What’s happening in markets?
US equities (US500.I and USNAS100.I): Nasdaq 100 closed at the highest level since April 2022
Remarks from House Speaker McCarthy and Senate Majority Leader Schumer signaling that they were ready for a bi-partisan vote on a debt-ceiling as soon as next week lifted market sentiment, seeing stocks moving higher. The S&P500 gained 0.9% at 4198, the highest in 2023 and the Nasdaq 100 surged 1.8% to 13,834, finishing the session at the highest close since April 2022. Netflix (NFLX:xnas) soared 9.2% and NVIDIA (NVDA:xnas) surged 5%. Netflix, Nvidia, Alphabet (GOOGL:xnas), Microsoft (MSFT:xnas), and Apple (APPL:xnas) all closed at new 52-week highs. Wal Mart (WAL:xnys) gained 1% after reporting an increase in sales and providing an upbeat outlook for 2023.
Treasuries (TLT:xnas, IEF:xnas, SHY:xnas): Sell off on a stronger Philly Fed manufacturing Index, decline in jobless claims and hawkish Fed remarks
Treasuries experienced a sell-off in response to unexpected surges in the Philly Fed manufacturing index and a decline of 22,000 in initial jobless claims. The sell-off was further intensified, particularly in the short to medium-term Treasuries, following comments by Dallas Fed President Logan, indicating that the Federal Reserve was not yet ready to pause its rate hikes. Consequently, the 2-year yield closed the day 10bps higher at 4.25%, while the 10-year yield increased by 8bps to 3.65%. SOFR interest rate futures also saw a sell-off, resulting in higher rates, as the probability of a rate hike in June rose to approximately 40%. Reflecting this trend, the December 2023 SOFR contract (SR3Z3) declined by 12bps, indicating higher rates, while the red months (2024 contracts) experienced a decline of 18-19bps, suggesting higher rates as well.
The USD15 billion 10-year Treasury Inflation-Protected Securities (TIPS) auction garnered strong demand. Looking ahead, the Treasury Department announced upcoming auctions of USD 120 billion in total for 2-year, 5-year, and 7-year notes next week.
Chinese equities (HK50.I & 02846:xhkg): range bound as sectors show mixed performance
The Hang Seng Index has remained directionless, trading within a 4% range since late April. Thursday's trading session witnessed a notable upswing of 0.9% from the lower end of this narrow range, as strong showings in Chinese banks, insurance companies, oil and gas, auto dealers, semiconductors, and China internet names outweighed declines in China properties, pharmaceuticals, and biotech names. The market's range trading can be attributed to a downward revision of macroeconomic expectations, which coincided with positive earnings surprises.
Auto dealer Zhongsheng (00881:xhkg) emerged as the top performer within the Hang Seng Index, experiencing a 4.2% rise. This was closely followed by China Life (02628:xhkg), Sinopec (00386:xhkg), Lenovo (00992:xhkg), and PetroChina (00857:xhkg), all of which advanced by over 3%. On the other hand, Longfor witnessed a 4% decline, making it the worst performer within the index.
Tencent (00700:xhkg) slid by 0.9% as the China Internet giant surpassed total revenue expectations but fell short in advertising revenue and earnings. Furthermore, Alphamab Oncology experienced a significant tumble of 18% following the biotech company's disclosure that its lung cancer trial failed to meet the regulatory submission requirements.
After Hong Kong market close, Alibaba (09988:xhkg) reported earnings (see below). The e-commerce giant’s ADR retreated more than 5%.
In A-shares, the CSI300 marginally declined by 0.1%, with gains in computing, media, commodities, communication, and banks partially offsetting losses in new energy stocks, properties, beauty care, electric vehicles, and farming stocks.
FX: USDJPY heading to 140?
The Dollar was firmer again and it hit two-month highs on the back of stronger than expected US data, hawkish Fed speak, easing regional bank woes, and potential optimism around the debt ceiling. The steep rise in Treasury yields saw the USDJPY climb above 138.50 to the highest levels since November, and the key 140 level will now be on the radar. EURUSD also in close sight of 1.0745 support while GBPUSD took a brief look below 1.24. AUDUSD may test 0.66 again after the weak employment data yesterday has eroded the case for a June rate hike from the RBA. While NZDUSD reversed higher after testing 0.62 handle.
Crude oil: increased rate hike pricing weighs
Crude oil prices dipped lower again on Thursday as firm economic data and hawkish Fed commentaries increased the probability of a June rate hike and reduced the case for big rate cuts in H2, bringing short-term demand concerns back on the radar. Asian demand outlook provided some offset, with reports that refiners in South Korea and Taiwan have been buying millions of barrels of US crude, while India is considering refilling its strategic reserves. WTI prices were back at $72 after a dip to $71,50 earlier while Brent was below $76. Powell stakes the stage today and G7 meetings remain on watch into the weekend but bigger focus on OPEC meeting on June 3-4 which will be an in-person meeting and could signal further intent to stabilize oil markets.
What to consider?
Alibaba's Q4 FY23 revenue below estimates while earnings surpasses expectations
Alibaba (09988:xhkg) reported Q4 FY23 revenue of RMB208.2 billion, showing a modest 2% year-on-year growth, below estimates. However, the company's group adjusted EBITA impressively rose by 60% to RMB25.3 billion, surpassing expectations. Non-GAAP EPS came at RMB10.71, 19% above consensus estimate.
While China Commerce and Cloud revenue fell short of projections, other segments within Alibaba performed well. International Commerce outperformed, with revenues growing at 29% Y/Y. Notably, the company announced a full spin-off of the Cloud Group, as well as plans to raise external capital for Alibaba International Digital Commerce. Additionally, Alibaba intends to explore initial public offerings for both Cainiao and Freshippo.
Taobao-Tmall Group will continue to be fully owned by Alibaba, while each business group will have independent financing options and an employee stock ownership program (ESOP). Looking ahead, Alibaba management aims to sustain their market position by investing in content, enhancing the merchant ecosystem, and driving technological innovations.
US jobless claims come in below estimates indicating labor market tightness continues
US initial jobless claims came in beneath expectations, falling to 242k after a rise to 18-month highs of 262k in the previous week. The data was for the week that coincides with the BLS survey period for nonfarms and the reversal from last week’s print suggests that the labor market is not loosening as fast as previously thought and continues to complicate the outlook for the Fed in the second half of the year. Meanwhile, the Philly Fed manufacturing index spiked to -10.4 in May from -31.3 in April, above the expected -19.8 and countering the plunge seen in the Empire State mfg. survey earlier in the week.
Fed speakers bring up June rate hike possibility to 35%
There isn’t a clear chorus in the Fed commentaries any more, but some continue to sound the hawkish alarms. Lorie Logan (voter) particularly opened up the door to more hikes, suggesting data so far does not support justifying a pause in June. Jefferson (voter) also said inflation is too high, but he was cognizant of the lagged effects of monetary policy. James Bullard also said that he will keep an open mind going into the June meeting but is currently leaning towards a hike, however he is not a voting member this year. The Fed Funds futures is now pricing in a June rate hike at over 35% probability from less than 20% at the start of the week. Powell will be on the wires on Friday
Japan’s April CPI matches estimates, core-core above 4%
April inflation data out of Japan this morning remained hawkish with headline CPI higher at 3.5% (in-line with expectations) from 3.2% in March. Core CPI rose to 3.4% YoY from 3.1% while the core-core measure rose above the 4%-mark to fresh 40-year highs at 4.1% YoY in April from 3.8% previously, but a notch softer than the 4.2% expected. While this data set will continue to build pressure on the BOJ to tweak monetary policy, the focus on wage inflation has been emphasized repeatedly and only modest changes can be expected at best if market pressures return.
Micron expected to invest in Japan
Micron (MU) intends to make a multi-billion dollar investment in Japan, although a Japanese official said no decision had yet been made. Micron said it will bring EUV technology to Japan, advancing its next-generation memory manufacturing, and expects to invest up to JPY 500bln in 1-Gamma process technology over the next few years. As chip wars accelerate, Japan is stepping up to be an alternate destination for semiconductor firms to set up plants, with reports that Samsung is also discussing to establish an R&D unit there.
G7 Summit: Potential for clear geopolitical implications
The heads of the G7 will convene for a summit held from May 19-21 in Hiroshima, Japan. The leaders are expected to deliberate on a range of topics, including the health of the global economy, risks of a recession and persistent inflation. Global food security and geopolitics will also be a key focus as the war in Ukraine rages on, along with the escalating tensions between US and China. There is considerable anticipation that the meeting could produce major geopolitical signals related to the nature of the nations’ relationship with China. Bloomberg reported that G7 finance heads will propose a new partnership on supply chains that will only allow participation if certain minimum standards are met on human rights and environmental policies. The statement will be scrutinized by China in case it feels targeted, after China last month called a G7 statement "full of arrogance, prejudice against China," and lodged complaints with this year's G7 host, Japan.
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