2.5% y/y from 1.2% in March with core CPI also turning positive at 0.7% from -0.7% previously.

Potential trading ideas to consider?

Short CNHJPY trade that we put on last month may still have room to go. The larger foreign currency outflows due to offshore investors’ bond selling and smaller inflow of foreign currency from trade settlement tend to give add to the depreciating pressure the renminbi. At the same time, the Japanese Yen is benefiting from a safe haven bid in the midst of global equity sell-offs.  Both Japanese investors and overseas leveraged investors who fund their positions in Yen tend to repatriate and need to buy Yen in the time of turmoil.  In addition, the prospect of a pickup in inflation in Japan may trigger traders to cover their bearish positions in the Japanese Yen. 

Asian retailers likely to see pressure from global counterparts. Consumer discretionary sector was leading the decline in the S&P overnight, and the rout is likely to spread to Asia. Watching key Asian retailer shares like Japan’s Fast Retailing (9983), Hong Kong’s Sun Art Retail (6808) and Australia’s Harvey Norman (HVN). With liquidity conditions only starting to tighten, there is likely room for the equity rout to run further, but cash is not a viable asset for long term investors. We remain overweight commodities and reopening.

Key economic releases this week:

• Friday: Japan nationwide CPI, China loan prime rates

Key earnings release this week:

• Thursday: Xiaomi, Generali, National Grid, Applied Materials, Palo Alto Networks, Ross Stores, DiDi Global