Global Market Quick Take: Asia – July 17, 2023

What’s happening in markets?

US equities (US500.I and USNAS100.I): S&P 500 slightly down, healthcare shines, banks beat forecasts, Nasdaq flat

On Friday, the S&P 500 edged down 0.1%, closing at 4,505. Among the sectors, healthcare stood out as the best performer, gaining 1.5%. United Health Group (UNH:xnys) jumped by 7.2% after raising its earnings guidance. The energy sector had the largest setback, declining by 2.8% due to a nearly 2% drop in crude oil prices.

The financials sector fell by 0.7%, making it the second worst-performing sector within the S&P 500 for the day. JPMorgan Chase (JPM:xnys), Citigroup (C:xnys), and Wells Fargo (WFC:xnys) initiated the Q2 earnings season for US banks with strong results, surpassing both revenue and profit forecasts. JPMorgan's share price increased by 0.7%, but Citigroup experienced a decline of 4%, and Wells Fargo slid by 0.3%. The KBW Bank Index, representing 24 large banks, shed 2.4%. Some investors expressed concerns that the performance of the three best-positioned large money-center banks might not be indicative of the rest of the banking sector, which could face more challenges. Additionally, Wells Fargo's cautious tone on commercial real estate further worried investors.

In the tech-focused Nasdaq 100, the market opened on a positive note but gradually declined throughout the session, ending nearly flat at 15,566. Nvidia (NVDA:xas) experienced a decline of 1.1%, while Microsoft (MSFT:xnas) saw an increase of 0.8%. These two companies played a significant role in Nasdaq's overall activities. Notably, there were approximately 1.4 million Nvidia calls traded during the day, indicating active investor engagement.

Treasuries (TLT:xnas, IEF:xnas, SHY:xnas): Front end sells off as strong consumer sentiment triggers yield surge

Treasuries sold off and yields rose, driven by large block sales in the 2-year notes futures (ZTU3) and cash selling across the front end of the yield curve. This selling pressure was triggered by the release of the University of Michigan Sentiment Index, which revealed surprisingly strong results, reaching the highest level since September 2021. Additionally, both short-term and long-term inflation expectations exceeded median forecasts. The 2-year yield surged 14bps to 4.77% while the 10-year yield climbed by 7bps to 3.83%, flattening the 2-10 curve by 7bps to -94bps.

Hong Kong & Chinese equities (HK50.I & 02846:xhkg): Hang Seng Index extends winning streak, A-share market shows mixed performance

Hong Kong and China stocks continued their winning streak for the fifth consecutive day, bolstered by positive developments surrounding Chinese internet companies throughout the week, which instilled optimism among investors. The Hang Seng Index gained 0.3%. The rally in the market was primarily driven by the telecom, materials, and energy sectors. China Unicom (00762:xhkg) surged 5.3% following the launch of a SIM card hard wallet for e-CNY, China's central bank digital currency. China Telecom (00728:xhkg) also witnessed gains, rising by 4.5%. China Nonferrous Mining (01258:xhkg) added 4.5%.

Meanwhile, in the A-share market, the CSI300 remained nearly flat. Telecommunication, cybersecurity, and cloud computing stocks saw gains after the release of a set of Interim Measures for the Management of Generative Artificial Intelligence Services by the Cyberspace Administration of China, with a particular emphasis on data security. However, these gains were offset by weaknesses in the autos, electric equipment, catering, household appliance, and beauty care services sectors.

Note: Trading at the Stock Exchange of Hong Kong will be delayed today as typhoon signal number 8 is hoisted.

FX: USD in focus after a tough week

The US dollar was marginally higher on Friday but slumped last week and DXY Index remains below the key 100-mark as the new week kicks off in Asia. JPY remains a key focus as the highly anticipated BOJ July meeting draws closer and expectations of an uptick in inflation forecasts or a tweak in YCC remain rampant. USDJPY trades below 139 from highs of 143 last Monday. EURUSD facing resistance ahead of a major Fibo of the entire sell-off wave from the pandemic highs to last fall’s lows coming in at 1.1275. CAD weakened as oil prices slumped.

Crude Oil: signs of tightness overshadowed by higher inflation expectations

Crude oil recorded a third straight week of gains amid increasing supply side issues. However oil prices slumped on Friday amid profit-taking, and with US consumer inflation expectations remaining anchored higher suggesting risks of higher-for-longer interest rates and underpinning demand concerns. The decline in oil prices extended in early Asian trading hours on Monday with WTI below $75/barrel and Brent below $80 with supply concerns also easing as Libyan oil field resumed production after a disruption last week.

Wheat: China output and Black Sea grain deal concerns underpin price action

Wheat futures rose 3.4% on Friday and extended gains further this morning in Asia to $6.70 a bushel with still no confirmation of an extension in Black Sea grain deal. The current agreement is set to expire on July 18, and traders are mulling the risk of Russia leaving the deal. The Black Sea grain deal allows for commercial food and fertilizer exports from three key Ukrainian ports in the Black Sea despite the Russian invasion of the country. Meanwhile, risks of tightness in wheat market also increased with heavy rain taking a toll on China’s summer crop.

What to consider?

US consumer sentiment soars

Preliminary University of Michigan survey pointed to sustained strength in the US consumer. Headline sentiment improved to 72.6 for July from 64.4 previously, and well above the expected 65.5. Sentiment was likely supported by cooling inflation and strength in the labor market, while gains in equity markets also potentially underpinned. The 1yr and 5yr inflation expectations remain elevated and rose to 3.1% (prev. 3.0%) and 3.4% (prev. 3.3%), respectively, offsetting some of the relief seen with softer CPI and PPI reports last week, and will continue to give a reason to Fed hawks to guide for another rate hike after July.

Bank earnings beat estimates: JPMorgan

JPMorgan Chase reported Q2 Adjusted EPS of USD4.75, 24% above the USD 3.83 consensus forecast. Adjusted income came in at USD 14 billion, a 71% increase from a year ago. Net interest income reached USD22 billion in Q2, beating the consensus of USD21 billion, driven by an improvement of net interest margin to 2.62% in Q2 from 2.57% in Q1. The bank’s common equity Tier-1 (CET1) ratio remained unchanged at 13.8% from the previous quarter. Management raised full-year 2023 net interest income guidance to around USD87 billion from USD84 billion while maintaining the expense guidance at USD84.5 billion for 2023. It was a set of overall better-than-expected results.

Bank earnings beat estimates: Citigroup

Citigroup reported Q2 Adjusted EPS of USD1.37, a 37% decline from a year ago quarter but 4% higher than the consensus estimate of USD1.315. Adjusted net income was USD2.61 billion, falling 39% Y/Y but 2.4% better than consensus. Net interest income increased 4% Q/Q to USD13.9 billion. Its CET1 ratio declined to 13.3% in Q2 from 13.4% in Q1. The management raised net interest income guidance for 2023 to USD46 billion from USD45 billion while revenue and expense guidance remains unchanged.

Bank earnings beat estimates: Wells Fargo

Wells Fargo reported Q2 EPS of USD1.25, growing 69% Y/Y and beating the consensus estimate by 7.7%. Adjusted net income grew 64% Y/Y to USD 4.66 billion. Net interest income of USD13.2 billion, increasing 29% Y/Y. The management raised the full-year 2023 net interest income margin guidance to +14% Y/Y from +10% Y/Y while expected expenses to increase to around USD51 billion from the previous guidance of USD50.2 billion. CET1 ratio fell to 10.7% in Q2 from 10.8% in Q1. Wells Fargo added USD949 million to its credit loss reserves, primarily due to deterioration in commercial real estate loans. The management said that the office portfolio had the “most nonaccrual loans in the highest level of allowance for credit losses,” and the allowance for credit losses coverage ratio for the office loans increased to 8.8% from 5.7%.

While the earnings results for JPMorgan Chase, Citigroup, and Wells Fargo beat estimates, there are concerns regarding the performance of smaller banks, particularly regional banks. The deterioration in commercial real estate loans as reflected in Wells Fargo’s results also worries investors.

China's Q2 GDP sequential growth to slow, industrial sector weighs

According to Bloomberg's median forecast, China's GDP growth is expected to decline to 0.8% Q/Q on a seasonally adjusted basis in Q2, down from 2.2% in Q1. The main factor weighing on the economy is the industrial sector, which is experiencing inventory destocking. However, the services sectors are expected to show resilience. On a year-on-year basis, real GDP is anticipated to grow by 7.1% in Q2, a significant increase from 4.5% in Q1 due to the low base effect resulting from the Shanghai lockdown last year.

The forecasted industrial production growth, based on Bloomberg's survey, is expected to moderate to 2.5% Y/Y in June, down from 3.5% in May. This is primarily due to the high base effect resulting from the stimulus measures implemented in the auto industry last year. Similarly, retail sales growth is projected to decline to 3.3% Y/Y in June, compared to 12.7% in May. This decline is also attributed to the high base effect in the auto industry.

Year-to-date total fixed asset investment (FAI) growth is projected to moderate to 3.4% Y/Y in June, down from 4.0% in May, primarily due to the property sector. Property investment for the year-to-date period is expected to decline by 7.5% in June, contracting at a faster pace than the -7.2% Y/Y decline in May.

Japan newspaper hints at a likely increase in BOJ’s FY2023 inflation forecast

The Yomiuri newspaper reported on Friday that Bank of Japan is on course to raise its inflation forecast for this fiscal year ending March to more than 2% from current 1.8% when it reviews the outlook later this month. The central bank sees businesses increasing prices more than it expected. Forecasts for fiscal 2024 and 2025 likely to be ~2%, compared to current forecasts of 2% and 1.6% respectively. The BOJ meets July 27-28.

New governor for Reserve Bank of Australia

The Australian government appointed current RBA deputy governor Michelle Bullock to replace Philip Lowe as RBA governor in September for a 7-year term. She is viewed as providing continuity of RBA policy and will be responsible for a significant overhaul of the RBA structure, which will now have a policy committee, fewer rate meetings in line with global peers, and a press conference after every meeting.

Hong Kong & China Connect Morning Session cancelled on Typhoon 8

Typhoon Signal 8 will remain in force before noon. Typhoon Talim was centred about 270 km (168 miles) south-southwest of Hong Kong at 5 a.m. and is forecast to move west-northwest at about 18 km/h in the general direction of Leizhou Peninsula and Hainan Island. The pre-opening session of the HK market has been cancelled and morning session delayed. The morning trading of stocks, bonds and derivatives is scrapped if Signal No. 8 or above is in force at 9am and afternoon session is cancelled if the signal isn’t lowered to No. 3 or below by noon.

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