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Global Market Quick Take: Asia – March 23, 2023

APAC Research

Summary:  The Fed delivered a 25bp hike but replaced the “ongoing increases” with “some additional policy firming may be appropriate” in its statement. The terminal rate on its dot-plot remains unchanged at 5.1%, i.e. one more 25bp increase. Treasury Secretary Yellen’s turning away from her previously perceived commitment to cover uninsured deposits at a Senate testimony spooked the equity markets with the S&P 500 falling 1.7% and KBW Bank Index tumbling nearly 5%. U.S. Treasuries rallied sharping as the 10-year yield fell 18bps to 3.43%.

What’s happening in markets?

US equities retreated and bank stocks plunged on Yellen’s comments at a Senate testimony

U.S. equities reacted positively to the dovish rate hike at first but quickly pared gains as Treasury Secretary Yellen told the Senate in her testimony that she is not considering a “blanket” insurance on bank deposits. Her comments spooked a sharp decline in bank stocks, seeing the KBW Bank Index shed 4.7% and the SPDR S&P Regional Banking EFT tumble 5.7%.  The S&P 500 declined across the board with all 11 sectors in the red and the benchmark index falling 1.7%. Nasdaq 100 dropped 1.4%.

Advanced Micro Devices (AMD:xnas) and Nvidia (NVDA:xnas) bucked the decline and gained over 1% after Nvidia introduced new chips and services in its AI-focused annual developer conference.

European markets lift despite UK inflation rising far more than expected

The market is likely to open in a caution stance on Thursday after not only UK inflation unexpectedly rose from 10.1% in January to 10.4% in February, far hotter than the fall expected, while at the same time the market will react to the Fed hiking interest rates by 25bps (0.25%) on Wednesday, and also signalling no cuts on the horizon this year. The European banking sector could likely also come under pressure after the Fed Treasury Secretary Yellen declared the US will not be considering a ‘blanket’ insurance on bank deposits.

Treasury yields plummet and may have much more to go

Yields dropped across the curve after the Fed raised the policy rate by 25bps to 4.75%-5.0% but replaced the “ongoing increases” with “some additional policy firming may be appropriate” in its statement. In addition, the statement made it crystal clear that the Fed is in a risk management mode but added a reference to the credit contractionary impact on the economy due to the recent development in the U.S. banking system. Yields on the 2-year tumbled by 23bps to 3.94% and the 10-year yield fell 18bps to 3.43%.

The money market curve is now pricing in a 50% chance of a 25bp hike at the May FOMC before the Fed pauses. We suspect that the credit contraction unfolding in the banking system will force the hands of the Fed and we may have seen the last rate hike in this cycle yesterday. U.S. banks, according to the latest survey done by the Fed in January, have already been tightening lending standards sharply before the recent turmoil. Given what has been happening over these two weeks, banks will refrain further from making loans and may cause credit growth to slow or even to contract.

U.S. Treasury yields, especially in the 2-year to the 5-year segment may fall further and they may still be a “buy” at the current level. Historically, when the Fed pauses, the short end of the curve performs better than the longer end and the yield curve will steepen.

Hong Kong equities rallied for the second day, led by property and financials

Hang Seng Index advanced 1.9%, driven by property and financials. HSBC (00005:xhkg) gained 3.1% and Standard Chartered (02888:xhkg) climbed 3.7% following overnight relief rallies in Europe and the U.S. the day before. However, the rally may be short-lived and will be tested today after Yellen made a 180-degree change last night in her perceived commitment to cover uninsured deposits by saying that regulators are not looking to provide “blanket” deposit insurance.

EV stocks gained on Wednesday following Beijing municipal government rolling out a new EV purchase subsidy. Nio (09866:xhkg) gained nearly 6% after the EV maker expressed confidence in doubling sales this year.

After market close, Tencent (00700:xhkg) reported revenues and earnings above analyst estimates, and saw its ADRs 1.3% higher versus the level at the Hong Kong close.

In A-shares, CSI300 edged up 0.4%, with computing, online gaming, software, and AI Generated Content stocks outperforming.

Australia’s share market outperforms Wall Street with gold stocks rallying. And brick giant, Brickworks guides for a strong building market

Despite the benchmark index, the ASX200 falling 0.9% on Thursday, pockets of green gave investors hope with copper, iron ore and gold prices rising. That said, Australia’s and one of the US’ largest brick companies, Brickworks, declared it is continuing to experience strong demand for prime industrial property even as interest rates rise. Additionally, the brick giant expects a significant surge in rental income over the coming years, with new developments being completed and rent reviews undertaken. This somewhat gave the market hope that banks and real estate margins might not fall as much as expected. However, for Brickworks the company, its shares rose about 4%, which is its biggest jump since January after it declared 1H underlying earnings (EBIT) rose 26% to A$569 million.

FX: Dollar weakens with EUR and JPY as winners on Powell/Yellen shocks

As the Fed hiked rates by 25bps, it also shifted to a data-dependent mode and failed to nudge market expectations that continue to price in close to 100bps of rate cuts for this year despite Powell hinting at no rate cuts. Dollar slid lower on the announcement, also aided by a return of banking sector risks as Janet Yellen denied backstopping all bank deposits. EURUSD jumped higher to 1.09 before settling at 1.0870 and USDJPY slumped below 131.50 from 133 although it continued to find support at 131. Focus shifts to BOE today after re-acceleration in inflation yesterday, and another break above 1.23 may be likely if more rate hikes are signalled.

Crude oil prices gained on demand strength but slid later as banking concerns revoked

Crude oil gained earlier in the session amid signs of a strong demand with the Energy Information Association’s weekly report highlighting record exports, while domestic fuel stockpiles declined. Gasoline inventories fell 6,399kbbl last week, in a sign consumer demand is rising strongly. This was despite a rise in commercial crude oil inventories by 1,117kbbl. Fed’s 25bps rate hike also came with a data-dependent mode from here which helped crude to maintain its gains until Yellen’s comments brought back concerns of a banking crisis. WTI prices still closed around $70 after topping $71 earlier, and Brent was down to sub-76 levels from $77 earlier.

Gold surges on uncertain economic outlook

The Fed’s 25bps rate hike came in-line with market expectations, but the push back on market expectations of about 100bps of rate cuts for this year failed to materialize. This brought Gold back to gains as it surged back to $1980. Meanwhile, the return of banking sector concerns after Yellen’s comments further brought Gold’s safe-haven appeal in focus again, keeping the $2000 level on target.


What to consider?

Fed raised rates by 25bps but considered a pause

The FOMC lifted the Federal Funds Rate target by 25bps to 4.75-5.00% and the updated economic projections left the terminal rate view unchanged at 5.1% while the 2024 rate view was adjusted higher to 4.25% from 4.125% earlier. Chair Powell in his comments later also said that they considered a pause but the consensus was for a rate hike, and that no participants had rate cuts in their base line scenario for this year. This comes against market’s expectations of nearly 100bps of rate cuts priced in for this year.

The statement removed reference to ‘ongoing increases in the target range will be appropriate’, though added that ‘some additional policy firming may be appropriate’. The Fed expressed confidence in the banking system, stating that it was ‘sound’ and ‘resilient’, adding that the recent developments were likely to result in tighter credit conditions and will weigh on economic activity, hiring and inflation.

Janet Yellen says Treasury unlikely to unilaterally expand deposit insurance

Treasury Secretary’s comments hit the wires when Fed Chair Powell’s press conference was going on. She said that regulators are unlikely to provide “blanket” deposit insurance to stabilize the US banking system. This brought back concerns on the US banking sector, especially the smaller banks, and risks of more bank runs arise as the US opens on Thursday. The KBW regional bank index slumped 5.7% while the broader KBW bank index was down 4.7%. Economic risks also escalated amid tighter bank lending standards.

UK February CPI far hotter than expected; Bank of England up next

The UK February CPI data showed inflation rising far more quickly than expected, with the headline out at +1.1% MoM and +10.4% YoY vs. +0.6%/+9.9% expected and 10.1% YoY in January. The news was no better for core inflation, which rose +6.2% YoY vs. 5.7% expected and 5.8% previously. Particularly the latter looks like an ugly re-acceleration that will challenge the Bank of England’s aggressive forecasts of disinflation for the coming two years. The February Bank of England meeting forecast that CPI would drop to below 4% by the end of this year and below 2% next year. After ECB’s 50bps rate hike and Fed’s 25bps, and considering the price pressures in the UK, the Bank of England would likely be looking to add more tightening today.

Investment considerations for a recession - post the FOMC hike, and no backstop for ‘blanket’ bank deposits

Given the Fed hiked by 25bps (0.25%) as many expected, and the Fed Chair suggesting further hikes will come, while the Fed Treasury Secretary Yellen said the US is not considering a ‘blanket’ insurance on bank deposits, we think the market will now begin to price in a recession.  Recall that in a recession economic conditions contract, corporate profits broadly fall, and credit is scarce for businesses and consumers. As such. we expect pressure on the banking, real estate, technology, and industrial sectors as a result, as well as some materials. So, consider downside protection, via puts (options) for downside protection, as well as exposure to gold (via gold contracts, gold equities or gold ETFs for example), also consider exposure to the safe-have foreign exchange currency, the JPY. And recall that bonds, as an assets class remain resilient in recessionary environments. As for sectors that typically do well in recessionary environments, consumer staples, health care, and utilities generally outperform the broad market in a recessionary cycle. 


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