Market Insights Today: U.S. bank Q4 earnings beat but weaker outlook; Yen surged on BOJ policy adjustment speculation; US holiday - 16 January 2023

What’s happening in markets?

Nasdaq 100 (NAS100.I) and S&P 500 (US500.I) gained as bank stocks bounced

U.S. equities opened lower as shares of banking stocks initially got hit by disappointing guidance on net interest income and credit loss provision, despite reporting Q4 earnings beating expectations. Shares of JP Morgan, (JPM:xnys), Bank of America (BAC:xnyg), Citigroup (C:xnys), and Wells Fargo (WFC:xnys) recovered fully from early losses and more, having finished Friday between 1.7% and 3.3% higher. Consumer discretionary names gained, with Target (TGT:xnys) and Amazon.com (AMZN:xnas) each rising around 3%. The S&P 500 Index edged up 0.4% to close at 3999.09, breaking to the upside its 200-day moving average (currently at 3981.22). The Nasdaq 100 Index rose 0.7% to 11,541.48, above its 100-day moving average (currently at 11523.33). Tesla (TSLA:xnas) fell 0.9% after the EV giant cut prices in the U.S. and Europe. Share of General Motors (GM:xnys) slipped 4.8% and Ford (F:xnys) plunged 5.3%. Delta Airlines (DAL:xnys) declined 3.5% on Q1 guidance which was below analyst estimates.

Yields on US Treasuries (TLT:xnas, IEF:xnas, SHY:xnas) jumped on profit-taking

Yields on Treasuries bounced from their lows and finished the Friday session cheaper on profit-taking. Selling concentrated in the front end and saw the yields on the 2-year jump 9bps to 4.23%. Yields on the 10-year rose 6pbs to 3.50%. The 2-10 year curve went more inverted at -73bps. The University of Michigan survey’s inflation expectations came in mixed. A softer print in the 1-year inflation expectation, falling to 4.0% Y/Y in January from 4.4% Y/Y in December was offset by the ticking of 5-year inflation expectation to 3.0% Y/Y from 2.9% Y/Y a month ago.

Hong Kong’s Hang Seng (HIF3) and China’s CSI300 (03188:xhkg) continued to rally

Hong Kong and mainland Chinese stocks rallied last Friday afternoon. Hang Seng Index gained 1%, bringing its advance to nearly 10% since the beginning of the year. China’s CSI 300 climbed 1.4% last Friday and gained 5.2% so far in 2023. Within the Hang Seng Index, healthcare and consumer stocks gained the most. Wuxi Biologics (02269:xhkg), up 6.4%, was the best performer, followed by Chow Tai Fook Jewellery (01929:xhkg), up 4.8%. Hang Seng TECH Index gained 1.5% on further signs that the regulatory crackdown against Chinese internet platform companies is being replaced by institutionalized and hopefully more predictable supervision and regulation. The Chinese authorities have taken up “special management shares” in local units of Alibaba (09988:xhkg), up 1.7%, and Tencent (00700.xhkg), up 2%. Didi is reportedly to gain approval for relaunching its ride-hailing app at app stores. The People’s Bank of China has reportedly drafted an action plan to help “quality” property developers to strengthen their balance sheets. Trade in shares of Chinese developers was mixed. The three Chinese state-own oil companies traded in Hong Kong advanced between 1% and 2% on higher oil prices. NetEase, rising 4.7%, stood out among China internet names.

Australia’s share market is a touch away from a record high; gold stocks charge in 2023

The Australian share market (ASXSP200.I) opened 0.5% higher on Monday with interest rates sensitive stocks charting the most, in anticipation of the Fed’s likely downshift in policy following on from last week's roll over in monthly CPI. The Aussie share market is trading at a two week highs, just a puff or 2.6% from its record high. The most momentum in 2023 is from the Mining sector, up 9%, in anticipation of higher earnings from China’s reopening. Gold stocks are the biggest shiners this with the most momentum, in anticipation of a higher gold price as global growth moderates, while the US dollar and bond yields retreat. At Saxo, we believe Gold may be likely to have a correction in the shorter term, but in 2023 gold should see a strong year of buying amid appetite from global central banks, as our head of Commodity Strategy mentioned.  Silver Lake Resources, De Grey Mining , Remelius Resources, up 18-23% so far in 2023.

FX: JPY takes centre stage this week

The Japanese yen gained by over 3% against the USD last week, moving from highs o f132.87 to lows of 127.46 on Friday. The yen was also stronger on all the crosses amid Bank of Japan’s unscheduled bond buying operations as the markets continued to test the policy yield cap of 0.5%. USDJPY and yen crosses will remain key this week as well as BOJ meets for the first time this year and speculation about a further policy tweak is rife. EURUSD gained to 1.080+ levels amid better growth prospects for Eurozone and a dovish bent in US CPI and Fed communications that has shifted the February rate hike pricing towards 25bps. AUDUSD has been basking in China’s reopening glory, testing 0.7000, but Australia’s employment data will be key this week. GBPUSD also has a host of UK data from CPI to retail sales to labor market to consider which could bring the 200DMA of 1.2000 in focus.

Crude oil (CLG3 & LCOH3) opens steady after last week’s gains

Crude oil prices were steady in the Asian morning hours after recording over 8% gains last week on China’s reopening optimism. WTI traded near $80/barrel while Brent was close to $85.50. China’s road traffic levels are continuing to rebound from record low levels following the easing of COVID-19 restrictions. A congestion index comprising the 15 cities with the most vehicles registrations has risen by 31.3% vs a week earlier. China’s crude oil imports rose to 48mt in December, up by 2.8% m/m. Meanwhile, increased import quotas by China saw oil demand pick up in the physical market. Sentiment was also bolstered by expectations of the Federal Reserve slowing its interest rate hikes, following lower than expected inflation. Higher inventory levels were to be expected, driven by the late December cold blast reducing exports while temporarily shutting down some refineries.

Iron ore (SCOA) reverses amid China pledging crackdown

Iron ore fell in Singapore back to $120.90 a ton from highs of $126 last week after China’s National Development and Reform Commission (NDRC), the top economic planner, said in a statement on Sunday that it would crack down on illegal activities including spreading false information, hoarding and price gouging to keep the iron ore market stable.

Corn (ZCH3) closes the week with strong gains following the US crop output report

Corn prices recorded their biggest weekly gain since August as droughts curb the world’s supply buffer. The US Department of Agriculture unexpectedly cut its outlook for US domestic production and available stocks of both corn and soybeans, a sign that an ongoing drought from last year may continue to underpin prices. The worst Argentinian drought in 60 years also led to a downgrade in the outlook for soybeans and corn production, some of that being partly offset by an expected bumper harvest in Brazil. Corn prices were up over 3% in the week and Soybeans up over 2%.

What to consider?

U.S. bank Q4 earnings beat but guidance on interest income and credit loss provision disappoint

The four largest commercial banks in the U.S., JPMorgan Chase, Bank of America, Citigroup, and Wells Fargo reported Q4 earnings beating analyst expectations. Q4 profits grew 6% at JPMorgan and 2% at Bank of America and fell 21% at Citigroup and 50% at Wells Fargo from a year ago. Revenues at JPMorgan Chase, Bank of America, and Citigroup in Q4 came in above analyst estimates while those at Well Fargo missed. Despite the overall solid earnings and revenues, provisions for credit losses were higher than expected and the outlooks guided by the management of these large banks on net interest income were weaker than analyst estimates. JPMorgan Chase made a provision for credit losses at USD 2.3 billion, above the street estimate of USD 2.1 billion.  JPM is guiding net interest income of $73bn in 2023, below the USD74.4 billion analyst estimate. CEO Jamie Dimon says there is still a lot of uncertainty around the impact of the macro headwinds and that the bank’s macroeconomic outlook has deteriorated modestly. Bank of America guided below expectations net interest income at USD 14.4 billion in Q1 2023. Wells Fargo reported a negative surprise on credit provisions ($57mn vs est. $860mn). Wells Fargo’s CFO is also saying that the bank is preparing for the economy to worsen.

Bank of Japan prepares to buy more Japanese Government Bonds

The Bank of Japan again broke its daily record for Japanese government bond purchases Friday as yields defied its 0.5% cap, in a sign of the rising market pressure for another policy tweak by the central bank as it meets this week in its first meeting of 2023. The BOJ bought roughly 10 trillion yen ($78 billion) in JGBs over the past two days, with a 5 trillion yen purchase on Friday topping the high it had just set Thursday and is preparing to purchase more Japanese government bonds on Monday, according to the Nikkei.

China’s exports declined 9.9% Y/Y in December; the import volume of iron ore grew while copper shrank

In U.S. dollar terms, China’s exports in December fell 9.9% Y/Y in December, further decelerating from the -8.9% in November but slightly better than the -11.1% feared as per the survey by Bloomberg. In real terms, that is, after adjusting for inflation in export prices, the decline in exports was deeper. The fall in exports was most notable to the European Union, which fell 17.9% Y/Y in December versus -9.3% in November. Export to the US shrank 18.4% Y/Y in December, negative but having improved from -24.7% Y/Y in November. On the other hand, exports to ASEAN grew by 6.6% Y/Y in December, accelerating from 5.9% in November. Imports shrank 7.5% Y/Y in December, less negative than -10.6% Y/Y in November and above the consensus estimate of -10.0%. The improvement however was largely a result of the base effect. In volume terms, the import of crude oil slowed to 4.2% Y/Y in December from 11.8% in November. Coal imports rebounded to almost flat in December from a fall of 7.8% Y/Y in November. Iron ore imports grew 5.6% Y/Y in December, reversing from a 5.8% decline in November. Copper import shrank 12.7% Y/Y versus a rise of 5.8% a month ago.

Tesla cut prices in the US and Europe

Tesla cut prices across models in the U.S., including shedding the price of its baseline Model Y lower by almost 20% and its high-performance Model 3 by 14%. The price reduction may allow buyers to entitle to federal tax credits. Telsa is also cutting prices in Germany, France, and other European countries by about 13%. Recently, Telsa has cut prices in China.

China took up “special management shares” in Alibaba and Tencent

The Chinese authorities have taken up “special management shares” also known as “golden shares” in local units of Alibaba and Tencent (00700.xhkg) apparently to exert influence over business decisions far beyond the around 1% equity stake that otherwise represents under normal situations. Investors generally welcome the move as it tends to signal that the Chinese authorities are shifting from a less predictable and heavy-handed crackdown on internet platform companies to more institutionalized, consistent, and predictable regulation and supervision of the industry. 

Comments from the Davos forum on watch

The World Economic Forum’s annual meeting kicks off in Davos, Switzerland this week. The theme this year is “Cooperation in a Fragmented World’, suggesting deglobalisation trends remain key to watch as has been a regular theme at Saxo. The meeting brings together heads of nineteen central banks and 56 finance ministers. Comments on key global issues, ranging from inflation to recession, as well as energy and food crisis will remain on watch. Geopolitical crisis will also constitute a key discussion as the war in Ukraine rages on and US-China tensions may come back in focus.

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