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Bank of Japan’s push higher to USDJPY; Flight to safety keeps USD on a rampage; Equity markets calm before Apple earnings and US GDP today

APAC Strategy Team

Summary:  The daily unlimited bond buying from the Bank of Japan has opened up the doors for further yen weakness. Market volatility has surged back to its highest level in almost a month, and investor bunker for safe havens is sending the US dollar index to a 5-year high. Equity markets remain supported by mixed US tech earnings and China’s policy support, and eyes are now on Apple earnings along with US GDP release due today.


What’s happening in markets?

Mixed earnings results overnight, amid a disappointing quarter. But markets holds breath for Apple (APPL) earnings tonight.  On Wednesday Boeing (BA) reported weaker than expected earnings ($1.2 billion loss, which was more than expected) and its shares sank over 7%, capping gains in the Dow Jones. While after hours, in the positive corner, Facebook parent Meta (FB) reported better than expected results and its shares rose 18% aftermarket. Meanwhile, Ford Motor Company (F) also delivering better than expected results afterhours, sending its shares up 4% aftermarket. All in all, this quarter, earnings are far below historical average, of 10% Q2 earnings, and S&P500 earnings are just 0.9%. Energy stocks continue to deliver the best earnings growth and outlooks.

Asian equities relieved by stability in Wall Street and more China support measures. Equity markets in Asia started the day on a positive note, even as flight to safety continued overnight. Japan’s Nikkei (NI225.I) was in gains ahead of the Bank of Japan monetary policy announcement, led by industrials and gas utilities and while Singapore’s STI Index (ES3) was steady.

Additional pledges of supports to economy helped stabilize equity markets in mainland China and Hong Kong. In addition to President’s Xi’s push for more infrastructure spending, yesterday we also had the Standing Committee of the State Council pledged to stabilize employment and the economy as well as the smooth operation of transportation and logistics with a series of measures including waiving taxes on delivery platforms and RMB100 billion loans to support the transport and logistics industries.  E-commerce names gained.  Alibaba (09988), JD.COM (09618), Meituan (03690) were up 1% to 3%. The broad markets failed to follow through more from yesterday’s rally and have been treading water this morning. 

The Australian share market’s ASX200 is up 1% Thursday supported by; better than expected Australian quarterly results and by stimulus talks in China, boosting commodity prices. Iron ore extended its rebound with BHP, rising 3.4%. As for earnings buoyancy; Fortescue (FMG) shares rose 4.9% on better than expected 3Q shipments and guidance ahead. Importantly iron ore majors like BHP and RIO have re-entered their long-term rebound. Sandfire (SFR) shares charged 13% on upgrading copper forecasts. While Australia’s biggest lithium company, Pilbara Minerals (PLS) reported it will meet this years guidance forecasts despite covid staff shortfall. The local lithium giant, also guided for another step up in the lithium price and PLS shares rose 5% At Saxo, we remain bullish on industrial metals, and minerals.

BOJ remains dovish, sending USDJPY towards 130. USDJPY rose over 1% to highs of 129.87 as the Bank of Japan strengthened its defense on the rising yields. Yield curve control was maintained, as was the sale of its asset purchases. BOJ unveiled unlimited daily bond buying to cap 10-year yields at 0.25%. The move suggests acceptance of yen weakness, giving it room to go further, and rising inflation in the hope it will bump up wages.

Rampant dollar dominance continues. The DXY index has surged to two-decade highs amid risk off. Energy crisis batters the EUR which was seen below 1.0550 in the Asian session again, after reaching a 5-year low overnight. ECB President Lagarde yesterday committed to deliver on the 2% inflation target over the medium-term. The NZD is still under pressure, and the AUD is down despite yesterday’s much higher than expected CPI numbers and revised expectations for sooner and faster rate hikes from the Reserve Bank of Australia.

EM currencies face a host of headwinds. EM currencies held up earlier this year despite inflation pressures and a hawkish Fed tilt. But the MSCI EM Currency Index has now slid to its lowest levels since December 2020 amid further headwinds from energy and food prices as well as lockdowns in China. USDCNH is now heading back towards 6.60, weighing on KRW as well which is down over 4% against the USD this month. Meanwhile, USDTHB is near 5-year highs while USDIDR is heading to 14500. Commodity exporters like BRL have also lost their shine amid the recent pullback in oil prices.


What to consider?

Hangzhou started mass Covid testing while Shanghai’s cases fell for a fifth day.  Hangzhou, a city in which many technology companies, including Alibaba are based, starts mass Covid testing today.  On the other hand, new cases in Shanghai yesterday fell for a fifth day to 10,662. There were 50 new cases reported in Beijing. The vice director of the Shanghai municipal heath commission indicated that the restriction on people in “districts with basically no community spready” would be somewhat relaxed.

Indonesia’s palm oil ban may well be short. Indonesian authorities have confirmed that crude palm oil would also be included in the list of banned items. This development will likely impact global food prices as palm oil is used as cooking oil and in food preparation, along with varied other uses such as in household products and cosmetics. Palm oil closed 9.2% higher in Malaysia, with prices on track for a 23% monthly gain. In Chicago, soybean oil hit a record. Indonesia President Joko Widodo has said the palm oil export can be lifted once domestic demand has been met, and given the Indonesia consumes only one-third of its production, we should expect exports to resume once inventories are rebuilt and prices stabilize.

US banks earnings have delivered the worst earnings growth this season, however potential buying opportunities could be ahead. We think after interest rates rise aggressively, banks margins are likely to rise, and it could be worth looking at Bank ETFs like Financial Select Sector SPDR Fund XLF, andVanguard Financials ETF VFH. US banks  could likely see long-term capital growth, but also typically pay annual dividends of 1.5-1.9%. The market is expecting further falls in US banking stocks, from a technical perspective. So be on watch for price stability potentially before taking a long term position.

US 1Q22 advance GDP on the wires later today. Annualised GDP is expected to come in at 1.0% q/q, but some analysts are looking for a decline too after 6.9% q/q growth in Q4. Underlying factors will be considered, as consumer and business sentiment still remain strong while trade deficit and a decline in government spending are likely to weigh. Focus will shift to core PCE release on Friday, that being the measure used by Fed.


Trading ideas to consider

Reopening theme to build further into May. Malaysia followed Singapore to relax virus restrictions including mask mandates and pre departure testing from May 1. This means reopening gains are likely to extend into May as regional travel resumes given pent-up demand.

Consider going Long Volatility Index – Given the unhinged monetary policy of the Fed, The Bank of Japan, the RBA, and with long term inflation heading higher, it could be worth considering going long volatility to potentially maximize profits about to explode.

Consider Shorting the RUSSEL 3000 - Companies are seeing the biggest earnings squeeze since the 1970s arguably, (Rio Tinto agrees). Small companies area grappling with higher inflation (higher employee cost and or higher input prices (food prices, oil) as well as supply chain constraints, and that’s even before rates aggressively rise (with the first suite of rates hikes in 13 years).

Consider going Long Copper, Aluminium or stocks in these sectors. To hedge against falling broad earnings. China is getting ready to rev up its engines in what we think could be the biggest infrastructure push since 2007-08. If you want to look at stocks, you could look at BHP, which makes about 27% of its revenue from Copper and an unspecified amount from Aluminium. Or Rio Tinto (RIO), who makes 22% from Alumimum, 11% from Copper and about 58% from iron ore.


Key economic releases this week:

  • Fri, Apr 29: Eurozone April inflation rate flash, US March PCE index


Key earnings to watch
:

  • Thu, Apr 28:
    • Australia: Pilbara Minerals (PLS) Regis Resources (RRL), Sandfire (SFR),
    • US: Caterpillar (CAT), Twitter (TWTR), Comcast (CMCSA), Merck (MRK), Amazon (AMZN), Apple (AAPL), Intel (INTC), PayPal (PYPL)
  • Fri, Apr 29:
    • Australia: ResMed (RMD), IGO (IGO), Origin Energy (ORG),
    • US: Exxon Mobil (XOM), Chevron (CVX), Colgate-Palmolive Company (CL)

 

For a global look at markets – tune into our Podcast. 

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