APAC Daily Digest: What is happening in markets and what to consider next – August 25, 2022
APAC Strategy Team
Summary: US Treasury yields climbed higher ahead of Jackson Hole, where the bar for hawkishness from Fed Chair Powell has been set high. USD gained modestly but the Japanese yen has been largely stable. Energy crisis threats are getting louder, and a re-embrace of nuclear power by Japan may just be the first step to long-term solutions. Crude oil rally was reignited, and coffee futures also extended gains on supply issues. Nvidia disappointment may bring more tech disappointment, but focus shifts to retailers reporting today.
What is happening in markets?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I)
U.S. equities closed modestly higher, taking a pause after a 3-day decline, S&P 500 +0.29% to close at 4140, Nasdaq 100 +0.28%. Energy stock led as the WTI crude firmed up by 1.2%, following EIA data showing a fall in crude oil inventory, Apache (APA:xnys) +3.9%, Ceterra Energy (CTRA:xnys) +3.2%. Nordstrom (JWN:xnys) tumbled 20% and Macy (M:xnys) fell 4%, after the retailers lowered their earnings guidance the day before, citing slowdown in spending of shoppers. On the other hand, Peloton Interactive (PTON:xnas) jumped 20% on news that the sporting goods company plans to sell its products on Amazon (AMZN:xnas). Bed Bath & Beyond (BBBY:xnas) snapped a 5-day collapsing streak to bounce 18% on news of closing a new loan deal.
U.S. treasuries (TLT:xnas, IEF:xnas, SHY:xnas)
U.S. yields climbed throughout the session, with initial selling triggered by a massive 22bp jump in the yield of 2-year U.K. Gilts across the pond. Treasury yields continued to edge up after digesting that headline durable goods orders came in flat, below forecasts but looking less weak once stripping out the more volatile transportation and defense orders. The result of the 45-billion 5-year auction was weak. 2-year yields rose 9bps to close at 3.39% and 10-year yields climbed 5bps to 3.10%.
Hong Kong’s Hang Seng (HSIQ2) and China’s CSI300 (03188:xhkg)
The news of 19 additional stimulus measures from China’s State Council coming out after the Hong Kong market close fueled buying in Chinese ADRs in the New York session, the NASDAQ Golden Dragon China Index +2.5%.
During the Hong Kong session, however, the equity markets slid, Hang Seng –1.2%, CSI 300 -1.9%. Chinese internet stocks were weak. Kuaishou (01024:xhkg) fell 8.1% in spite of reporting better-than-expected earnings as some traders attributed the fall to overhang of the stake of Tencent in the company. Meituan (03690:xhkg), another company that counts Tencent (00700:xhkg) a major shareholder, fell 2.7%. Chinese auto names dropped, led by XPeng (09868:xhkg) that tumbled 12.2%, followed by over 5% declines in other EV names.
The State Council backed newspaper, Economic Times, ran a piece saying that the special loans to developers initiative much talked about earlier this week was not to fuel speculation in properties but to ensure delivery of stalled presold residential units, Longfor (00960:xhkg) -3%, Country Garden(02007:xhkg) -3.9%.
The Stock Exchange of Hong Kong will be closed this morning due to a typhoon and is scheduled to resume trading in the afternoon.
Higher yields bring modest gains in USD
With US 10-year yields going above 3.1%, there was a modest bump higher in US dollar which is now close to its cycle highs, recovering from the post-PMI lows. EURUSD trades close to parity, looking for further direction as Jackson Hole is awaited and the energy crisis related weakness seems to be priced in for now. Higher US yields however didn’t push up USDJPY considerable, but commodity currencies continued to face further pressure. NZDUSD was the weakest on the G10 board, and pressure aggravated this morning with Q2 NZ retail sales disappointing at -2.3% QoQ vs. expectations of 1.7% gains.
Crude oil prices (CLU2 & LCOV2)
Price action in crude oil intensified with Brent back above $101/barrel in Asian morning and WTI futures trading above $95. US crude oil stockpiles fell, with commercial inventories down 3.3m bbl last week, according to EIA data. This was driven by record exports of crude and refined oil, and comes despite a record 8m bbl SPR release and net imports rising by 0.9m b/d. Both technical and fundamental factors are turning supportive, and a potential short squeeze is brewing.
Coffee futures extend gains
Coffee, both Arabica and Robusta, rallying strongly for a third day as the supply outlook continues to deteriorate. The June high at $2.42 in Arabica the only level standing in the way for a push towards the Feb 11-year high at $2.605. Robusta stocks in Vietnam are expected to have dropped by 50% at end-September while arabica supplies have been hurt by weather conditions in Brazil, Colombia and Central America.
What to consider?
A weaker message from Powell could bring a risk rally
While most of the Fed members lately have been consistent in their view on inflation and the need for more aggressive rate hikes, the bar for Powell has been set high. Market pricing for September rate hike has shifted towards 75bps with 60% odds, up from about 45% earlier in the week. Moreover, the market now prices in peak Fed funds rate at above 3.75%, which is pretty much in-line with the dot plot. Additionally, only about 37bps of easing is priced in for next year, and given the uncertain economic environment, Powell may chose to stay on the sidelines. Any hints on staying data-dependent or highlighting the risk of an economic slowdown may be viewed as dovish, and result in a risk rally.
US durable goods data remains mixed
July durable goods orders data disappointed on the headline but core orders came in above expectations, again suggesting resilience in the economy. Headline was unchanged m/m against expectations of 0.6% gain, with June’s print revised higher to 2.2% from 2.0% earlier. Excluding the volatile components such as transportation and defense, durable goods orders were up 0.3% and 1.2% respectively.
Japan’s nuclear plans getting a leg up
The threat of an energy crisis has prompted Japan to make headway on bring back nuclear power after more than a decade following the Fukushima disaster. Japan plans to restart seven more nuclear reactors from next summer onwards, and PM Kishida said that the government will also explore development and construction of new reactors as the country aims to avoid new strains on power grids that buckled under heavy demand this summer, and to curb the nation’s reliance on energy imports.
Japan Tokyo CPI for August to show more price pressures
Japan's Tokyo CPI for August is due on Friday morning, and it is likely to suggest further price pressures above the Bank of Japan's 2% target. Consensus expectations point toward another higher print of 2.7% y/y for the headline measure and 2.5% y/y on the core measure, signalling inflationary pressures will continue to question the Bank of Japan's resolve on the ultra-easy policy stance.
Nvidia earnings may spell tech caution
Nvidia (NVDA:xnas) reported Q2 revenue growing by 3% YoY and EPS $0.51, in line with expectations. The company provided Q3 revenue guidance to be $5.9 billion, plus or minus 2%, missing the previous estimate of $6.92 billion. The share of the chip maker fell 4.5% in extended hours trading.
China’s State Council rolled out 19 new stimulus measures to support the economy
The crux of the new stimulus package consists of an incremental RMB300 billion financing from policy banks to provide equity-like capital for infrastructure projects and a new quota utilizing unused quota carried over from previous years to allow local governments to issue RMB500 billion special bonds by the end of October this year.
Emerging countries dominate in terms of nuclear capacity under construction
According to the latest data released by the World Nuclear Association, the countries with highest nuclear capacity under construction are: China (23.3K MG), India (6.6K MG), Turkey (4.8K MG) and South Korea (4.2K MG). The United Kingdom is the first developed country in the list with 3.4K MG. France lags with only 1.6K MG, for instance. Nuclear energy is the subject of intense debate in several European countries. In our view, this is certainly one of the best options to support green transition and avoid a surge in the energy bill which will lead to lower purchasing power for longer.
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