APAC Daily Digest: What's happening in the markets and what to consider next – August 2, 2022
APAC Strategy Team
Summary: The US dollar weakness found further legs as August trading kicked in, helped by the steady slide in Treasury yields. This helped to unlock further gains in the Japanese yen, although commodities struggled to hold the gains from last week as demand destruction fears picked up following a miss in PMIs from China and Europe and a slowdown in US ISM manufacturing PMI as well. Australia’s RBA is set to raise rates today, and we see a potential for a bigger hike compared to the market’s expectation of 0.5% points. Pelosi’s visit to Taiwan will be a key risk event today, and earnings from Caterpillar and Advanced Micro Devices will be on watch later in the day.
What is happening in markets?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I)
Economic data continues to show slower US growth, which is considered as “good news” by equity investors, as it may open the door for the Fed to pause or even cut rates early next year. The major indices closed slightly lower on the first day of August, with selling in energy stocks putting markets under pressure after the oil price retreated. The S&P500 and Nasdaq100 lost 0.3% and 0.2%. The July rally seems to have stopped there, while markets now await the next catalysts; with July’s non-farm payrolls report on Friday and earnings from AMD, Caterpillar and Paypal due this week. On top of that, markets will also content with US-China tension increasing. The House Speaker Pelosi is said to visit Taiwan on Tuesday, and US futures fell as a result. As for company moves afterhours; Pinterest (PINS) shares soared ~22% after Elliott Investment Management confirmed a major stake in the company and Pinterest also reported resilient sales and user numbers.
Hong Kong’s Hang Seng (HSI.I) and China’s CSI300 (000300.I)
Stocks in in Hong Kong and mainland China traded lower at the open but managed to pare all the losses through the day and closed moderately higher. HSBC (00005:xhkg) surged 5% after reporting higher Q2 revenues and earnings, beating market expectations. Net interest income increased 6.5% sequentially and 13.2% from a year ago. Interest margins increased to 135 basis points in Q2 from 126 basis points in Q1. Autos surged across the board on incremental government policies in China, including the extension of tax exemption on EV purchases for one year, to boost demand for passenger car purchases. Geely (00176:xhkg), up 13%, led the charge higher after reporting strong delivery of its high-end EV in July.
On the other hand, Chinese property shares fell, following China’s top 100 developers’ sales growth in July remained deeply in negative at -47.9% YoY in volume and -39.7% in value. The Wind 30 major cities home sales volumes declined 33.4% YoY in July. The suspended China Evergrande (03333:xhkg) failed to release a “preliminary restructuring plan” by the end of July as promised and the company was ordered to pay 7.3 billion in an arbitration ruling. The news that China is considering to seize undeveloped land to help finance stalled housing projects also weighed on the sentiment. Guangzhou R&F (02777:xhkg) led the charge lower, falling 4.3%. China Overseas Land & Investment (00688:xhkg) and China Resources Land (01109:xhkg) declined 1.8% and 1.2% respectively. Semiconductors were under pressure as investors were concerned about the U.S. authorities tightening restrictions on access to chip making equipment. SMIC (00981:hkgx) dropped 1.7% and Hua Hong Semiconductor (01347:xhkg) was down 1.9%.
US yields fell and curve flattened
U.S. treasuries were well bid across the curve overnight and continued to today Asian morning trading, in particular the long end. 10-year yield fell 10bp to 2.55% and 2-year yield dropped 3bp to 2.86%. The Treasury is expected cut auction size in the 20-year segment contributed to the outperformance of the long-end. Safe haven demand following the news of House speaker Pelosi’s plan to visit Taiwan also boosted demand for treasuries.
Crude oil prices (OILUKOCT22 & OILUSSEP22)
Oil prices tumbled on Monday as demand concerns were aggravated by a slide in China and European PMIs while the US ISM manufacturing PMI also weakened. Meanwhile, improved supply from Libya, which is seen rebounding to 1.2mb/d after a series of disruptions that halved supply, also underpinned. WTI futures slid below $94/barrel and Brent was also seen below the $100 mark.
Wheat and corn futures slide as Ukraine shipments begin
Wheat and corn futures fell after the first grain shipment since Russia's invasion left for Lebanon from Ukraine. While some of the good news from the shipments out of Ukraine may have been priced into the market’s sentiment, as is evident from the drop in grain prices from the peak in May, there is still potential for a further slide if shipments can be ensured on a consistent basis. Given how Russia is playing the energy war games with Europe, there is skepticism that grain shipments will continue.
USDJPY broke below the key support at 131.50
The key beneficiary for lower US yields remains the Japanese yen. With geopolitical tensions taking a leg up in the wake of Pelosi’s Taiwan visit and the killing of al-Qaeda leader Ayman al-Zawahiri by the US over the weekend in a strike in Afghanistan, there is potential for some risk-averse behavior that should further boost the potential for gains in the yen. A break below 131.50 has exposed the sub-130 area, but we will be wary of too much downside in the dollar in the wake of the US jobs report due this week.
GBPUSD looking at a 50bps BOE rate hike this week
While a weaker dollar meant gains across most of the G10 space on Monday (except the CAD), GBPUSD was broadly pushed higher amid expectations of a 50bps rate hike from the Bank of England (BOE). There is also an expectation that Liz Truss will win the Conservative leadership election, and that is helping to boost rate expectations given her aggressive tax cut promises. GBPUSD surged to test the 1.2300 handle while EURGBP slid to 0.8360.
What to consider?
US ISM manufacturing weakening, not collapsing
We had expected some impact from weakening in demand on the ISM manufacturing print, and that is what we got. US ISM manufacturing slid to a 2-year low of 52.8 in July from 53 previously, with new order in contraction territory for a second straight month. This appears to be in-line with the general demand weakness trends, which is necessary for the Fed to ease inflationary pressures, and does not push the rhetoric needle any further towards recession concerns.
US House Speaker Nancy Pelosi plans to visit Taiwan today
In the midst of strongly-worded protests from China, Nancy Pelosi, speaker of the U.S. House of Representatives, plans to fly to Taiwan on Tuesday and meet with Taiwan’s president, Tsai Ing-wen on Wednesday. The visit is not in Pelosi’s official itinerary but has been widely expected and has created much tension between China and the U.S. in recent days.
Australia RBA rate hike; what it means for Australia and big banks
The RBA is expected to hike rates 0.5% at their monthly meeting today, but we think given trimmed CPI (which the RBA looks at), surprisingly rose to a record, showing price rises are higher and deeper entrenched, there is a fair chance of a 0.75% hike. This will put pressure on 2.5 million Australians who have no buffer and have mortgages. More broadly, we think rising interest rates will also crimp borrowing power in the second half, and consumer confidence over the coming months and cause retail spending to further decline. We are also watching house prices in the most populated cities and Sydney and Melbourne continue to fall off their highs; and we expect this property turnover to worsen (prices fall 2.2% MoM and 1.5% in Sydney and Melbourne in July. This snowball will also flow to banking profitability, and we think bank margins will come under pressure – especially the big four banks.
Australian reporting season kicks off in August
A star-studded line-up of big global names, report results in Australia this week; including Virgin Money and Square. We will also get a gauge on how local Australian banks fared in the financial year ending June 2022, with Suncorp (SUN) the first bank to report next Monday, August 8. Commonwealth Bank (CBA) reports Wednesday August 10- with the biggest bank in Australia, to maybe beat consensus, given its margin is expected to hit 1.89%. That seems a little low, considering property prices have only just started to fall. However, we do expect CBA to announce bad debt provisions increased, with foreclosure rates expected to rise as people struggle to pay higher rates, so we expect weaker earnings for FY23. Another risk is that remember, the RBA promised Australians that rates would not rise until 2024. 40% of Aussies who got mortgages over the last two years, have them at fixed rates. The concern is, these people will be disgruntled now rates have risen, as they have not allowed for a buffer. We could see the reverse-wealth effect hit markets, before rates are then cut next year.
Germany retail sales and PMI spark caution
While the Euro-area growth held up last week, the collapse in Germany sales and output remains a key area of caution given its higher dependence on Russian gas which is now being used as a weapon in the war. Retail sales was reported yesterday, and it was the slowest on record, coming in at -9.8% y/y (prev: +1.1%) or -1.6% m/m (prev: +1.2%). Germany’s manufacturing PMI also slid in contraction for the first time in 2 years as it came in at 49.3 for July from 52 previously.
China’s Caixin manufacturing PMI decelerated
After a much weaker than expected official NBS PMI from Sunday, Caixin manufacturing PMI also declined to 50.4 (vs consensus: 51.5; June: 51.7), barely staying in the expansion territory. In comparison with the official PMI, the Caixin manufacturing PMI survey focuses its coverage more on SMEs in the coastal region. The weakness of the index reading is attributed to weak demand and production cuts. The new orders sub-index fell to 50.3 from 51.2 and the output sub-index dropped to 52.0 from 56.4.
Hong Kong GDP contracted 1.4% YoY and grew 0.9% QoQ in Q2
Real GDP growth in Hong Kong came in at -1.4% YoY and +0.9% QoQ in Q2, a weaker than expected recovery (Bloomberg consensus: -0.2% YoY; +3.0% QoQ) from the marginally upward revision of -3.9% YoY and -2.9% in Q1. The disappointment was largely attributed to weakness in exports of goods (-8.6% YoY) and investment (-3.0% YoY). Private consumption growth was flat YoY in Q2. Exports of services rebounded to +1.8% YoY.
Hong Kong is considering reducing the days of quarantine for inbound travelers
John Lee, Hong Kong’s Chief Executive, says that the Hong Kong Government is studying the data and considering to cut the number of hotel quarantine days required for inbound travelers. In the meantime, the Hong Kong Rugby Union announced that the Hong Kong Seven would go ahead in November.
Southeast Asia PMIs shine, while export hubs suffer
To start the week, sentiment was dampened by China’s dismal PMI numbers and the pessimism spread further after South Korea and Taiwan also reported deeper contractions in the manufacturing PMIs. South Korea’s July PMI slid to 49.8 in July from 51.3 previously, while Taiwan’s was down to 44.6 from 49.8 previously. While that does spark some concerns for the global demand conditions, the story for India and Southeast Asian PMIs was quite a contrast. India’s manufacturing PMI touched an 8-month high of 56.4 in July from 53.9 in June, while Thailand, Indonesia, Vietnam and Malaysia reported a further jump in PMIs as well. Philippines’ manufacturing PMI eased but it still remained in expansion in July.
Fed speakers on tap today
While the PCE or ISM data remains back-dated, the Fed speakers can provide us some insights into what the central bank is thinking in terms of policy options going forward. Having kept the forward guidance vague at the FOMC last week, Powell has increased the volatility around data and Fed speakers in the weeks ahead. Chicago Fed president Charles Evans (non-voter this year) and St. Louis Fed president James Bullard (voter) are scheduled to speak later today, and we are looking for a rhetoric that can help markets to understand that inflation still remains a big problem, especially with financial conditions easing. Investors are likely to pay close attention to their remarks for insights into the Fed’s thinking, and to build further views on the inflation vs. recession argument.
Caterpillar and AMD earnings on watch
Caterpillar (CAT) remains a barometer of economic health for the US and globally as it maps the strength of the construction sector. Earnings are due before market, and consensus is for earnings of $3.01 a share on revenue of $14.3 billion. Advanced Micro Devices (AMD) report after market and the focus for the semiconductor companies have shifted more to the demand side now and the supply glut, especially after Qualcomm (QCOM) guided weaker due to slowing demand in the wake of inflation and rising interest rates.
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