Global Market Quick Take: Asia – June 8, 2023

What’s happening in markets?

US equities (US500.I and USNAS100.I): Russell 2000 rallies; Nasdaq 100 slumps

The Russell 2000 Index demonstrated strong momentum for the second consecutive day, surging by 1.8% on Wednesday, outperforming the mega-cap stocks. Conversely, the Nasdaq 100, which is heavily focused on technology, experienced a significant decline of 1.8%. This downward movement was highlighted by Alphabet (GOOGL:xnas) dropping 3.8% and Microsoft (MSFT:xnas) shedding 3%. Meanwhile, the S&P 500 declined by 0.4%. The weakness in communication services, information technology, and consumer discretionary sectors was partially offset by the strength observed in energy, real estate, utilities, and industrials. Notably, regional banks continued their rally, with the SPDR S&P Regional Banking ETF (KRE:arcx) advancing by 3.3%.

Treasuries (TLT:xnas, IEF:xnas, SHY:xnas): Sell off on Bank of Canada's unexpected rate hike

Following an unexpected rate hike by the Bank of Canada, US Treasuries had a significant sell-off. Initially, the selling pressure was concentrated in the front end of the yield curve but later shifted to the 5-year and 10-year maturities. As a result, the 2-year yield concluded the day 8 basis points higher, while the 10-year yield surged by 14 basis points, reaching 3.80%. This movement bear flattened the 2-10 curve by 6bps to -76.

Chinese equities (HK50.I & 02846:xhkg): Hang Seng Index gains despite China's export decline; Apple suppliers rebound

Despite a 7.5% decline in China's USD-export terms in May, the Hang Seng Index managed to achieve a 0.8% gain on Wednesday. The advancements were primarily driven by the industrial, consumer, and China Internet sectors. Techtronic (00669:xhkg) surged 5.7% following the dismissal of allegations stated in the Jehoshaphat report, coupled with favorable stock recommendations from several brokers. Additionally, suppliers of Apple witnessed a rally, with Sunny Optical (02382:xhkg) rising by 4.2%.

The Hang Seng TECH Index (HSTECH) also demonstrated notable gains, rising by 2.3%. Within the HSTECH index, Hua Hong Semiconductor (01347:xhkg) stood out as the top-performing stock, achieving a gain of 5.5%. China Internet stocks rose across the board. EV manufacturers gained, with Li Auto (02015:xhkg), rising by 4%. Moreover, solar shares benefited from positive government support headlines, with Xinyi Solar (00968:xhkg) gaining 2.1%.

In contrast, the CSI300 in A shares declined 0.5%. CATL faced a significant setback, plummeting by 5.5% after a prominent US investment firm downgraded the battery maker to underweight. Despite the overall market decline, shares of the suppliers of Apple rebounded, recovering from the previous day's sell-off. 

FX: CAD gains on surprise BOC rate hike; offshore yuan pushes to new lows; TRY in free fall

Two central banks in a row have now surprised hawkish, BOC being the latest after RBA earlier in the week. This has raised risks of a Fed surprise next week, which led to higher Treasury yields and dollar regaining strength overnight. Still, Fed Funds futures see only 30% probability of a Fed rate hike next week but a rising chance of a July tightening move. USDCAD pushed lower to 1.3322 also helped by oil price gains, but rose back to 1.3370 at session-close. NZDUSD was the underperformer as it plunged to lows of 0.6031. The Chinese yuan also came under further pressure after Chinese exports data for May disappointed, and USDCNH rose to YTD highs of 7.1533. Turkish lira experienced its largest fall since late 2021 after president Recep Tayyip Erdoğan’s new finance minister’s pledge to restore “rational” policies. The currency dropped to a record low of 23.4 against the USD.

Crude oil: higher on inventory data and higher Chinese imports

Crude oil prices edged higher yesterday as EIA inventory data showed refinery utilization at its highest since 2019, signalling expectations of a strong summer demand. This resulted in a build-up in inventory of gasoline in the order of 2745kbbl last week. Commercial inventories of crude oil were down 452kbbl over the same period. China’s demand for oil also showed signs of growing. Oil imports rose to 51.4mt after declining to 42.4mt in April. WTI prices rose to $73/barrel before sliding back below $72.50 into early Asian hours while Brent rose to $77.50 before being back below $77.

What to consider?

Bank of Canada ends conditional pause with a surprise 25bps rate hike

The Bank of Canada hiked rates by 25bps in a surprise but not completely unexpected move yesterday to 4.75%. The central bank noted that monetary policy was not sufficiently restrictive to bring supply and demand back into balance and return inflation sustainably to the 2% target. They said that labour market remains tight and overall, excess demand in the economy looks to be more persistent than anticipated. Looking ahead, the BoC is seemingly entirely data-dependent as they have removed the language from April that they are prepared to raise further if needed and will continue to assess core inflation and the outlook for CPI instead.

China’s exports fell more than expected in May

China reported a -7.5% year-on-year drop in exports in dollar terms, far below expectations for a -1.8% drop. It was the first drop in exports in three months. The import numbers were also negative, at -4.5% year-on-year, well above expectations for a -8% drop, and marking the third consecutive month of falling demand. The weak export numbers will have observers looking for a new round of policy stimulus. Imports of key commodities meanwhile was firm with crude oil imports rising to 12m b/d, second highest this year, and natural gas to a January 2021 high at 10.6m tons. Copper (ore & concentrates) and soybeans both reached record highs at 2.6m and 12m tons respectively.

US crop deteriorates due to bad weather

The latest weekly report from the US Department of Agriculture shows the US corn crop deteriorated by the most in nearly three years as drought conditions worsened in the Midwest. About 64% of the nation's corn crop was rated good-to-excellent in the weekly report, a five percentage-point plunge that was the most significant decline since August 2020. Other grain and soybean sectors are also seeing rising prices in June led by growing concerns that a current dry spell across Northern Europe, the Black Sea region, and parts of the US may negatively impact this year's crop production. Read more on this here from our Head of Commodity Strategy Ole Hansen.

Japan’s Q1 GDP sees a big upward revision

The final print of Japan’s Q1 GDP saw a large upward revision to 0.7% sa QoQ from 0.4% flash print and 0.5% expected. The YoY print came in at 2.7% from 1.6% flash and 1.9% expected. Q4 GDP growth was flat QoQ and +0.1% YoY. While private consumption was revised a notch lower for Q1, most of the upward revision came from higher business spending. The Japanese yen showed a minor gain on the report to drop back below 140 but policy tightening still remains a far-fetched idea for Bank of Japan.

Stanley Druckenmiller warns "more shoes to drop" but optimistic on AI

Stan Druckenmiller told Bloomberg's Invest Conference that "this is the most complicated non-roadmap, unanalyzable situation I've ever seen in terms of having a lot of confidence in an economic prediction going forward... I just don't see a fat pitch right now. Our central case is there's more shoes to drop, particularly in addition to the asset markets economically." He was positive on AI and said his firm owns Nvidia and Microsoft, especially hinting at a 2-3 year time horizon for Nvidia. He said that “unlike crypto, I think AI is real... If [AI is] as big as I think it is, Nvidia is something we're going to want to own for at least two or three years. Not for 10 months.” While AI presents a whole lot of opportunities, investors should also be aware of some key risks. Watch Saxo’s video on how to avoid the AI hype to know more.