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Global Market Quick Take: Asia – April 20, 2023

Macro 5 minutes to read
APAC Research

Summary:  US equity markets continue to tread water, with the market not only beginning to price out some of the rate cuts that were previously expected later this year, but we also have investors parsing through disappointing Tesla results, while awaiting incoming IBM and Procter and Gamble reports. Tesla shares sank about 6% in afterhours trade, with the EV giant’s results showing its operating margins are falling, even though its guiding for more EV price cuts. This reflects that Musk is sacrificing short term profitability, and is instead focused on mass EV penetration, in a bid to leave BYD and other EV names in the dust. Meanwhile Bancorp continued to grow its deposits, which has supported banking ETFs in moving to higher ground.

What’s happening in markets?

US equities (US500.I and USNAS100.I) continue to trade flat: pricing out some rate cuts while awaiting mega cap results

US equity markets continue to tread water, with the market not only beginning to price out some of the rate cuts that were previously expected later this year, but we also have investors parsing through mixed results, while awaiting incoming mega cap results. Tesla shares sank 2% in normal trading and 6% in afterhours trade, after the EV giant’s results showed its operating margins fell, and this is in the face of Tesla saying more EV price cuts are to come. While Nvidia shares rallied after Tesla revealed its continuing to make significant purchases of Nvidia’s GPUs. That said, incoming results from some of the biggest US companies including IBM and Procter and Gamble, who report this week, followed by Coca-Cola, McDonald’s, Microsoft, Boeing, Visa, Intel and Chevron next week, could also validate the S&P 500’s 8% rise off its lows. Should overall results be better than expected, we could potentially see the psychological resistance level at 4,200 be tested. However if results are weaker, then the broad US indices might see some profit taking. Also consider some of the mentioned mega-caps such as Microsoft are up 20% YTD, with Intel holds up 18% YTD, Visa is up 12% and McDonalds up 11%.

Regional banks bounced

Regional banks rallied on better-than-expected results. Western Alliance Bancorp soared 24.1% on a USD 2 billion deposit inflow in the first two weeks of April. Metropolitan Bank jumped 17.8% after reporting increases in revenue and profit. SPDR S&P Regional Banking ETF rallied 3.9%.  Meanwhile, US Bancorp, the fifth largest commercial bank in the US, reported a beat on EPS but total average deposits were below expectations despite a rise of 12% in Q1.

Today’s focus on Bank OZK, Comerica, Fifth Third, KeyCorp and Truist Financial report, with at least eight additional smaller banks reporting as well.

Treasuries (TLT:xnasIEF:xnasSHY:xnas): yields climb on UK inflation and repricing of Fed rate path

Selling on treasuries emerged in London hours, dragged by a 10bp selloff in U.K. Gilts after a hotter-than-expected U.K. CPI report. Traders repriced the Fed rate path higher by adding to the probability of a June rate hike and shedding the odds for rate cuts in the second half of 2023 and the magnitude of cuts in 2024. The SOFR Jun-Dec 2023 spread (SR3M3Z3) narrowed by 5bps to -54bps. The 2-year yield rose 5bps to 4.25%. The long end of the curve, however, managed to pare losses following a solid 20-year auction. The 10-year yield edged up 2bps to 3.59% and the 30-year yield finished the day unchanged.

Chinese equities (HK50.I & 02846:xhkg): retreat while Macao casinos bucked the decline

Yesterday, Hang Seng Index shed 1.4%, driven by weaknesses in property developers, EV, and Internet names. After another round of intervention by the Hong Kong Monetary Authority to sell the US dollar in support of the Hong Kong dollar to prevent it from weakening beyond 7.85, the interbank liquidity measure, aggregate balance, fell to its lowest level in 15 years. The draining of liquidity stirred up fears of Hong Kong dollar interest rising to narrow the gap with the USD interest rates and weighed on interest rate-sensitive local property developers.

Hang Sent TECH Index declined 2.4% as EV and Internet stocks tumbled. Despite the NDRC’s plans to boost auto consumption and ahead of the Shanghai Auto Show, Nio (09866:xhkg), Li Auto (02015:xhkg), XPeng (09868:xhkg), and Geely (00175:xhkg) plunged around 4 to 6%. On the Internet space, Kuaishou (01024:xhkg) shed 4.4% and Bilibili (09626:xhkg) dropped by 3.5%. Trip.COM (09961:xhkg), however, rose 1.9%.

Macao casino operators bucked the decline as a leading investment bank expected a sustained revenue recovery of the sector and investors added to long positions ahead of the May 1 golden week holiday. Galaxy (00027:xhkg), up 4.4%, advanced the most.

In A-shares, CSI300 slid 0.9%, with property and infrastructure names leading the decline. On the other hand, tourism stocks gained in anticipation of a surge in traveling over the May 1 golden week.

The Australian equity benchmark, the S&P/ASX 200 is on the back foot after commodity prices soften, while the Australian government recommends RBA changes

The ASX200 has continued to slowly peel away from its April high, as the market begins to price in a potential incoming rate hike from the RBA, with the RBA saying more rate hikes may be needed. In addition to that, the RBA is being called upon to develop an expert policy board and hold fewer meetings to align with global peers, with these being just some of the 51 recommendations from the independent review. So, the market is unpacking that and that’s resulting in profit taking which could continue. Meanwhile, commodity prices and proxies for economic growth, such as copper and oil are lower, after an economic survey from the Fed showed the US economy stalled in recent weeks, sparking fears over slowing commodity demand, and energy in particular. This is weighing on stocks such as BHP and Rio. Meanwhile Rio announced it exported a record amount of iron ore shipments, which the market is now somewhat concerned about, given China advised it may slow demand to reduce emissions.

FX: NZDUSD drops on weaker Q1 CPI, AUD eyes RBA Lowe

NZDUSD dropped to lows of 0.6156 from 0.62+ levels on weaker than expected Q1 CPI putting the May rate hike from the RBNZ in doubt. AUDUSD also retreated to the 0.67 handle and AUDNZD popped higher to 1.0880, near 6-week highs, and RBA Governor Lowe will be speaking today. GBPUSD was choppy with gains on the back of a strong CPI print remaining less than convincing, as pair remained below 1.2440 at today’s Asian open. EURUSD also still not able to make another move towards 1.10. USDCAD shot up above 1.3460 with oil prices slumping. USDJPY eying a break above 135 with BOJ continuing to stress on maintaining the current policy stance.

Crude oil: closing in on the OPEC-driven gap

Crude oil prices plummeted further on Wednesday as fears of weaker demand increased following the Fed’s Beige Book which suggested that economic activity has stalled. These concerns overshadowed the bullish EIA report which showed that US commercial inventories of crude oil fell 4.58mn barrels last week. Demand issues remain a focus for now, but supply concerns may take over as OPEC production cut becomes effective in May. More concrete indicators of an upturn in China demand are also awaited. WTI prices dropped below $80/barrel while Brent ended below $83.

Gold: further consolidation still likely

Rates markets have been seeing some adjustment in pricing the Fed path as economic data and early signs from the earnings season continue to weaken the case for a recession. Rate cuts pricing from this year have gone down from 75bps at one point to about 50bps now, pushing yields higher and that has weighed on Gold prices. Still, Gold continues to find support and reversed from lows of $1970 yesterday. More consolidation or even lower prices remain likely as rates adjustment continues, but given ETF and central bank buying, the medium-term bullish case on Gold remains intact.


What to consider?

Fed speakers increase May rate hike chorus, Beige Book hints at stable economic activity

New York Fed President Williams, a permanent voter at the FOMC, reiterated that inflation is still to high and Fed will act to lower prices. He did see some tighter credit conditions, but said that banking conditions have stabilized, while inflation is likely to take two years to get back to 2% levels. He continued to see imbalances in the labor market, and expects unemployment rate to rise to 4-4.5% over the next year from 3.5% currently. Chicago Fed President Austin Goolsbee was still neutral and continued to watch the credit side. Meanwhile, April Beige book hinted at some tightening of lending standards but overall little change in economic conditions, suggesting the impact of banking stress could remain limited to weaker parts of the market.

NZ Q1 CPI slows more than expected despite the cyclone effect

New Zealand CPI came in softer than expected at 6.7% YoY for Q1 from 7.2% YoY previously and weaker than expectations of a drop to 6.9% YoY with the QoQ figure also cooler at 1.2% vs. 1.4% last month and 1.5%V expected. The Q1 print was also weaker than the RBNZ’s own forecast of 7.3% in its Feb monetary policy statement. Inflation remains supported due to high food and utility prices, but softer crude oil prices cooled transportation costs. Today’s print adds to the case of RBNZ pause at the May 24 meeting, despite current market pricing suggesting 71% chance of another rate hike. This makes NZD vulnerable to potentially more downside as even a hawkish rhetoric would make the markets expect a RBNZ policy error.

UK data: uncomfortably high March CPI a challenge for BoE complacency

The UK March CPI this morning came in at +0.8% MoM and 10.1% YoY vs. 0.5%/9.8% expected and the core was steady at 6.2% YoY versus expectations of a fall to 6.0%. These hot data points are a challenge to the Bank of England’s aggressively disinflationary CPI forecasts. The Retail Price Index only fell slightly to 13.5% vs. 13.3% expected and 13.8% in Feb.

Tesla shares slide on the company saying more price cuts are coming; raising concerns about margins slowing even further

Tesla shares sank 2% in normal trading and 6% in afterhours trade, after the EV giant’s results showed its operating margins fell, and this is in the face of Tesla saying more EV price cuts are to come. This could likely trigger a further round of profit taking, given the stock is up considerably, up 75% from its January low. That said, Musk believes further price cuts to its EVs may stoke demand, even at the expense of its industry-leading profit margins. So it seems Musk is again, taking a longer term view in a bid to outpace BYD and other competitors. Indeed, what added to Tesla’s continued margin squeeze is that it slashed the base price of its Model 3 to below $40,000 in the US for the first time in years – That’s a $7,000 cut from the start of the year.  Tesla’s operating margin was 11.4% in the first quarter, down from 16% the previous period and 19.2% a year ago, this is despite the lithium price falling 72%.

ASML still has demand and China risks to address

ASML, which is the world’s largest semiconductor manufacturer of advanced lithography machines, has reported better than expected Q1 2023 results with both revenue and gross margin exceeding estimates. Q2 revenue guidance of €6.5-7bn is coming out above estimates of €6.4bn and the ASML is reiterating their long-term goals of revenue around €44-60bn by 2030 with a gross margin between 56-60% up from revenue of €21.2bn in FY22 and gross margin of 50.5%. However, market reaction was lukewarm due to comments around “mixed signals on demand” as well as the China risks as the company awaits Dutch government’s final decision on whether to follow US demands and begin curbing semiconductor equipment sales to China. Read more here.

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

For a global look at markets – tune into our Podcast.

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