Summary: China’s RRR cut and mixed economic reports remain underwhelming for the markets. Rising commodities and yields will remain the theme again this week, so brace for more volatility in stock and bond markets. Gold at an early stage of an uptrend, while yen’s underperformance will need more than a verbal intervention. Shanghai may be looking to restart production, but it will be patchy at best. IMF meetings to reflect increased central bank hawkishness.
What’s happening in markets?
Nasdaq 100 (USNAS100.I), S&P 500 (US500.I), China’s CSI300 and MSCI Asia Pacific ex Japan (FMASM2) – Asian markets followed the US stocks lower on Monday after the Good Friday holiday. Tech-heavy NASDAQ closed over 2% lower on Friday while S&P was down 1.2%. Some Asian markets like Hong Kong and Australia remain closed for Easter Monday, and most European markets will be on holiday as well. MSCI Asia Pacific ex-Japan (FMASM2) was down by 0.5% despite a positive surprise in China’s key economic data. Nikkei (NI225.I) was in loss of 1.8% amid losses in technology shares as inflation and rapid tightening concerns keep hold. CSI300 (000300.I) was down by 0.8% while Straits Times Index STI (ES3) was down by 0.5%.
China’s RRR cut underwhelms, Q1 GDP surprise insufficient to bolster sentiment. China's PBoC announced to reduce Reserve Requirement Ratio (RRR) by 0.25% which is estimated to increase the loanable fund in the Chinese banking system by RMB 530 billion. The market expected a bigger 0.50% cut. Q1 GDP data was mostly above expectations, even as consumption slumped and joblessness rose higher. Overall a strong headline Q1 GDP growth of 4.8% y/y still means that there is now a greater chance of the loan prime rate remaining unchanged on Wednesday or at most seeing a small 5 basis point cut. It reflects the fact that the authorities fear stoking another bubble in the property market while likely wanting credit policy to do much of the heavy lifting.
Crude oil (OILUKJUN22 & OILUSMAY22) continued to rise higher in Asia as supplies from Libya were interrupted and Russia warned of the potential for record prices if more nations ban its energy. WTI was close to the $108 handle and Brent remained around $113/barrel. The phased reopening of Shanghai is also bringing demand back on the table. Japan’s Inpex (1605) was up over 1.4%. Meanwhile, US natural gas reached fresh 13-year highs amid a de facto EU embargo on Russian gas. Gold (XAUUSD) also rose to a 5-week high and technical suggest an early stage of an uptrend.
What to consider?
Yen’s knee-jerk to Kuroda, but eyes remain on Yellen. USDJPY rose to fresh 20year highs of 126.79 on Monday as a dovish BOJ keeps local yields anchored to the floor while their U.S. equivalents surge on expectations for aggressive Fed hikes. BOJ Governor Kuroda’s described the yen’s recent drop being “very rapid” and cited a weaker yen has some negative effects on the economy, but no change in BOJ policy can still be expected and a weak yen remains positive for the economy. AUDJPY retreated towards 93.200 from day’s highs of 93.866 following China’s mixed data, and focus remains on Reserve Bank of Australia’s meeting minutes due on Tuesday.
Shanghai’s production resumption may kickstart manufacturing. Although reports of Shanghai’s first Covid fatalities in the current wave proved dire, business reopening plans supported sentiment as hopes of repairing the supply chains developed. Some of the firms that have been reported to be on the first version of a whitelist to restart according to state media reports are Fosun Pharma (600196), China Eastern Airlines (CEA). Tesla (TSLA) factories are also likely to resume production as early as this week.
Twitter’s (TWTR) poison pill means more volatility. Twitter adopted a poison pill to discourage hostile takeover attempts after Elon Musk’s unwelcome offer to take the company private. With Musk reportedly having a Plan B, and openly criticizing the management of Twitter, this means more volatility is in store. Tesla (TSLA) may be caught in the fire as well, but remains a medium to long-term story.
Trading ideas to consider
Fed Chair Powell may drop the final hint for a 50 basis point hike this week. Brace for more gains in yields and pain in tech stocks as Fed Chair Powell will be making his last public comments on Thursday at the IMF meetings before the Fed’s pre-meeting quiet period that starts Friday. He is expected to drop a final hint that a 50 basis points hike is coming and more details on quantitative tightening are also sought.
Apple suppliers in focus as China locks down key manufacturing areas. Lockdown in the entire Zhengzhou Airport Economic Zone, a manufacturing hub where Foxconn’s factories are located, due to rising COVID-19 cases is threatening iPhone production lines in China. Watch AAC Technologies (02018), Luxshare Precision (002475), GoerTek (002241).
Earnings due this week. Bank earnings continue with Bank of America (BAC) and BNY Mellon (BK) today and American Express (AXP) at the end of the week. We also get Pinnacle (PNFP), J&J (JNJ), Netflix (NFLX), IBM (IBM), Tesla (TSLA), BHP (BHP), United Airlines (UAL), AT&T (T), Keppel Corp (KPELY) among many more this week.
Key Asian economic releases this week:
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Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
