Equities rebounded but the road ahead remains bumpy and downside risks are high Equities rebounded but the road ahead remains bumpy and downside risks are high Equities rebounded but the road ahead remains bumpy and downside risks are high

Equities rebounded but the road ahead remains bumpy and downside risks are high

Equities 8 minutes to read
APAC Research

Summary:  Elon Musk’s acquisition of Twitter and lower treasury yields triggered a turnaround in U.S. equities. This morning in Asia, China and Hong Kong markets rallied on less than feared development in lockdowns in China and supportive rhetoric from the central bank and the State Council. Through a cut in the reserve requirement ration for forex deposits, China’s central bank signals that the pace of the renminbi depreciation has gone a bit too fast.


What’s happening in markets?

Turnaround Tuesday has limited legs. While the threat of US indices breaking below March lows continues, there was some respite into the close of Monday. S&P500 (US500.I) closed in gains of 0.6% while the tech-heavy NASDAQ 100 (USNAS100.I) was lifted by 1.3% following the Twitter deal. A decline in treasury yields also helped equities. Asian equities remained under pressure from threats of a wider China lockdown but some respite was seen as the PBoC stepped up efforts/rhetoric to support the economy. Japan’s Nikkei (NI225.I) rose 0.6% in the morning while Singapore’s STI Index (ES3) was in loss of 0.4%. Australia returned from the long weekend to witness easing commodities, especially industrial metals such as iron ore, and ASX 200 was down nearly 2%, breaking the support at 7356.

China A shares and Hong Kong stocks rebounded.  With an another round of supportive rhetoric from central bank officials and pledge of the State Council to boost domestic consumption, CSI300 (000300.I) and Hang Seng Index found a bid and gained over 1%.  While residents in additional 11 districts in Beijing are required to do Covid tests, the new measures are less severed than the much feared lockdowns.  Chinese mega caps stocks traded in Hong Kong led the charge higher, with Alibaba (09988), Meituan (03690), Tencent (00700), JD.COM (09618) rising 3% to 10%.

USDCNH retraced after the PBoC cut the Reserve Requirement Ratio for FX deposits by 1%, bringing it from 9% to 8% effective May 15.  Before the announcement, USDCNH rose to as high as 6.609 and then fell to 6.57 right afterward the PBoC move.  At the time of writing, it is trading at 6.5557.  There is about USD1.05 trillion equivalent of forex deposits in China so this 1% cut will increase the loanable forex liquidity in the banking system by about USD10.5 billion. 

Twitter (TWTR) deals raises questions for the future of social media. Expectations of wide-ranging changes by Elon Musk, especially given his ideas around free speech on the internet, could go either way. Alternative platforms are probably already under development, but whether they will see any interest will depend on how unpopular are Musk’s changes to Twitter.

What to consider?

USDJPY in a bearish breakout ahead of BoJ. The Japanese yen is seeing a respite from two key factors: a fall in US yields and the CNHJPY cross exposure being trimmed. Japan finance minister Suzuki said that there is no truth to the media report on Japan/US discussion on joint FX intervention. While there maybe room for a further fall in USDJPY given the outsized gains we have seen so far, policy divergence between the Fed and Japan remains the key theme and any BOJ policy tweak this week remains on watch.

How long can the grain gains last? Cooler temperatures and more rains in north US are pointing to further delays in wheat production. Corn futures are also higher given wet conditions slowing planting and Brazilian corn output is likely to be lower as well. Corn is up 35% this year and Wheat up over 40%. The COT report shows massive net longs in the sector but despite strong fundamental support, the sector is exposed to a speculative sell out should the mentioned general commodity sector weakness continue.

IMF warns on Asia stagflation risk. IMF has said that the Asian region faces stagflationary outlook with growth being lower than previously expected and inflation being higher. The larger-than-expected slowdown in China due to prolonged or more widespread lockdowns, longer-than-expected slump in the property market, constitutes significant risk for Asia. Monetary tightening will be needed in most countries, with speed of tightening depending on domestic inflation developments and external pressures.

Trading ideas to consider

Around half of the S&P 500 market capitalization is reporting this week. Earnings reports from Coca-Cola (KO) and Activision Blizzard (ATVI) have continued to show a strong consumer and the ability to pass on the rising costs. Still, the disappointment from Activision Blizzard is hinting potentially at more disappointments on technology earnings this week, but only time will tell. Our equity strategist Peter Garnry wrote in a note yesterday that if US technology companies as a whole this week can show that it is insulated from inflation then investors could suddenly begin treating large cap technology stocks as an inflation hedge and prop up the broader equity market while the long tail of non-technology companies will continue to suffer from inflation.

The weakening trend of the renminbi remains unchanged. Through the cut in the reserve requirement ratio for forex deposits yesterday, the PBoC is sending a signal to the market that it considers the pace of depreciation of the renminbi over the past five sessions excessive.  On the other hand, by not cutting more, not evening reversing the 2% increase made in last December, the PBoC seems also intentionally not to push back this trend in development for a weaker renminbi too much. The 8% level is still much higher than the 5% level from 2007 to as recently as May 2021.  We suspect that the PBoC is aiming for an orderly depreciation of the renminbi, in particular to reverse the renminbi’s sharp appreciation versus its trading partners such as the Japanese yen, Korean Won, and Euro since September last year amid a deteriorating outlook for exports. 

Key economic releases this week:

  • Tue, Apr 26: US Durable goods orders, US New home sales
  • Wed, Apr 27: Australia Q1 inflation
  • Thu, Apr 28: Japan retail sales, Bank of Japan meeting, US GDP
  • Fri, Apr 29: Eurozone April inflation rate flash, US March PCE index, US employment cost index

Key earnings to watch:

  • Tue, Apr 26: Warner Bros. Discovery (WBD), UPS (UPS), PepsiCo (PEP), General Electric (GE), Alphabet (GOOG, GOOGL), Microsoft (MSFT), General Motors (GM), HSBC(00005), China Overseas Land & Investment (00688), Jiangxi Ganfeng Lithium (01772)
  • Wed, Apr 27: T-Mobile US (TMUS), Boeing (BA), Kraft Heinz (KHC), Ford Motor (F), Meta Platforms (FB), Qualcomm (QCOM), BAIC Motor (01958), BYD (01211), BYD Electronic (00285), China Life Insurance (02628), Guangzhou Auto (02238), HKEX(00388)
  • Thu, Apr 28: Caterpillar (CAT), Twitter (TWTR), Comcast (CMCSA), Merck (MRK), Amazon (AMZN), Apple (AAPL), Intel (INTC), PayPal (PYPL)
  • Fri, Apr 29: Exxon Mobil (XOM), Chevron (CVX), Colgate-Palmolive Company (CL), China Molybdenum (03993), China Vanke (02202), Haier Smart Home (06690)

 

For a global look at markets – tune into our Podcast

Quarterly Outlook 2024 Q3

Sandcastle economics

01 / 05

  • Macro: Sandcastle economics

    Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.

    Read article
  • Bonds: What to do until inflation stabilises

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain inflation and evolving monetary policies.

    Read article
  • Equities: Are we blowing bubbles again

    Explore key trends and opportunities in European equities and electrification theme as market dynamics echo 2021's rally.

    Read article
  • FX: Risk-on currencies to surge against havens

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperform in Q3 2024.

    Read article
  • Commodities: Energy and grains in focus as metals pause

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities in Q3 2024.

    Read article
You can access both of our platforms from a single Saxo account.
Disclaimer

The Saxo Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-hk/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo or its affiliates.

Saxo Capital Markets HK Limited
19th Floor
Shanghai Commercial Bank Tower
12 Queen’s Road Central
Hong Kong

Contact Saxo

Select region

Hong Kong S.A.R
Hong Kong S.A.R

Saxo Capital Markets HK Limited (“Saxo”) is a company authorised and regulated by the Securities and Futures Commission of Hong Kong. Saxo holds a Type 1 Regulated Activity (Dealing in Securities); Type 2 Regulated Activity (Dealing in Futures Contract); Type 3 Regulated Activity (Leveraged Foreign Exchange Trading); Type 4 Regulated Activity (Advising on Securities) and Type 9 Regulated Activity (Asset Management) licenses (CE No. AVD061). Registered address: 19th Floor, Shanghai Commercial Bank Tower, 12 Queen’s Road Central, Hong Kong.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products may result in your losses exceeding your initial deposits. Saxo does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo does not take into account an individual’s needs, objectives or financial situation. Please click here to view the relevant risk disclosure statements.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-hk/about-us/awards.

The information or the products and services referred to on this site may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and services offered on this website are not directed at, or intended for distribution to or use by, any person or entity residing in the United States and Japan. Please click here to view our full disclaimer.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc. Android is a trademark of Google Inc.