APAC Daily Digest: What's happening in markets and what to consider next (July 29, 2022)
APAC Strategy Team
Summary: US equity futures continue to inch higher as a negative Q2 US GDP print further pared bets of Fed tightening and major tech giants Apple and Amazon reported upbeat earnings post-market, lifting sentiment. US 10-year bond yields slid below 2.70%, supporting yen, and further weakening in the dollar added another tailwind to commodity prices which have been recently focusing on supply concerns rather than the expected weakness in demand. US PCE data on the cards today, along with Europe’s growth and inflation numbers likely giving us a glance into a tough winter ahead.
What is happening in the markets?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) rise despite the US falling into a technical recession
The S&P 500 gained 1.2%, hitting a seven-week high of 4,072, and moved further above its 50-day moving average with over 80% of the index members closing in the green as traders bet the Fed will pare rate hikes. US GPD data showed the US economy fell into a recession with Q2 GPD falling 0.9% (more than expected 0.4% growth expected), following Q1’s GPD drop of 1.6%. Personal consumption showed resilience rising 1%, but is down from 1.8%. Joe Biden played that down given employment growth remains strong. Janet Yellen conceded although we have a technical recession in the US, America is not seeing ‘weakening of the economy’.
U.S. bond yields collapsed as recession fear looms
Following the weak GDP print that furthered the market’s fear of recession, U.S. bond yields fell sharply with the front-end yields leading the fall. 2-year yield fell 12 bps to 2.87% and 10-year yield fell 10 basis points to 2.67%. Since June 14, the 10-year yield has fallen from 3.5% to 2.67%, a massive move of over 80 basis points. The money market curve is now pricing in a 50 basis point hike in the September meeting and a total of 93 basis points from now to the end of the year.
Hong Kong’s Hang Seng (HSI.I) and China’s CSI300 (000300.I)
Key indices in the Hong Kong and mainland bourses were little changed on Thursday. Property developer had a short-lived rally in the afternoon following a news report saying the size of the bailout fund spearheaded by the People’s Bank of China would leverage up to RMB one trillion in size. Zhengzhou, one of cities that have most mortgage boycott cases, was planning initiatives to help stalled development projects to resume through restructuring, acquisition, conversion to affordable housing and so on. Shares of Chinese banks were mostly slightly lower with China Merchant Bank (03968:xhkg) falling the most by -2%. Meituan (03690:xhkg) Nfell more than 1% after news of Sequoia’s Neil Shen selling 2.1 million shares, reducing holdings to 2.69% from 2.73% in the company. Shares of China’s education services providers traded in Hong Kong surged across the board.
Amazon and Apple released better than expected results after hours
Amazon (AMZN) rose 13% after revenue topped estimates and the e-commerce giant gave a strong sales forecast for the current quarter. Apple (AAPL) rose 4% after third-quarter results narrowly beat Wall expectations; easing concerns supply chain snags and a shaky economy could ravage the tech giant’s sales over the year.
Weaker than expected result after hours; Intel, Roku and Dexcom
Intel Corp. (INTC) drops 8%, the world biggest maker of computer processors fell far short of analysts’ second-quarter sales and profit estimates and slashed forecasts for the year. Roku (ROKU) tanked 25% after the video-streaming platform gave a 3rd-quarter revenue forecast that was below the analyst consensus maker of glucose-monitoring systems, Dexcom Inc. (DXCM) tumbled 17% after 2-quarter profit and sales that missed expectations.
Bloomberg Commodity Index surges to one-month high with the market focusing on fundamentals, while being supported by the USD fall
The index has extended its bullish run and risen 11% from its June low, not only supported by the USD falling but by the market refocusing on fundamentals once again. Despite oil dropping overnight on weakening economic data, we’ve seen a big draw in US crude inventories with German and Australian power prices surged to record highs. Soybeans rose for the 5th day on concerns about US heat and dryness and wheat and corn also moved higher. Meanwhile, the world is also headed for a severe copper shortage with new mines are finding it increasingly difficult to build and remain profitable with new tax regimens in Chile hanging in the lurch. So the forward 3-month Copper contract has extended its uptrend, and is 12% off its low. While iron ore (SCOA) rose above $117, for the for the first time in 7 weeks (which is supporting iron ore giants stocks move higher), while Chicago wheat is now up 8% off its low, back above $8.11 per bushel.
Crude oil prices (OILUKSEP22 & OILUSSEP22) remain supported
Crude oil prices were higher again in the Asian morning after some demand concerns weighing overnight. WTI futures have gained about 3% in the week to rise above $97/barrel, while Brent is now above $107. This comes despite the US slipping into a technical recession with a negative Q2 GDP print, but weaker demand concerns continue to be offset by the much-weaker supply issues. Shell CEO Ben van Beurden warned that there is more upside than downside when it comes to the oil price, with supply remaining tight.
Copper and Aluminum push higher
Aluminum led the metals higher amid concerns of weaker supply especially at London Metal Exchange where stockpiles have plunged to 31-year lows. Inventories of other metals such as nickel and zinc are also near record lows. Copper, meanwhile, has gained over 4% in the last 5 days touching the key hurdle at $3.50. A softer dollar in the aftermath of the FOMC meeting has also helped the metals space, and commodity prices in general.
USDJPY and EURJPY see downside pressures
USDJPY broke below the key 135 level overnight as the US recession concerns following the Q2 GDP release led to a further softening in yields, boosting the yen. Pair now eyes support at 131.50 area, but even a higher-than-expected Tokyo inflation is unlikely to push Bank of Japan into the tightening mode. The lower EU yields have also sparked a move lower in EURJPY to 136.50, with the 133 area now in focus as we approach Europe’s growth and inflation prints due later today.
What to consider?
US Q2 GDP growth turns negative, PCE data ahead
US reported a second consecutive quarter of negative GDP growth, suggesting the onset of a technical recession. The first estimate of Q2 GDP recorded a decline of 0.9% on an annualised basis, coming in below consensus expectations of a marginal growth. Still, a broad-based recession remains elusive with personal consumption, the largest contributor to US GDP, came in at +1% and the labour market remains strong. Initial jobless claims for the week were slightly higher at 256k vs 261k previously, with the 4-week average still significantly below levels that could spark concerns. The Fed’s preferred measure of inflation, (core) PCE data is due later today, and will form one of the many inputs to the data-dependent Fed’s September decision.
Japan’s Tokyo inflation beats expectations
Japan’s Tokyo CPI came in above expectations at 2.5% y/y for July (vs. 2.4% expected and 2.3% prior) suggesting price pressures continue to ramp up. It is a signal that national CPI will likely also inch higher for the month, but pressure on the Bank of Japan to join the global tightening race has eased with yields softening. BOJ’s Summary of Opinions from the July meeting was released, which without a doubt, continued to suggest that the Bank would not hesitate to ease further to support wage growth.
China’s politburo meeting made new emphases on ensuring stability of the property market
The politburo of the ruling Chinese Communist Party of China head a meeting on Thursday. In the readout from the meeting, the politburo made news emphases on ensuring stability of the property market. While it reiterates the official line of “housing is for living in, not for speculating”, wordings seen the first time include “stabilizing the property market”, “utilizing well and in full the policy toolkits in accordance with the local conditions in each city”, “making it the responsibility of the local governments to ensure delivery of apartments and stabilization of people’s livelihood”. The readout further highlights the determination to ensure the stability of the financial market and to properly deal with the risks facing by local and rural banks. The politburo also notes that the authorities will complete the reform and to regulate the platform economy under a persistent regulatory framework and to roll out a series of “green light” investment projects. The readout has no mention of any growth target for the year.
U.S. President Biden and China’s President Xi dug into their positions over Taiwan
Over a meeting that lasted for more than two hours on Thursday, President Biden told President X that “the United States policy has not changed and the United States strongly opposes unilateral efforts to change the status quo or undermine peace and stability across the Taiwan Strait.” President Xi mentioned to President Biden that adherence to “the principle of one China” is the foundation of Sino-American relationship and “anyone who plays with fire will eventually burns himself”. It is reported that the two leaders had discussed a possible summit but no agreed plans yet for such a meeting. In the meantime, U.S. House Speaker Nancy Pelosi is scheduled to depart for a trip to Asia but it is unclear if she will go to Taiwan during the trip.
China’s manufacturing PMI is expected to remain subdued
Market economists are expecting China’s manufacturing PMI – which is scheduled to release on Sunday July 31 – to come in at 50.3 for July, just a touch better than the June reading of 50.2 and barely moving higher from the expansion/contraction threshold of 50. Non-manufacturing PMI is expected to fall to 53.8 in July from 54.7 in June. The weaker-than-expected emerging industries PMI reported last week, pick-up in Covid-19 related restrictive measures, and the turmoil in the property market are cited as contributors to the weak estimates.
No signs of easing in Eurozone inflation, even as growth concerns mount
Eurozone price pressures remain elevated, and another higher print is expected for July today after Germany reported an acceleration to 8.5% from 8.1% previously. Meanwhile, Eurozone GDP growth is likely to signal further economic weakness as the threat of Russia curbing gas flows continues to loom. High energy prices are curtailing the spending power of households, with real incomes for households in Germany, Italy and Spain expected to drop by at least 2% this year. Still, the scope of another 50bps rate hike by the European Central Bank in September remains high as the window to tighten is fast diminishing, even as sovereign spreads continue to widen.
Apple earnings did not disappoint
Apple (AAPL) reported a beat on both the topline and the bottom line, while also providing a better-than-expected outlook for the next quarter on easing supply chain concerns and some recovery in China. Revenue grew 2% YoY to $83 billion, a closing in on the consensus estimate of $82.59 billion while EPS of $1.20 was better than the consensus estimate of $1.16. iPhone sales in the quarter grew to $40.665 billion versus $39.57 billion last year. Apple’s innovation and pricing power are key positives that provide resilience, and strong balance sheet and robust capital-return program suggest long term potential despite a tough macro environment.
Reopening brings profits back for Singapore Airlines
Singapore Airlines (C6L:xses) reported a first-quarter profit of S$370 million, compared with a loss of S$409 million in the year-ago period. Revenue in the quarter tripled and operating profit was the second highest in history. Outlook remains upbeat with the upcoming year-end holiday period supporting more travel demand, despite headwinds from higher oil prices and virus resurgences.
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