APAC Daily Digest: What is happening in markets and what to consider next – August 24, 2022
APAC Strategy Team
Summary: A disappointment in US PMIs brought the USD lower, even as US 10-year Treasury yields sat above the 3% mark in a still-fragile move. Fed’s Kashkari reaffirmed inflation concerns, setting the stage for Powell to stay hawkish at Jackson Hole. Agricultural prices firmed amid deteriorating crop conditions, while crude oil prices were higher as OPEC+ hinted at output cuts if Iranian oil returns. Key earnings ahead from Nvidia, Salesforce, and Snowflake to provide further clarity on technology spending and the outlook for the overall technology sector.
What is happening in markets?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I)
U.S. equities traded sideway, S&P 500 -0.22%, Nasdaq 100 -0.07%. Energy stocks outperformed as WTI crude rose 3.7% on the prospect of OPEC+ cutting production after the comments from Saudi Prince Abdulaziz bin Salman. More than 95% of its constituent companies have reported, the Q2 EPS of the S&P is set to grow by 6.2% from a year ago. On Tuesday, S&P Global US Services PMI declined further into the contractionary territory. Investors are weighing where the better-than-feared corporate earnings can sustain in Q3 with further signs of economic slowdown and potentially a Fed determination to continue to raise interest rates until inflation rates come down to much lower levels. Equity investors took note of the 10-year treasury yield sting above 3% for the second consecutive day.
Palo Alto Networks (PAWN:xnas) jumped 12.1%, after the network security company reported a profit and larger-than-expected sales. Twitter (TWTR:xnys) plunged 7.3%, following that the former security chief of the company alleged Twitter in whistleblower testimony that it misled users and regulators about its defenses against spam and hackers. Intuit (INTU:xnas) rose 5.6% in the after-hours session, after reporting EPS of $1.10, beating analyst estimates and a smaller-than-expected decline in revenues.
U.S. treasuries (TLT:xnas, IEF:xnas, SHY:xnas)
With a weaker-than-expected S&P Global US Services PMI print at 44.1 (consensus 49.2), falling deeper into the contractionary territory, U.S. 2-year yield ended the trade 1bp lower to 3.30%. Positioning ahead of the Jackson Hole event and block selling in futures contracts drove 10-year yield higher by 3bps, bringing the 2-10 year spread 4bps steeper at -26bps. Fed’s Kashkari sounded hawkish ahead of the key speech from Powell later this week, and underscored Fed’s commitment to fight inflation, while discounting the lower oil prices and stressing on the threat of persistent underlying price pressures.
Hong Kong’s Hang Seng (HSIQ2) and China’s CSI300 (03188:xhkg)
Hong Kong/China equities headed south on Tuesday, Hang Seng Index -0.8%, CSI 300 -0.5%. Rate cuts, a special loan plan, and urges to banks from the PBoC, China’s central bank, did not manage to generate a sustainable rally in equities. Share prices of Chinese property developers were mixed, China Overseas Land & Investment (00688:xhkg) -2%, Longfor (00960:xhkg) +0.2%, Country Garden (02007:xhkg) +0.4%. The former chairman of the state-owned China Resources Land (01109:xhkg), -0.8%, is being investigated for alleged disciplinary and unlawful violations. KWG (01813:xhkg) dropped 4.6% after its bond investors decided to exercise a put option to ask for early redemption of a renminbi bond.
Anta Sports Products (02020:xhkg) climbed 4% after reporting H1 sales growth of 14% YoY, beating expectations. The sportswear retailer’s net income fell 7% YoY but was better than feared in a challenging operating environment in H1.
In A shares, northbound outflow exceeded RMB9 billion (USD1.3 billion). Construction materials, food and beverage, pharmaceutical, and beauty-care stocks declined while coal mining, oil and gas, utilities, and electric equipment names advanced.
Commodity currencies gain on dollar weakness, USDCNH in consolidation
Dollar weakened on Tuesday in the run up to US PMIs, and the losses were extended after the disappointing reports. EURUSD rose back above parity, but was unable to sustain the gains for much longer. GBPUSD, however, is still above 1.1800 in the early Asian morning hours. The biggest gains of the day were commodity currencies, with NOK up over 1% against the greenback. AUDUSD rose towards the 0.7000 level, but remained short of it, while NZDUSD rose above 0.6200. After extending its rally to new highs on Tuesday morning, USDCNH pared early gains to end the New York trading session at 6.8544.
Crude oil prices (CLU2 & LCOV2)
Crude oil prices rallied on Tuesday, with Brent futures topping the $100/barrel mark and WTI futures getting above $93. US crude stockpiles fell by 5.6 million barrels last week, as per the API report. European natural gas futures retreated despite concerns of further cuts to Russia gas flows, as crippling economic output from the surge in gas prices became a key concern for traders. The delay in the restart of Freeport LNG to end-November (vs. previous restart date of October), with full operation expected in March, may mean more gains for Dutch TTF natural gas futures.
Corn futures at near 2-month highs
Corn futures jumped to their highest levels since June-end after a US crop tour revealed how badly conditions have deteriorated following poor weather in key growing areas alongside an August heatwave. Wheat and soybean futures also surged higher following the crop conditions report. The USDA rated 55% of the U.S. corn crop in good-to-excellent condition, down from 57% the previous week. For soybeans, the government rated 57% of the crop as good-to-excellent, down from 58% previously. Corn yield potential was estimated at 118.6 bushels per acre, well below the three-year average of 161.8 bushels. Soybean pod counts stood at 792.5, below the 1,073 average. Coffee rose on drought in Brazil.
What to consider?
Manufacturing PMIs from Europe and UK in contraction
A further retreat in Europe’s composite PMI to 49.2 in August from 49.9 previously suggested that the growth momentum continues to retreat. Europe is reeling under the threat of energy crisis, and the manufacturing sector has been hit hard due to the surge in power and utility prices. Eurozone manufacturing PMI slid further to 49.7 from 49.8 previously while the services sector was also slower at 50.2 in August from 51.2 previously despite some tailwinds from resumption of travel and tourism. UK manufacturing PMI was a big disappointment at 46 from 52.1 in July, coming in at the slowest pace in over two years.
US PMIs and new home sales disappoint
US S&P flash PMIs for August came in below expectations, as a precursor to the ISM numbers. Manufacturing survey fell to 51.3 in August (vs. 51.9 expected) from 52.2 in July while the services print came in at 44.1 (vs. expected 49.1) from 47.3 previously. Composite PMI at 45 was the weakest reading since early in the pandemic, but some relief came from softening of input and output prices. Meanwhile, new home sales continued to show some concerns on the housing sector, with a fall of 12.6% in July to 511k being the slowest pace of sales since January 2016 including pandemic lows. New home supply rose to 10.9 months (prev. 9.2mnths), increasing for eight consecutive months, hitting its highest level since 2008.
JD.COM, Kuaishou Technology, and Ping An Insurance reported after Hong Kong close on Tuesday
As JD Logistics turned up an RMB36 million operating profits instead of a loss, and a 0.8 percentage point YoY improvement in the margin at JD Retail, JD.COM (09818:xhkg/JD:xnas) reported Q2 earnings beating market expectations. Q2 revenue growth of 5% YoY was in line with forecasts. Net income grew 40% YoY in Q2 to RMB6.49 billion, 42% above the consensus forecast of RMB4.58 billion. The company had 580.8 million annual active customers in Q2, which was 9.2% higher than a year ago.
Kuaishou Technology (01024:xhkg) reported Q2 revenues growing at 13% YoY to RMB21.7 billion, above market expectations. Q2 Net loss narrowed to RMB1.3 billion from the loss of RMB5 billion in Q2 last year and beat the consensus forecast of an RMB2.29 billion loss. Operating loss margin improved to -5.5% from -25.9% last year on cutting spending on marketing and revenue growth.
Ping An Insurance Group (02318:xhkg) reported a 3.9% rise in net income to Rmb60.3 billion in H1, beating analyst estimates. The better performance was attributed to lower claims and better-than-expected policy persistence at Ping An Life.
Singapore’s July core inflation surge brings off-cycle MAS tightening risks
Food and fuel price inflation continued to draw Singapore’s inflation higher to 7% y/y on the headline level, while core accelerated to 4.8% in July from 4.4% in the preceding month. That suggests price pressures are broad, and demand-pull inflation is also at play with the regional and global reopening gathering momentum. The case for another off-cycle tightening move by the Monetary Authority is getting stronger, with the next meeting only scheduled in October.
Earnings on tap
In the U.S., Nvidia (NVDA:xnas), Salesforce (CRM:xnas), and Snowflake (SNOW:xnys) are scheduled to report on Wednesday. Nvidia is expected to report a big drop in its growth rate due to weakening demand in gaming and more importantly weakness in crypto mining. Salesforce is expected to show solid growth and here investors will focus on the Slack integration and what it means for growth ahead. Snowflake's growth rate is coming down and thus investors will demand improvements in the operating income. You can find more about the earnings preview of these three companies in this article from Peter Garnry, Saxo’s Head of Equity Strategy.
In China, LONGi Green Energy (601012:xssc) is scheduled to report on Wednesday. Last month, the solar PV solutions provider issued H1 net income guidance to be in the range of RMB6.3 to 6.6 billion, which represents YoY growth of 26-32%. Growth in module shipment and stable margins are expected to offset rises in polysilicon costs.
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