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Global Market Quick Take: Asia – March 22, 2023

Macro 5 minutes to read
APAC Research

Summary:  Ahead of the Fed decision risk-on sentiment was charged up, on hopes the Fed may potentially map out a pause ahead amid the bank lending crisis. The US dollar remains weaker, oil rebounds off 15-month lows, and global equities rally up with banking and energy stocks charging. Nike revenue beats expectations despite a China miss, yet the sports giant's outlook is vague amid consumer pressure, which shows the pain businesses may feel ahead. And the RBA highlights a rate pause is coming.

What’s happening in markets?

Ahead of the Fed decision US equities rally up, with bank shares bouncing higher 

Treasury Secretary Yellen said actions of covering uninsured deposits “could be warranted if smaller institutions suffer deposit runs that pose the risk of contagion.” And this stoked confidence in bank stocks, which staged a strong rally, with the KBW Bank Index soaring 5% and the SPDR S&P Regional Banking ETF (KRE:arcx) jumping 5.8%. The S&P 500 gained 1.3% and Nasdaq 100 lifted 1.4%. Energy, consumer discretionary, and financials led the sector advance. 

As for stand out stocks, Tesla (TSLA:xnas) rallied 7.8% following strong sales data from China and a Moody’s upgrade of the EV maker’s debts to Baa3, which is an investment grade. Footlocker (FL:xnys) surged 7% on a revenue and earnings beat.

EU markets lift on hopes the Fed will pause amid the bank lending crisis 

There’s been a decrease in contagion risk as the market is focusing on the Fed decision, with some thinking the Fed could potentially be forced to pause amid the bank lending crisis. Still we believe the Fed won’t pause as that could cause a market tremor. Nevertheless, despite Yellen calming jitters, banking caution still remains, as some banks are being forced to sell down assets at a loss. For example, Sweden's biggest pension fund, Alecta, sold all its First Republic shares at a $728 million loss, after the fund racked up about $2 billion in losses from three troubled US lenders. All in all, The FTSE outperformed EU indices after rising 1.8%, while the broad Stoxx600 gained 1.3%, with all sectors in the green and banking services leading the gains.

Treasury yields jump as bank stocks rally and European yields climb

Hawkish comments from ECB Holzmann on more rate hikes saw European government bond yield surge and took yields on U.S. Treasuries higher alongside. Rallies in European and U.S. bank stocks added to the selling in the front end and bear flattened the Treasury curve. The 2-year yield surged 19bps to 4.17% and the 10-year yield climbed 12bps to 3.61%, bringing the 2-10-year curve 6.5bps flatter to -56bps. The money market curve is pricing an 80% chance of a 25bp hike at today’s FOMC. The SOFR Jun-Dec spread steepened by 6bps to -48bps, trimming the amount of rate cut priced in for the 2nd half. The 20-year Treasury auction went well and around USD 6 billion investment-grade corporate bonds was issued on Tuesday.

Hong Kong and Chinese equities rally on improved sentiment and earnings beats 

Yesterday, selling in the Hong Kong equity market took a pause as battered financial names rallied and the Hang Seng Index gained 1.4%. HSBC (00005:xhkg) bounced 2.9% and Standard Chartered (02888:xhkg) climbed 2.3%. Strong performance in sportswear and EV names on earnings beats added fuel to the improvement of sentiment. 

Anta (02020:xhkg) jumped 9.2% after the sportswear company reported revenues and net profits beating estimates. Li Ning (02331:xhkg) and Shenzhou (02313xhkg) advanced over 5%. Geely (00175:xhkg) rose 3.8% as the automaker reported FY2022 income rising 9% to RMB 5.26 billion, far above analyst estimates of RMB 4.85 billion. XPeng (09868:xhkg) surged 11% and Li Auto (02015:xhkg) gained 4.8%. Wuxi AppTec (02359:xhkg) jumped 8.6% on upbeat FY23 and FY24 guidance. Wuxi Biologics surged 8.9%. In the China internet space, Bilibili led the advance with a 6.9% gain following its imported game Uma Musume: Pretty Derby got banhao approval. 

In A-shares, CSI300 climbed 1.1%, led by pharmaceuticals, food and beverage, retailer, defense, and lithium battery stocks. Kweichow Moutai (600519:xssc) and Wuliangye (000858:xsec) gained 2.7% and 3.4% respectively.

The Australian share market lifts for the 2nd day, with energy stocks rebounding, while the market weighs up central banks halting hikes

On Wednesday the ASX 200 index gained 0.9% to 7,015 in the first 1.5 hours of trade with the market moving above its 200-day average as nerves settled with the financial sector rising 1.7%. Despite that, commodities are the best performers after the oil price extended its recovery from the 15-month low hit the previous day. Oil giants Beach Energy and Woodside are up almost 5%, while coal miners are also leading with New Hope up about 4% after guiding for higher coal prices this year. On the downside, Gold producers are among the worst performers, as they’re tracking bullion’s decline overnight. Further south, in New Zealand, the NZX 50 index trades 0.5% higher at 11,585.74.

FX: USDJPY higher with a rise in Treasury yields

The Japanese yen weakened with the USDJPY moving back to 132.50 as Treasury yields rose higher with the 2-year moving back above 4%. The US dollar remained weaker overall as the greenback awaited the FOMC announcement due today with markets once again tilting more towards a 25bps rate hike. EURUSD was firmer again and moved to highs of 1.0788 despite a miss in German ZEW economic sentiment. AUDUSD back below 0.67 on RBA hinting at an April pause but AUDNZD making a fresh attempt at 1.08.

Rally in crude oil prices taking a breather ahead of FOMC announcement 

Crude oil rallied as investors rushed back into risk assets following more assurances from regulators on support for the US banking sector. The potential expansion of FDIC’s coverage to all deposits soothed concerns of further bank runs. The support was aided by further supply side issues as Russia extended its 500kb/d crude output cut through June. WTI rose above $69/barrel and Brent was at $75 as the focus turns to the FOMC announcement and the dot plot to ascertain if market expectations of over 75bps of rate cuts this year could be met. 

Gold lower, Copper back above $4 again

The risk-on tone in the markets and higher Treasury yields took off some more shine from the yellow metal, with the Fed announcement becoming a key focus to shed some light on the financial risks and what that could mean for monetary policy in the year ahead. Gold slumped to $1940 bringing the 38.2% retracement at 1931 in focus. Overall, gold is in an uptrend short- and medium-term and could test all-time highs around $2,074.

Meanwhile, Copper rose for the fourth session to go back above $4 as concerns of a full-blown banking crisis eased and a supportive stance from the regulators continued to suggest that economic concerns could remain limited. Signs of stronger demand in China also boosted sentiment. Inventories at Shanghai Exchange warehouses fell 15% last week, while stockpiles immediately available for delivery at LME warehouses also fell this week.

What to consider?

The FOMC is announcement aheadto hike or not to hike? Dot plot will be a key focus as well

The focus for the upcoming Fed will clearly have to address the current financial stability concerns while pretending to stay on message on inflation considerations. The US Feb. CPI data remained hot, with services inflation still sticky, and Powell's preferred "supercore" metric (which excludes shelter and rent) rose 0.5% month-on-month from 0.36%, the highest since September, so there is plenty of cause for the Fed to continue its hiking regime from the “incoming data” side of the equation. 

But the Fed’s messaging on inflation will be pushed to the side as investors watch for two things: first, simply whether the Fed hikes 25 basis points or stands pat, but second and more importantly, how it positions its level of concern around recent events and the risk of a funding crisis in the banking system and therefore how it guides for the path of rates and QT from here. 

The dot plot will be a key watch today, with the market already marking the Fed to cut more than 75 basis points by year-end. Expectations for today have picked up somewhat to 21bps, so close to fully pricing in a 25bps rate hike. Given that the ECB still went for a 50bps rate hike this month, a pause (and more so a cut) from the Fed could spell further panic and push the US dollar lower. 

Nike revenue beat expectations despite a China miss; yet its outlook is vague amid consumer pressure

Nike continued its streak of reporting stronger sales than expected, with revenue rising 14% in the quarter to $12.39 billion, outpacing the $11.52 billion estimate. However, higher freight and material costs, coupled with marked down inventory, weighed on margins which fell to 43.3% in the quarter, slightly under the 43.7% estimate. Its most profitable region, China, reported less revenue than expected, with revenue down 7.7% YoY to $1.99 billion, missing the $2.03 billion expected, while other revenue lines beat estimates. Despite Nike seeing sales momentum ahead that will result in leaner inventory, the company flagged consumer confidence could face pressure. That remark also weighed on sentiment and Nike’s shares fell about 2% after hours, almost erasing the gain of 3.6% in normal trading. Still, Nike shares are up 27% in six months. We also believe Nike’s somewhat tepid outlook reflects what we could see from other consumer businesses in 2023. 

RBA to consider pausing, sending the Australian dollar under 0.67

Australia’s central bank, the RBA will consider pausing its policy tightening cycle next month, with interest-rates are already restrictive, all while the economic outlook is uncertain. This is according to the RBA’s March meeting minutes. And this comes just a day after the Assistant Governor of Financial Markets, Christopher Kent said almost a million fixed-rate mortgage loans will roll over to variable this year, leaving many Australians with a sizeable jump in their mortgage payments, which will pressure household budgets, while people are being burdened with high inflation. We see the risk being that the reverse wealth effect will take hold in Australia, causing property prices to fall further and discretionary spending to fall. The Australian dollar fell to 0.6663, falling further below its 200-day simple moving average The next catalyst is the Fed decision, and then Australian retail sales out on March 28.

Coal demand is not going away, global underinvestment should support prices to 2050

Australia’s second larger coal producer, New Hope posted its half-year financial results today with earnings, and revenue rising far more than expected, as a testament to coal demand rising more than forecast, despite the green energy push. New Hope reported a 102% jump in profit to US$448 million) for the six months to December on Tuesday, with earnings being buoyed by surging prices for thermal coal, despite volumes slumping over 3% from floods affecting output. For 2023, the Australian coal price has fallen 50% so far this year, but the company sees price strength coming back, with demand outpacing supply, and future growth expected to come from South-East Asia. The miner sees underinvestment in new mines continuing to support prices, with demand continuing to outstrip supply well past 2050. The coal miner is potentially looking potentially buy BHP’s jettisoned coal mines.

China-Russia signs deepening cooperation

Russia President Putin and China President Xi had a thorough exchange of discussions, where economic relations, energy cooperation, and Ukraine were discussed. Putin praised Xi Jinping's proposal for ending the war in Ukraine, saying it could be the basis of a deal when Kyiv and the West if they accept it. Russia’s statement on the use of nuclear forces softened, and Xi touted close China-Russia ties, and invited Putin to make a return visit this year.

German investor morale drops, reflecting concerns over the banking sector

The German ZEW headline showed that the economic sentiment index significantly worsened this month, arriving at 13.0 from 28.1 in January. This is much lower than the market consensus of 16.4. The current situation index was also worse than expected at minus 46.5 versus expected minus 45.8. This is mostly explained by the negative financial markets outlook and concerns about the financial sector. Both the banking sector and the insurance industry are a source of worries for investors according to the report.

Tencent reports today

Tencent (00700:xhkg), which reports on March 22, is expected to see modest total revenue growth and a 24% Y/Y increase in adjusted net income, with growth in its gaming and advertising businesses offsetting slower growth in fintech and cloud.

Sino-Ocean Group deferred coupon payment of a perpetual bond

Sino-Ocean Group (03377:xhkg) told bondholders that the China developer is delaying the coupon payment of a perpetual subordinated bond on Tuesday. The price of the bond, which hfell 17.5 cents to 26.8 cents on the dollar as per Bloomberg.

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