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Global Market Quick Take: Asia – March 13, 2023

Macro 6 minutes to read
APAC Research

Summary:  A slight recovery in sentiment was seen into the Monday open as US regulators stepped in to prevent further fallout from the SVB crisis and announced an emergency bank term funding program assuring SVB depositors they will be fully protected and have access to their money as the week begins. US jobs data on Friday was mixed, putting focus on the CPI this week, although the banking crisis reduces the case for a 50bps rate hike this month.


What’s happening in markets?

US equites pulled back on Friday after the Silicon Valley Bank fuelled fear

The futures turned green, indicating Monday could potentially see buying return. Market jitters were calmed after the Fed announced an emergency bank term funding program, with SVB depositors to have access to all money from Monday. On Friday though, markets were hurting, SVB parent, SVB Financial Group’s (SIVB:xnas) demise was felt through markets, triggering a sharp sell-off in US equities with the Nasdaq 100 and S&P500 falling 1.4% on Friday and wiping off 3.8% and 4.6% over the week. The banking sector was hit hard, as investors worried about the risk of contagion after 16th largest bank failed, which lead to selling in other banks, and deposit withdrawals – with American losing faith in the banking system.

The KBW Bank Index shed 3.9% on Friday, and 15.7% over the week. PacWest Bancorp (PACW:xnas) tumbled 37.9% on Friday and a massive 53.7% since Thursday.

US equity futures rallied on Monday Asian hours after the Fed assured depositors in the Silicon Valley Bank they will be fully protected.

Treasury yields plunged on safe-haven bids amid banking woes and Fed speculation

Safe-haven demand and reduced likelihood of aggressive rate hikes drove down Treasury yields. Meanwhile, asset markets were jolted by the Silicon Valley Bank incident, leading to a surge in safe-haven buying of Treasuries. Prices of Treasuries climbed, and yields fell sharply, with the front end and belly of the curve seeing the best performance. Traders are now speculating whether the contagion of the crisis to other banks, and the widening of credit spreads will sway the Fed in favor of keeping the next hike at a modest 25bps, or perhaps even pausing earlier than expected. These speculations are supported by the slight 0.2% month-over-month or 4.6% year-over-year increase in average hourly earnings, and an increase in the labor force participation rate to 62.5% in February.

Interest rates implied by SOFR contracts fell significantly, with June, September, and December 2023 plunging 28 basis points, 44.5 basis points, and 52.5 basis points, respectively. This brought the terminal down to 5.29% in June 2023, from 5.70% in September 2023 just two days earlier on Wednesday. The 2-year Treasury yield tumbled an astounding 28 basis points to 4.59%, while the 10-year yield dropped by 20 basis points to 3.70%. As a result, the 2-10-year yield curve steepened by almost 7 basis points to 89 basis points on Friday. Given the ongoing banking crisis, Treasuries are likely to remain in high demand.

Hang Seng Index and China’s CSI 300 plummeted amid concerns about consumption recovery in China

The Hang Seng Index and CSI300 experienced sharp declines on Friday, with losses of 3% and 1.3% respectively, resulting in weekly losses of 6.1% and 4%. This was attributed to investors selling China internet and consumer names after JD.COM's (09618:xhkg) downbeat comments on consumer spending prospects in China, causing JD.Com to plummet by 11.5%. The Hang Seng TECH Index also dropped significantly by 3.8%.

Auto stocks, particularly BYD (01211:xhkg) and Great Wall Motor (02333:xhkg) took a major hit, with declines of 8.1% and 6.2% respectively, due to an intensification of price war prompted by Dongfeng (00489:xhkg) and other Chinese automakers' price cuts. Auto names were among the largest losers in A-shares on Friday.

The tech war involving semiconductors may extend beyond advanced equipment to materials, leading to concerns about Japan restricting the export of crucial chemicals like photoresists to China. In addition, the turmoil in U.S. banking stocks overnight further weighed on sentiment.

Australian equities (ASXSP200.I) somewhat unscathed following global rout. Gold miners charge

After the demise of the US’ 16th largest bank, SVB with other US banks in jeopardy, Australia’s market has so far outperformed global equity markets, falling 1.9% last week, while the S&P500  shed 4.6% and Hong Kong’s Heng Seng slumped 6.1%. The prudential regulation over Australia’s banks is keeping ASX listed banks relativity unscathed, however smaller non-financial companies with less financial strength are being penalised. The worst performing ASX200 stocks today are BrainChip, and Lake Resources, both down over 4.6%. While capturing upside and lot of bids are, gold miners, with Capricorn Metals, Ramelius Resources and Regis Resources all up 7-9%.

FX: Dollar on the backfoot on chatter of SVB bailout

After slumping to fresh lows on Friday to get in close sights of 104, the US dollar reversed higher into Friday’s close but gains were short-lived as the announcement on a potential backstop funding from the Feb for distressed bank SVB brought risk trades back to the table. AUDUSD pushed back above 0.66 to highs of 0.6647 in early trading amid thin liquidity and a recovery in sentiment. NZDUSD also took another look at 200DMA at 0.6166. GBPUSD testing 1.21 handle again with this week’s focus being the Spring budget and the labor market data. ECB’s hike remains in focus, and EURUSD taking another hit at 1.07 as risk sentiment improved this morning in Asia.

Crude oil prices jumped higher on Friday but closed with a weekly loss

Fears of further monetary tightening, coupled with risks of a financial contagion, raised concerns of a demand weakness and saw crude oil prices slide lower last week. The weak sentiment was compounded by high crude oil inventories in the US. This dominant narrative continues to overshadow signs of stronger demand in China. Some respite was however seen on Friday and into early Asian trading on Monday as US regulators announced measures to protect depositors and let them withdraw money from SVB starting Monday. WTI prices touched $77 from lows of sub-75 on Friday and Brent was above $83 from sub-81 levels earlier. The spread between Brent and Dubai narrowed to USD2.70/bbl, as Dubai crude gained against the global benchmark, suggesting robust Asian demand.

Gold making a fresh stride higher despite easing banking sector crisis concerns

Gold prices saw a big jump on Friday and gains were extended further on Monday morning in the Asian session as a mixed US jobs report and risks of a contagion in the banking sector spooked investors and prompted safe-haven demand. Expectations of a rapid Fed tightening also eased, and Fed swaps fully priced in a 25bps rate cut by year-end. This, along with rising inflation (breakeven) expectations and a sharp drop in yields, has made gold attractive for investors with precious metal charging higher and breaking above key resistances. Gold prices touched highs of $1890 this morning before easing slightly.

 

What to consider?

SVB fallout spreads; Fed announces plans to fully protect Silicon Value Bank and potentially Signature Bank

After the demise of the US’ 16th largest bank, SVB, on Friday and its takeover by the FDIC – which marked the largest bank failure since the 2008 financial crisis, the fallout spread. Regulators took control of another bank, Signature Bank. Unlike SVB which supports venture capital firms, Signature bank specialises in providing banking to law firms. The Fed stepped in and announced an emergency bank term funding program, assuring SVB depositors they will be fully protected and have access to their money from Monday, with agencies said to enact a similar program for Signature Bank. All this follows the Venture Capital community urging startups to withdraw funds, which led to civilians taking their money out of banks. Regulators are seeking buyers for SVB. Meanwhile, the Fed said it’s providing additional funding to banks.

US nonfarm payrolls remained elevated in February

Nonfarm payrolls in the US rose by 311k last month, less than the January's blowout print of 504k (revised down from an initially stated 517k) but still remaining elevated and above consensus expectations of 215k. While the headline continued to reaffirm a tight labor market, other indicators from the report were rather weak.

Average hourly earnings rose +0.2% MoM in February, lower than the expected and last month’s +0.3% MoM. The annual rate of averag hourly earnings rose from +4.4% in January to +4.6% YoY, a touch short of the 4.7% that the market was expecting. The unemployment also picked up by 0.2% pts to 3.6% against market expectations of no change, likely as participation rose 0.1% pt to 62.5%. The data remained short of cementing a 50bps rate hike possibility for March, also given the recent concerns on the US banking sector from the SVB collapse. Focus now turns to CPI release on Tuesday to further shape Fed expectations.

China's February aggregate financing surged beyond expectations with 9.9% Y/Y Growth

China's aggregate financing growth in February was much better than expected, reaching RMB 3160 billion, far above the RMB2300 consensus estimate. The outstanding aggregate financing growth also accelerated to 9.9% year-on-year (Y/Y) in February, up from 9.4% Y/Y in January. Furthermore, M2 increased at a faster pace in February, growing 12.9% Y/Y, up from January's 12.6%.

The surge in outstanding RMB loans played a major role in driving the credit growth, increasing by 11.6% Y/Y in February, compared to January's 11.3% Y/Y. Corporate loans were the primary driver, while household loans remained weak.

Bank of Japan’s Kuroda ends term without sparks

The Bank of Japan kept its policy unchanged on Friday at Governor Kuroda’s last meeting of his decade-long tenure. The target band for the 10-year JGB yield was kept unchanged at around 0%, with an upper limit of 0.50% after being raised in December. The BOJ held its short-term rate at -0.1%. Despite some expectations of another tweak, the outcome carried his usual dovish tone, ensuring a smooth handover to incoming Governor Kazuo Ueda who has conveyed policy continuity in his first remarks after being nominated. Incoming data will be key to watch for what tweaks the next governor Ueda can bring, but near-term focus shifts to US data on inflation, as well as the extent of fallout in the US banking sector as the market appears to be a panic mode after SVB’s collapse which may bring some safe haven flows to the yen.

 

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