APAC Daily Digest: What is happening in markets and what to consider next – August 26, 2022
APAC Strategy Team
Summary: U.S. equities rallied ahead of the Jackson Hole Powell keynote. Comments from discount retailer Dollar Tree about pressures to cut prices and customers shifting to “needs-based consumable products” cast doubts on the health of U.S. consumers. The market chatters and then a WSJ article on a potential deal between the U.S. and China on access to audit working papers and avoiding Chinese ADR delisting sent the share prices of China internet stocks and ADRs soaring.
What is happening in markets?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I)
U.S. equities rallied for the second day in a row ahead of the much anticipated Powell speech at the Jackson Hole symposium on Friday, S&P 500 +1.4%, Nasdaq 100 +1.8%. Discount retailers, Dollar General (DG:xnys) and Dollar Tree (DLTR:xnys) reported Q2 results. Discount General beat the relatively high expectations and finished the session down modestly -0.6%. Peer Dollar Tree’s results fared weaker with in-line Q2 results but a downward revision of full-year EPS due to its plan to cut prices sent its share price 10.2% lower.
U.S. treasuries (TLT:xnas, IEF:xnas, SHY:xnas)
U.S. treasury yield fell 7 to 8 basis points from the belly to the long-end of the curve after a strong 7-year auction. The change in 2-year yields was relatively modest, -2bps. Flows were light ahead of Chair Powell’s keynote speech at the Jackson Hole event on Friday.
Hong Kong’s Hang Seng (HSIQ2) and China’s CSI300 (03188:xhkg)
China internet stocks rallied dramatically in a typhoon-shortened session in Hong Kong on Thursday, JD.COM (09618:xhkg) +11%, Bilibili (09626:xhkg) +10.3%, Baidu (09888:xhkg) +9.2%, Alibaba (09988:xhkg) +8.8%, Meituan (03690:xhkg) +8%, Tencent (00700:xhkg) +4.8%. Hang Seng Tech Index (HSTECH.I) surged 6%. Investors found optimism in the 19-point stimulus package as well as chatters among traders about unverified progress on resolving the audit working papers access issue in the heart of the Chinese ADR delisting risk. During New York hours, the Wall Street Journal ran an article, suggesting that the U.S. and China are nearing a deal to allow American regulators to inspect in Hong Kong the audit working papers of Chinese companies listed in the U.S. The NASDAQ Golden Dragon China Index soared 6.3%. Compared to their respective Hong Kong closing levels, Alibaba +4.5%, Meituan +4.0%, Tencent +2.1%.
Chinese property names rallied across the board by 2% to 5%. The performance in A-shares was more measured, CSI 300 fluctuated between gains and losses and finished the session 0.8% higher. Coal miners, oil and gas, and crude tankers stocks surged in Hong Kong as well as mainland bourses.
Mainland investors did not participate much in the sharp move higher as southbound flows registered a net outflow.
AUDUSD on the backfoot in early Asian hours
The USD rebound returned in early Asian hours on Friday amid a sustained hawkish tilt inn Fed commentaries ahead of Powell taking the stage at the Jackson Hole summit. AUDUSD saw downside pressures and slid to sub-0.6960 from an overnight high of 0.6991. AUDNZD found support at 1.1200 and may be looking at new highs of the cycle with the current account differentials at play. USDJPY caught a bid early as well, and rose to 136.70 with focus squarely on high Powell’s comments can take the US yields.
Crude oil prices (CLU2 & LCOV2)
Hawkish Fed comments and further prospects of Iran deal saw crude oil reversing lower in the overnight session. However, modest gains have returned this morning with the supply side remaining a key focus with Brent futures close to $100 and WTI at $93+. Saudi Arabia was joined by Libya and Congo in supporting the view that supply curbs may be needed to stabilise the oil market. Further concerns on Kazakhstan’s supply also emerged amid repair works required on three damage moorings at the port facility.
What to consider?
Some more hawkish Fed comments before we get to Powell
Several Fed speakers were on the wires echoing the same message on inflation and more rate hikes. The markets are still holding their breath for wat Powell has to say later today. James Bullard (2022 voter) reiterated his year-end target of 3.75% to 4% and market expectation is not too far from that now. Esther George (2022 voter) was more open about rates going above 4%, but stayed away from a specific guidance for the September meeting. Patrick Harker (2023 voter) said rates need to be lifted into restrictive territory. Raphael Bostic (2024 voter) told the WSJ it's too soon to call inflation’s peak and that he hasn't decided yet on a 50 or 75bps rate hike next month.
Tokyo CPI surprises to the upside
Japan’s Tokyo inflation for August has come in close sight of the 3% mark, with headline at 2.9% y/y vs. expectations for 2.6%. The core measure was also above expectations at 2.6% y/y, coming in despite measures to help cool price pressures. Further gains can be expected later in the year as cheaper cell phone fees are reversed, and we also see threats of an energy crisis in Japan as LNG imports get diverted to Europe. This will continue to erode the purchasing power and keep the risk of a BOJ pivot alive.
Europe’s energy woes
French power prices soared 15% to EUR 900/MWh, more than 10x last year’s price amid expanding nuclear outages. Meanwhile in Germany, power prices for next year soared as much as 23% to an all-time high of EUR 792/MWh. UK and Italy also recorded fresh highs in power prices while Spain's parliament approved a law aimed at cutting energy use. The UK will announce its financial commitment for a new nuclear plant, Sizewell C, next week.
The U.S. and China are said to nearing a deal in resolving the Chinese ADR audit papers inspection issue
According to a Wall Street Journal article, Chinese securities regulators “are making arrangements for U.S.-listed Chinese companies and their accounting firms to transfer their audit working papers and other data from mainland China to Hong Kong” and “would allow American accounting regulators to travel to Hong Kong to inspect the audit records”. It is important to note that an agreement has yet to be reached and the regulators from both sides remain silent about it so far. One of the hurdles to the proposed arrangement of transfer of audit working papers from the mainland to Hong Kong can satisfy the U.S. regulators, particularly the U.S. SEC Chair Gensler who has emphasized “full access”. If this turns out to happen, it will not only benefit the Chinese companies that are listed in the U.S. but also sets the U.S. and China in a more conciliatory mood at least in some financial matters, and shows case the uniqueness of the position of Hong Kong.
German business sentiment is not that bad in August
The headline reading is out at 88.5 versus expected 86.8 and prior 88.6. This is only a bit softer than the previous month. The same goes as well for the current conditions (out at 97.5 in August versus prior 97.7) and the expectations (80.3, unchanged compared to July). Overall, business sentiment remains soft. But given the quick economic deterioration, it could have been much worse. We still expect sentiment to further fall in the coming months as the German economy sinks into a recession. The energy crisis is hitting very hard consumers and companies – thus leading to lower demand and corporate investment. Yesterday, Germany’s benchmark year-end power kept rising (+13% in one day) to a new record of EU725/MWH. So far, the German government has spent roughly €60bn to limit the impact of higher energy prices on households and corporations. This represents about 1.7% of GDP according to the calculations of the Belgium-based think tank Bruegel. In percentage of GDP, this is still much less than many other European countries (3.7 % of GDP for Greece, 2.8 % for Italy and 2.3 % for Spain, for instance). In any case, this is unsustainable, of course.
Softer July US PCE print would not derail Fed’s tightening
After a softer CPI report in July, focus will turn to the PCE measure – the version of the CPI that is tracked by the Fed to gauge price pressures. Lower gasoline prices mean that PCE prints could also see some relief, although we still upside pressures to inflation given that energy shortages will likely persist and easing financial conditions mean that inflation could return. We would suggest not to read too much into a softer PCE print this week, as the stickier shelter and services prices mean that the 2% inflation target of the Fed remains unachievable into then next year. This suggests that the aggressive tightening by the Fed will likely continue, despite any likely softness in the PCE this week.
U.S. discount retailers reported mixed Q2 results, highlighting pricing pressures ahead
Dollar General (DG:xnys) reported revenue growth of 9% YoY to $9.4 billion, in line with the consensus estimate, and EPS of $2.98, +10.6% YoY, above the consensus estimate of $2.94. Same-store sales in Q2 grew 4.6% YoY, above the consensus at +3.8%. In the company’s guidance for 2022, revenue growth was raised to +11% from previously +10.0-10.5% and the same-store-sales growth was raised to +4.0-4.5% from +3.0-3.5%.
Q2 results from another discount retailer, Dollar Tree (DLTR:xnys) were however weaker, with revenue growth of 6.7% YoY to $6.77 billion, slightly below the consensus estimate of $6.79 billion. EPS came in at $1.60, in line with expectations. Same-store-sale for the quarter was +4.9%, below the consensus estimate at +5.0%. The company lowered its 2022 full-year EPS guidance to $7.10-$7.40 and said that 60% of the cut was due to cutting prices. The management said that they “expect the combination of this pricing investment at Family Dollar and the shoppers’ heightened focus on needs-based consumable products will pressure gross margins in the back half of the year”. The comments from Dollar Tree casts a shawdow over the health of consumers in the U.S. in general.
Earnings on the tap
Meituan (03690:xhkg) is scheduled to report Q2 results on Friday after the market close. Analysts are upbeat about the food and grocery delivery platform’s potential in being benefited from the recovery of consumer demand amid the reopening and cost control initiatives. The consensus estimate (as per the Bloomberg survey) for Q2 revenue is to grow 11% YoY to RMB48.59billion and adjusted net loss of RMB2.17 billion. Coal miner China Shenhua Energy (01088:xhkg) and oil and gas company Sinopec (00386:xhkg) are also scheduled to report on Friday.
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