What’s happening in markets?
US equities (US500.I and USNAS100.I): Tech stocks surge as Tesla, Nvidia, and Alphabet make strides
Soft economic indicators have further reinforced the notion of the Fed concluding its actions. Bond declined, while stocks orchestrated a broad-based rally. The S&P 500 gained 1.5% while the Nasdaq 100 surged ahead by 2.2%. Notably, large-cap tech stocks exhibited exceptional performance. Tesla (TSLA:xnas) saw a surge of 7.7%, attributed to robust BYD results, which in turn signify the resilience of the Chinese EV market. Nvidia (NVDA:xnas) also registered a 4% increase, and Alphabet (GOOGL:xnas) ascended by 3%. This ascent followed the joint announcements of these two tech behemoths to expand their AI infrastructure and foster software partnerships.
Treasuries (TLT:xnas, IEF:xnas, SHY:xnas): 2-year yield falls 15bps to 4.89% on soft data
Treasuries rallied strongly (yields lower) after the JOLS job openings report and Conference Board consumer confidence both came in below street estimates, trimming expectations of a rate hike in the next two FOMC meetings in September and November. The 2-year notes led the market rally, with yields reversing the recent up trend to fall sharply by 15bps to 4.89%. The 10-year yield ended 8bps lower at 4.12%. The 2-10 curve bull steepened by 7bps to -77bps. The USD36 billion 7-year auction met with strong demand and was awarded at 2bps richer than the level at the auction deadline and a 2.66x bid/cover ratio.
Hong Kong & Chinese equities (HK50.I & 02846:xhkg): Markets stabilize amid strong showing in semiconductor, property, and auto Sectors
Chinese equity markets stabilized as selling pressure abated and the US Commerce Secretary's remarks in China highlighted no intent for US-China decoupling. Both nations' commerce officials agreed on regular trade and semiconductor dialogue. Hang Seng Index rose by 2.0%, Hang Seng Tech Index by 2.6%, led by semiconductor stocks like SMIC (00981:xhkg) with a 7.2% gain and Hua Hong Semiconductors (01347:xhkg) surging by 8%. Chinese banks are reportedly considering reducing home mortgage and deposit rates. China property stocks surged, with COLI (00688:xhkg) rising by 6.5% and Longfor (00960:xhkg) by 6.1%. In the auto sector, BAIC Motor (01958:xhkg) rallied by 17%, while BYD (01211:xhkg) increased by 5.6%. The CSI300 gained 1%, driven by autos, tech, electronics, and media. The market is showing signs of stabilizing, potentially prompting FOMO buying with further increases.
FX: Yields collapse but JPY strength still modest
Bad data was good for the markets and risk sentiment improved with a sharp fall in front-end Treasury yields pushing the dollar lower. NZDUSD rose to 0.5978 retesting the highs from last week before turning lower in the Asian morning as July home-building approvals fell 5.2% MoM. AUDUSD also only went as high as last week to 0.6487 while USDJPY rocketed to 147.37 ahead of the jobs data and only retreated to lows of 145.67 before recovering to 146+ levels in early Asia.
Crude oil: Improved risk sentiment buoys oil prices
Oil prices rose for a fifth consecutive day as US data disappointed but sent signal that the Fed tightening may be coming to an end. WTI touched $81.50/barrel and Brent was above $85 with private API inventory data showing tumbling US crude inventories. Gains extended in early Asia with reports suggesting that Chinese banks are said to be considering additional deposit rate cuts in order to boost growth. Chinese refining giant Sinopec Corp also said its planning to maintain steady refinery output during the second half of 2023 amid expectation of further recovery in domestic fuel demand.
Gold and Silver: Boost coming from expectations of a sustained Fed pause
Gold jumped higher following the weakness in US economic data, and silver rallied even more sharply with boost coming both from lower yields and improving sentiment on Chinese stimulus announcements. Gold broke above 50DMA at $1930 but a move higher will need confirmation above $1950. Silver broke above $24.50 resistance and $26 maybe the next key target. ADP jobs data out today in the US will be on watch followed by PCE and NFP later in the week.
What to consider?
US job openings crater, signaling the end of Fed’s tightening cycle may be near
The July JOLTS report showed a sharp slowdown in job openings and quit rate. Number of job openings edged down to 8.83 million in July from 9.16 million in June, which was also revised lower from 9.53 million earlier. July JOLTS was below consensus and the lowest since March 2021, but remains above the pre-COVID levels of ~7mn. The quits rate edged down slightly to 2.3% from 2.4% in the prior report, taking it to the lowest since January 2021. These numbers are one of the first indications that Fed’s tightening campaign is having an impact on the economy, and focus now turns to ADP numbers due today and the NFP jobs report out on Friday. Meanwhile, the US consumer confidence also plunged sharply to 106.1 in August, much beneath the expected (116.0) and the downwardly revised 114.0 in July. The Present Situation index dipped to 144.8 (prev. 153.0), while Expectations declined to 80.2 (prev. 88.0), back near the recession threshold of 80.
Chinese banks are considering cutting interest rates for existing mortgage loans
Media reports indicate that prominent Chinese banks are contemplating a potential reduction in the interest rates applied to existing mortgage loans by up to 20 bps. If this move comes to fruition, it has the potential to enhance positive sentiment within the equity market. This enhancement would be especially prominent in the property and consumer sectors, although it might exert downward pressure on the banking sector. Consequently, banks could find themselves grappling with narrower net interest rate margins. In response, they may opt to decrease deposit rates in an attempt to alleviate a portion of this impact.
Australia’s July inflation relief may not last
Australia’s July CPI is scheduled for release on Wednesday and may show some signs of cooling. The headline CPI is expected to slow to 5.2% YoY from 5.4% previously as higher electricity tariffs and higher rents are more than offset by lower goods and gasoline prices. However, the risk of a surge higher in inflation again later in the year cannot be ruled out amid the increases in gasoline prices and an upswing in travel and leisure activity demand. Quarterly inflation prints still carry more weight in Australia and monthly prints can be volatile, so a sustained boost to AUD can only likely come from more China stimulus measures announcements or a further improvement in global risk sentiment. Building approvals, lending indicators and some pre-GDP partials are also out this week.
PDD reports strong Q2 Revenue Growth
PDD Holdings (PDD:xnas), the parent company of China's e-commerce giant Pinduoduo, reported a robust Q2 revenue of RMB52.3 billion, marking a 66% Y/Y increase and surpassing Bloomberg's consensus by 21%. Revenue from online marketing grew by 50% Y/Y, while transaction service revenue surged by 131% Y/Y. PDD invested heavily in the 618 promotion to boost sales. The adjusted operating margin contracted by 5.6pp Y/Y to 28% due to a lower gross margin. Adjusted EPS rose by 39% Y/Y to RMB10.47, exceeding Bloomberg's consensus estimate by 47%.
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