APAC Daily Digest: What is happening in markets and what to consider next – September 19, 2022
APAC Strategy Team
Summary: Sentiment in U.S. equities has been dampened by rising expectations of larger rate hikes for the rest of the year and profit warnings and depressed remarks from the management of heavy-weight companies about their business outlook and the economy. All eyes are on the FOMC meeting this Wednesday. China’s August industrial production, retail sales, and infrastructure construction surprised on the upside but housing market activities and home prices remained sluggish.
What is happening in markets?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) are looking bearish again
US equities closed off the week with the biggest loss since January after heavy-weight companies were hit by a series of company earnings and guidance woes, with their pain being compounded by rising bond yields. S&P 500 was down 0.7% on Friday and down 4.8% for the week and Nasdaq 100 dropped 0.6% on Friday and 5.8% for the week, wiping out the prior week’s gains. The Nasdaq 100 is now down 29% from its November 2021 peak and the technical indicators on the monthly chart tend to suggest further downside ahead.
Big US stock movers
Last week there were a number of industrial titans, first Dow Chemical (DOW:xnys), Eastman Chemical (EMN:xnys), Huntsman (HUN:xnys), Nucor (NUE:xnys), and capped with FedEx (FDX:xnys) warning about grim demand outlook. FedEx only missed EPS for the August quarter massively but also cut its Nov quarter EPS guidance and completely withdrew the FY2023 guidance, citing significantly worsened macroeconomic trends both internationally and in the US. FedEX tumbled 21.4% on Friday. Amazon (AMZ:xnas) declined 2.2%, following FedEx’ warning. General Electric (GE:xnys) warned the supply chain pressure is having a negative impact on profits. Uber (UBER:xnys) dropped 3.7% after the ride-hailing services provider following a major data breach in its computer network caused by a hacker. Amazon (AMZ:xnas) declined 2.2%, being dragged down by the woes in FedEx. Adobe (ADBE:xnas) slid another 3.1% on Friday and a massive 19.4% in two days since the software maker announced a USD20 billion offer to acquire Figma, collaborated product design platform at 100x of the latter’s recurring revenue. For more discussion on FedEx and Adobe, please refer to Peter Garny’s note here. Last Friday, over USD3 trillion notional of options expired on Friday and S&P3900 puts traded about 95,000 contracts.
U.S. treasuries (TLT:xnas, IEF:xnas, SHY:xnas)
Trading in treasuries on Friday was mixed, with yields of -2-year and 10-year notes unchanged at 3.86% and 3.45% respectively as 5-year yields came off 3bps to 3.63%, and 30-year bonds underperformed for the first time during the week, seeing yield rising 4bps to 3.51%. Treasuries pared their early losses (higher yields) after the 5-10 year inflation expectations in the University of Michigan consumer sentiment survey fell to 2.8%, the lowest since July 2021. The underperformance in the 30-year bonds was attributable to supply, including a USD12 billion 20-year treasury bond auction on Tuesday and expected corporate issuance of about USD20 billion this week. The latest data shows that the holding of Japan, the largest foreign holder of U.S. treasury securities, fell USD2 billion to USD1.23 trillion and China, the second largest holder, saw its holdings increase by USD2.2 billion to USD970 billion in July.
Hong Kong’s Hang Seng (HSIU2) and China’s CSI300 (03188:xhkg)
Shares traded in Shanghai and Shenzhen plunged, with CSI 300 down 2.4%. The General Office of the State Council issued guidelines to encourage securities firms, funds, and financial guarantee companies to lower fees. Shares of brokerage firms fell across the board in mainland bourses by nearly 5%. East Money (300059:xsec) tumbled 10.8%. Chinese brokerage companies listed in Hong Kong also plunged, with GF Securities (01776:xhkg) down by 8.6%, CITIC Securities (06030:xhkg) down by 5.0%, Huatai Securities (06886:xhkg) down by 4.8%. Chinese property stocks fell in both the mainland bourses and Hong Kong bourse, following the report that new home prices 2nd to 4th tier cities fell sharply again in August despite the recent relaxation of home purchases in a large number of cities. The weakness of the property sector in the fixed asset investment data in August and the news that the city of Suzhou resumed home purchase restrictions on non-residents in four districts added to the woes in the developer space. Country Garden (02007:xhkg) tumbled 7.6%. The EV space declined, falling from 1% to 4.5% following the Ministry of Industry and Information Technology’s Vice Ministry said that there are “blind investments” and overlapping projects in EV in some provinces and municipalities. In the China internet space, Kuaishou (01024:xhkg) led the charge lower, down more than 7%, as Alibaba (09988:xhkg), Tencent (00700:xhkg), Meituan (03690:xhkg), and Bilibili (09626:xhkg) down from 1.5% to 4.4%.
Australia’s ASX200 has wiped out July’s rally. Focus will be on RBA minutes released Tuesday
The ASX200 shed 2.3% last week, erasing July’s gain but faring better than US equities. The market woes have not only come after Australian 10-year bond yield rose to fresh highs, up 0.2% last week, while hovering in 8-year high neighbourhood. But secondly, market sentiment has also been capped as the Fed is set to aggressively hike rates, which pressures Australia’s tech stocks, with many Aussie tech companies making the majority of their revenue from the US. And thirdly, metal commodities have come under pressure again of late, as China’s demand continues to wane. In fact, fresh Chinese export data shows their rare earths and aluminium exports surged yoy. Meanwhile total China’s imports of steel plunged 16% yoy, corn fell 44% and wheat dropped 25% yoy. The trifecta of issues is seeing the ASX200’s technical indicators on the day, week and month charts flag further downside is ahead.
Australian dollar on notice with the Fed to hike this week
The AUDUSD is under pressure after hitting a new low last week, 0.6727 US cents, which is about a two year bottom. Despite already losing 7% this year, the commodity currency, the AUDUSD is on notice again this week with the Fed expected to hike by 75bps (0.75%) at its Wednesday meet, which will take the Fed funds rate to 3-3.25%. There is also a slim chance (25% chance) of a full percentage hike of 100bps (1%) after the hotter-than-expected August inflation. Either way, the fundamentals support the US dollar gaining momentum against the Aussie, especially as the RBA is limited in its hiking power and likely to only hike by 0.25% next month. Also consider a jump in the US 10-year yield will likely further bolster the USD.
A slightly softer USD heading into the FOMC week
The USD is slightly softer going into the FOMC week amid some profit-taking, but it still remains the haven of choice with massive amounts of policy tightening packed into the week. AUDUSD pared some of the recent losses amid China reopening optimism and RBA’s Kearns saying that Aussie home buyers could benefit from higher rates. USDCAD rose to near 2-year highs on Friday at 1.3308, partly oil induced, but also due to increasingly sour sentiment and perceptions that BoC-Fed policy will likely diverge in wake of the latest disappointing Canadian employment data vs still-tight US labor markets. USDJPY will be a key focus with both FOMC and BOJ meetings scheduled in the week, and possibility of another round of strong verbal intervention from the authorities is seen. EURUSD is back above parity, as ECB members stay hawkish, but risks remain titled to the downside in the near term.
Crude oil (CLU2 & LCOV2)
With massive central bank action scheduled in the week, it can be safely assumed that demand concerns will likely remain center-stage. A spate of rate hikes is aggravating concerns of an economic slowdown, but easing of restrictions in China’s Chengdu today will ease some of the concerns. Dalian will also exit restrictions today. Nevertheless, more supply disruptions remain a risk. Germany seized the local unit of Russian oil major Rosneft PJSC, including three refineries. One of those is now preparing for short-term restrictions in crude supplied via the Druzhba pipeline. WTI futures were seen higher above $85/barrel in early Asian hours, while Brent futures were close to $92.
Gold saw some recovery after touching support of $1660/oz on Friday as interest rate hike bets picked up following the hotter-than-expected August CPI in the US last week. Further resilience in economic data out of the US has further kept interest rates expectations on an upswing, while rising geopolitical and economic risks are doing little to entice haven buying as the US dollar still remains the prime safe-haven choice. Gold was back close to $1680 this morning in Asia. The risk of the FOMC sending the US economy into a recession before getting inflation under control is rising and, once that occurs, the dollar is likely to turn sharply lower, thereby supporting fresh demand for investment metals.
What to consider?
University of Michigan survey remains optimistic
The preliminary September University of Michigan sentiment survey saw the headline rise to 59.5 from 58.5, just short of the expected 60, but nonetheless marking a fourth consecutive rise. Notably, the rise in forward expectations was starker than in current conditions, with the former also coming in above consensus expectations. Also, key were the inflation expectations, which echoed what was seen in the Fed surveys last week. The 1yr slowed to 4.6% from 4.8% and the 5yr expectations slowed to 2.8% from 2.9%.
China’s August activity data improved better-than-expected
China’s activity data for August came in at stronger than expected growth rates. Industrial production grew 4.2% Y/Y in August beating the consensus estimate of 3.8% Y/Y and improving from last month’s 3.8% Y/Y. Higher output in automobile and power generation offset the impact from slower activities in other industries such as pharmaceuticals and computers. Retail sales grew 5.4% Y/Y in August, well exceeding the 3.3% Y/Y median forecast from the Bloomberg survey and the 2.7% YoY in July. A favourable base effect and stronger auto sales during the month boosted retail sales and more than offset the drag from tightened pandemic control measures and a slow housing market. Fixed asset investment grew 6.4% Y/Y in August, notably accelerating from the 3.6% Y/Y in July, led by 14.8% Y/Y growth in infrastructure and 10.7% Y/Y growth in manufacturing investments while investment in properties slowed further to a decline of -13.9% Y/Y in August from July’s -12.1%.
China’s property prices in lower-tier cities continued to decline in August
According to data released by the National Bureau, the weighted average of new home prices in the top 70 cities in China fell 1.1% Y/Y (vs -0.6% Y/Y in July), driven largely by declines in property prices in lower-tier cities. The easing of home purchase restrictions by local governments has so not been able to stop the decline in property prices in lower-tier cities. Sequentially, new home prices in Tier-2, Tier-3, and Tier-4 cities dropped by about 5% M/M annualized while new home prices in Tier-1 cities rose by 1.6% M/M annualized.
An unexpected seventh bidder for Macao gambling licenses created uncertainties about incumbent operators
In a tender for the six 10-year casino operating licenses, the six incumbent casino operators faced an unexpected rival from the Malaysian Genting Group which submitted a bid into the tender. As the maximum number of licenses remains at six, the entry of Genting Group into the competition may mean one of the incumbent license holders might be ousted.
Chengdu exits lockdown
Chengdu, the largest city in Western China ends its nearly 3-week-long lockdown today and allows its 21 million population to leave their home and resume most aspects of normal life. Residents are required to do PCR tests at least once a week.
Hong Kong considers ending hotel quarantine for inbound travelers
The Hong Kong Government is reviewing and considering plans to end the hotel quarantine requirements for inbound travelers. Currently, travelers to Hong Kong are required to be quarantined in a hotel for 3 nights and followed by four-day medical monitoring at home and then another 3 days of self-monitoring without mobility restriction. The news may lift the share price of travel-related stocks, such as Cathay Pacific (00293:xhkg).
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