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Global Market Quick Take: Asia – April 19, 2023

Macro 5 minutes to read
APAC Research

Summary:  US indices remain elevated despite mixed earnings reports. Bank of America and Bank of New York Mellon rally on higher revenues, adding to the better than expected banking sector results. While Netflix missed Q2 revenue forecasts but it sees a stronger second half on its password-sharing crackdown. Markets hold their breath for more Fed speak and Tesla and Morgan Stanley results. The VIX continues to fall, Bloomberg’s Commodity Index hits new highs, and the KBW Bank Index continues to rally off its lows. Here is what to watch today.


What’s happening in markets?

 

US indices (US500.I and USNAS100.I): ended little changed amid mixed earnings reports

The S&P 500 managed to only rise 0.1%, however, the US benchmark index hit a new cycle high and is now up almost 9% from the March low. Traders are awaiting the next catalysts, such as Morgan Stanley and Tesla earnings, and well as more Fedspeak. On Tuesday, industrials, energy, information technology, and materials led the advance while health care, communication services, and utilities retreated. As for single names, Goldman Sacks shed 1.7% on a decline in fixed-income trading revenue and loan write-offs, while Bank of America and Bank of New York Mellon gained on higher revenues. In extended hours trading, Western Alliance jumped 17% on an increase in deposits. Netflix plummeted as much as 11% after missing Q2 revenue forecasts before ended almost flat. Also in afterhours trade Apple, Tesla and Microsoft, are trading slightly lower, which is causing the index futures to trade slightly down, implying a soft start the US Wednesday session.

Treasuries (TLT:xnas, IEF:xnas, SHY:xnas): curve flattens in muted trading

The lack of negative surprises from banks’ Q1 results so far and the rejection of recession risks in 2023 from St Louis Fed president Bullard weighed on the front end, seeing the 2-year yield rising 3bps to 4.20%. Yields from the 5-year to 30-year edged down 2bps, with the 10-year yield finishing the muted session at 3.58%. The 2-10-year curved flattened to -62. As yields were being range-bound lately, traders were seen shorting volatility in rates by selling strangles.

Chinese equities (HK50.I & 02846:xhkg): mixed despite strong GDP and retail sales

The reactions of Hong Kong and mainland stocks to the much stronger-than-expected GDP and retail sales prints in China were muted. Hang Seng Index shed 0.6% while CSI300 Index added 0.3%. The biggest loser within the Hang Seng Index was Anta Sports which tumbled 7.4% after raising HKD11.8 billion in a share placement at an 8.84% discount to the previous close. Hang Seng Tech Index declined 1.2% as technology hardware names were top losers with SMIC (00981:xhkg) dropping by 3.9% and Sunny Optical (02382:xhkg) declining by 3%. China Life Insurance (02628:xhkg) and Pin An Insurance (02318:xhkg) were among the top gainers, rising 2.8% and 1.5% respectively. HKBN (01310:xhkg) surged 12.3% on a Reuters report saying China Mobile (00941:xhkg) is studying the acquisition of the Hong Kong telco.

In A-shares, household appliance names gained following a 10.6% Y/Y increase in retail sales. Financial and telecommunication stocks advanced. Semiconductor and pharmaceutical stocks retreated.

Australian equities march up, remaining in a risk on mode, supported by commodities

The S&P/ASX 200 index rose a modest 0.1% in the first 30 minutes of trade, lifted by mining shares despite broad declines across other major sectors. Gold miners such as Gold Road are up about 3%, while Star Entertainment shares tumbled 10% on further concerns. This time Star dropped its guidance on weakening operating conditions. Separately, it's also important to note, the Bloomberg Commodity Index has gained for seven straight sessions, taking the index to its highest in two months.

FX: Dollar loses shine as NZD, EUR gain

The US dollar weakness returned on Tuesday despite hawkish comments from Fed’s Bullard. A strong start to the Q1 earnings season is reducing recession risks however. NZ inflation print in focus for tomorrow and NZDUSD rose above 0.62, with AUD basking in the glory of robust China growth data released yesterday and RBA minutes not turning out to be overly dovish. EUR gains returned as well, but still below 1.10 which was broken last week, as ECB’s Chief Economist Lane reaffirmed his baseline case is that the Bank should hike in May, but did not confirm the magnitude (suggesting 50bps may still be a possibility). GBPUSD also returned back above 1.2420 after wage data showing strength, and CPI release will be in focus today.

Crude oil: awaiting next catalyst

Crude oil prices steadied despite hawkish comments from Fed’s Bullard as demand concerns were buoyed by China’s strong Q1 GDP data. API data also reported a drop in inventories of 2.7mn barrels last week for crude oil, and focus will be on government data due today. WTI prices remained capped below $81.50 while Brent was capped at $85.50 and gap to pre-OPEC cut still remains to be closed.

Wheat: renewed supply threats from Ukraine

Fresh gains in wheat have come through, more so in European wheat Paris Milling which saw fresh highs of EUR 262/t yesterday on worries that Ukraine grain exports could be disrupted after Ukraine said that Russia for the second time in a week had blocked inspections of vessels. That’s happening as Poland, Hungary and Slovakia have banned imports of Ukrainian gran over concerns supplies were hurting their domestic markets. Meanwhile, Chicago and Kansas wheat are also gaining due to poor winter crop conditions.

 

What to consider?

China’s Q1 GDP growth and March retail sales come in stronger than expected

China’s real GDP rose 4.5% Y/Y in Q1, beating expectations and accelerating from the 2.9% in Q4 last year, driven by stronger-than-expected growth in the tertiary sector (mainly services). Retail sales also came in strong at a growth rate of 10.6% Y/Y. The growth in industrial production, however, was below expectation at 3.9% Y/Y, dragged by a deceleration in the mining industry. Fixed assets investment decelerated to 4.8% Y/Y in March from 5.5% in the first two months of the year, driven by a larger -5.9% Y/Y decline in property investment. Floor space sold fell 3.5% Y/Y in March, marginally improved from the 3.6% Y/Y decline in January-February.

Fedspeak: hawkish, but from non-voters

Fed’s most hawkish member Bullard was on the wires overnight, still vouching for terminal rate at 5.50-5.75% against current market pricing of 5.1%. He also stated that US recession predictions ignore the strength of the labour market and pandemic savings still to be used, and the risk of bank stress causing broad problems seems to have diminished. Raphael Bostic also reiterated that he expects one more rate hike, noting the economy still has lots of momentum and inflation is too high and it will take a while to move back to target. On the banking stress, he said that more caution in bank lending will allow the Fed to hike rates less.

RBA minutes reveal it could hike in May

The RBA meeting minutes reiterated the Bank could hikes rates again. The RBA implied that just because it paused for one month, it doesn’t necessarily mean the Bank is going on an extended pause. The RBA also concluded that it may be contemplating if its policy needs to be tighter in the May meeting. However next week’s CPI data will be the important factor the Bank will lean into before making their May rate decision. Beware, the market has not priced in a hike. So, if a rate hike in May is made, it could pressure Aussie equities and fuel buying in the AUD.

UK data: no signs of cooling in wages, CPI up next

UK’s labor data provided little comfort to Bank of England despite a smaller than expected growth of 31k in March payrolled employees (vs. 48k expected). February figures were also revised lower to 39k from 98k previously and showed pace of hiring is slowing. The unemployment rate rose to 3.8% in the three months to February, slightly higher than 3.7% previously which partially reflects higher participation rate. The biggest hawkish surprise however came for wage growth, which was firm at 6.6% YoY in the three months to February, and gains in private sector wages were also strong at 6.9%. This suggests cooling in inflation may remain sluggish, and March CPI data will be on watch today. Even if headline inflation was to cool but services inflation remained firm, that will probably prompt the BOE to lock in another rate hike at the 11 May meeting. Market pricing has increased from less than 80% chance of a 25bps hike in May to over 90% chance after the release.

Netflix dangles the share buyback carrot, but pushes back its password sharing crackdown and guides for EPS to fall in Q2

Netflix delivered a mixed report card, while affirming it’s on track to meet its full year financial objectives. The streaming giant sees operating margins of 18% to 20% in the full year, vs Bloomberg’s estimation of 19.2% growth. All in all, the market seems concerned that it’s pushing back its password-sharing crackdown to the second quarter, at a time when its paid streaming memberships grew less than expected in Q1. Netflix also declared that over 100 million households share accounts, that’s about 43% of its global user base and this has affected its ability to invest in new content. That said paid memberships rose marginally, by 4.9% YoY to 232.5 million.

The market also focused on its second quarter projections that underwhelmed. Netflix sees EPS falling from $2.88 in Q1 to $2.84 in Q2. But, it sees revenue slightly rising from $8.16 billion in Q1, to $8.24 billion in Q2, while Bloomberg’s consensus expected $8.47 billion. In another surprise, Netflix announced it's shutting down its original business of delivering DVDs by mail, after introducing the at-home TV viewing of movies 25 years ago. For shareholders, the silver lining in its results,  is that it expects to return cash to shareholders via share repurchases, which it hopes to increase over the course of 2023. Netflix shares are up 16% from March 13. The stock could potentially be worth watching, as it briefly fell under its 21-day moving average over the last two sessions, which implies that buying could be slowing.

Goldman Sachs results add to the rhetoric that most US banks are beating analyst's estimates, while Bank of America disappoints  

Goldman Sachs shares fell 1.7% in normal trading with its business failing to capitalize on the boom in fixed-income, resulting in its fixed income revenue missing expectations. Plus its currency and commodities sales and trading revenue also missed average analyst estimates. Goldman Sachs is now the only major US bank that has missed earnings estimates. Looking ahead there is growing risk that its weak tax collections will pull forward, to the point that the US government will exhaust its borrowing authority under the federal debt ceiling. This concern was raised by Goldman Sachs themselves. This simply means its earnings results ahead could be on the weaker side of expectations, and Goldman could make less revenue than last year. Meanwhile, Bank of America’s first-quarter profit beat estimates after its fixed-income revenue delivered a windfall, that was large enough to cover the rising cost of the bank’s souring loans. Revenue from BoFA’s fixed-income, currencies and commodities trading unexpectedly rose almost 30% to $3.4 billion in the first quarter, with its clients bunking into bonds to capitalize on higher interest rates. Bank of America shares have continued to rally up of their cycles lows and are now up 16%. If BofA shares can rise above its 50-day moving average at around $31.35, you might expect technical buying in the stock.

Tesla earnings up next: Q2 guidance is the focus

Tesla has reported its Q1 delivery figures so the market will be focusing on the EV giant’s guidance on Q2 and generally forward demand. Analysts expect Tesla to report 25% y/y revenue growth in Q1 and EBITDA of $4.4bn vs $4.5bn a year ago as recent price cuts will make it difficult to expand the operating margin.

For a detailed look at what to watch in markets this week – read or watch our Saxo Spotlight.

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