Global Market Quick Take: Asia – June 21, 2023

What’s happening in markets?

US equities (US500.I and USNAS100.I): Tesla surges on Rivian joining charging standard

In a session thin of market-moving headlines, the Nasdaq 100 ended nearly changed at 15,070 while the S&P500 extended its pull-back modestly by 0.5% to dip below the 4400 threshold to close at 4,388. Energy was the worst-performing sector in the S&P500 following the decline in crude oil prices. Consumer discretionary stood out as the only sector in the S&P500 to finish the session higher. The outperformance of consumer discretionary was driven by a 5.3% surge in Tesla (TSLA:xnas) after Rivian (RIVN:xnas) said the EV maker is adopting Tesla’s charging standard. Megacap tech did well, with Nvdia (NVDA:xnas) advancing 2.6% and Meta (META:xnas) adding 1.2%.

In extended trading, FedEx plunged 3% after reporting FY 4Q23 revenue and FY 2024 guidance both missing estimates.

Treasuries (TLT:xnas, IEF:xnas, SHY:xnas): rally on lower European bond yields and crude oil prices

US Treasuries found support from the strong rally across the pond in the UK gilt and European government bond markets. A nearly 2% decline in crude oil price added fuel to the rally in Treasury price (decline in yields). Yields fell by 3-4 basis points across the curve with the longer-end outperformed. The 2-year yield dropped by 3bps to close at 4.68% and the 10-year yield finished at 3.72%, 4bps lower. The week is thin on data and the focus will be on Powell’s 2-day congressional testimony starting today.

Hong Kong & Chinese equities (HK50.I & 02846:xhkg): decline on a smaller -than-expected LPR cut

Hang Seng Index tumbled 1.5% despite China cutting 1-year and 5-year loan prime rates by 10bps. Investors were disappointed as there had been rising expectations of a larger 15bp cut over the days leading to the release. Southbound flows from the mainland was a net sale of around HKD3 billion.

Alibaba (09988:xhlg), down 1.5%, was in the news that the current CEO/chairman moves to head up the Cloud business unit as part of the reorganization of the group. Wuxi Biologics (02269:xhkg) plunged 17% after the management warned about weakness in revenue growth and the number of projects in the first half on an investors’ day. China property names declined, with Country Garden (02007:xhkg) and Longfor (00960:xhkg) falling 6.8% and 4.9% respectively. On the other hand, Macao casino operators surged on new post-pandemic record highs in gross gaming revenues.

Likewise, real estate names declined in the A-share market, driving the CSI300 lower by 0.2% as some of the downward pressure was offset by advances in defense, telecommunication, computing, and household appliances. Northbound flows were a net buying of RMB1.7 billion.

FX: Dovish RBA minutes and underwhelming China stimulus weighs on AUD

The US dollar was marginally bid after the long weekend as housing starts jumped higher. But with yields facing technical resistance, dollar gains remained capped. AUD was the weakest currency on the G10 board, with AUDUSD slipping below 0.68, weighed down by a double whammy of RBA minutes failing to confirm a hike for July 4 meeting and China loan prime rate cuts coming in below expectations. AUDNZD took a look below 1.10 before rising just above the key level. USDJPY reversed from strong 142.25 resistance to 141.20 as yields slid. GBPUSD to be a key focus in the day ahead as UK CPI could cause gilt volatility but a more general focus will be on Powell’s comments.

Crude oil: China concerns bring losses

Crude oil prices declined on Tuesday amid the disappointment over the pace and magnitude of China stimulus measures. A general risk-off tone across markets also weighed and brings the focus on Fed Chair Powell’s testimony over the next two days. WTI prices touched lows of sub-$70/barrel before recovering to $71, while Brent was down to $74.50 before being back above $75/barrel.

What to consider?

China LPR cut underwhelms

Following the People’s Bank of China’s 10bp cut to the 1-year Medium-term Lending Facility (MLF) rate last week, Chinese banks fixed the 1-year Loan Prime Rate (LPR) and the 5-year LPR also 10bps lower to 3.55% and 3.65% respectively. Investors were disappointed about the 10bp cut to the 5-year LPR as many of them have revised up their expectations to a 15bp easing on the hope that China would send a stronger signal to support the ailing property market. In China, banks benchmark the mortgage lending rates at a spread over the 5-year LPR.

Dovish RBA minutes bring down July rate hike expectations

Despite the surprise rate hike from the RBA in June, the central bank’s meeting minutes proved to be a dovish surprise as it stated that the Board considered a 25bps rise or holding steady and reconsidering at a later meeting. The minutes said that arguments were finely balanced, but the Board decided that the argument for an immediate hike was stronger. The minutes advocated a data-dependent stance and did not signal an imminent July rate hike. Market pricing for a July 4 rate hike fell from over 50% to sub-30% after the minutes.

Management reshuffle in Alibaba

Alibaba Group’s Daniel Zhang will leave his current post as Chairman/CEO of the group to focus on leading the cloud-computing unit which is poised to become a separate entity from the group.  The group’s co-founder Joseph Tsai will take over the role of Chairman and Eddie Wu, who heads the Taobao and T-mall domestic e-commerce business will become CEO of the group.

US housing starts bring a positive surprise

Housing starts spiked 21.7% M/M to 1.63mn from 1.34mn in April (which was downwardly revised from the initial 1.40mn print), marking the largest M/M relative increase since October 2016, smashing the consensus estimate of 1.40mn. Activity in the housing sector has been muted for so long that it is reasonable to expect a rebound at some point, but one month of data is still not enough to confirm a trend. A sustained recovery in housing requires a meaningful improvement in affordability, via lower mortgage rates, or falling home prices, or both.

Fed Chair Powell heads to Capitol Hill after a pause in the rate hike cycle last week

Fed Chairman Jerome Powell will be appearing before the House (June 21) and the Senate (June 22) to provide his semi-annual monetary policy report. After the hawkish hold last week, there appears to be minimal new information for Powell to add any significant new direction on monetary policy. He may continue to signal more rate hikes, but Republicans would get the stage to express their concerns around the sticky core inflation while Democrats advocate for a more dovish policy given the rising risks to economy. Markets looking to understand what the next key catalyst for a move may be will perhaps be disappointed and continue to find a reason to rise further.

Hot UK CPI will add further pressure on Bank of England

After a hot labor market report from the UK last week, focus turns to May inflation due today and another upside surprise can spell havoc again for UK gilts. Bloomberg consensus expects headline CPI to soften to 8.4% YoY from 8.7% previously, while the core CPI is likely to stay firm at 6.8% YoY. Higher food prices may be offset by the decline in fuel prices, while services inflation is likely to remain sticky due to the tightness in the labor markets. The Bank of England announcement is due the day after, on June 22, and a 25bps rate hike to 4.75% is expected while a 50bps can also not be ruled out. Rate expectations for BOE have moved considerably higher to ~6% terminal rate, and a hawkish surprise from the central bank will be very tough at this juncture. GBPUSD has also had a remarkable run from 1.25 to 1.28, and technical analysis suggests further upside room, but policy expectations are looking stretched.

FedEx misses revenues and 2024 guidance

FedEx reported fiscal Q4 (ending May 2023) results with revenue coming in at USD21.93 billion, a 10% decline from the year-ago quarter and 3% below the consensus estimate. Adjusted EPS of USD4.94 beat the USD4.876 marginally. During Q4, global express volume declined. The management gave guidance of 2024 adjusted EPS between USD16.5 and USD18.50, implying a midpoint of USD17.50 which is below the median forecast of USD18.31 by analysts.

Singapore’s Grab announces massive job cuts

Singapore-based Grab Holdings, Southeast Asia's leading ride-hailing and food delivery app, is cutting 1,000 jobs or 11% of its workforce to manage costs and ensure more affordable services long term. The move follows other players in the industry like GoTo and Sea Ltd which have announced job cuts earlier. Grab has a target to reach break-even in Q4, but the move is being touted as a strategic reorganization to adapt to the business environment which remains tough.

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