Summary: US equity and bond markets were closed on Monday for a holiday. Mainland China stocks surged 1.6% as northbound flows reached over RMB15 billion and were in net buying for the 9th day in a row. Ryan Cohen is building a stake in Alibaba. USD saw a rebound but will likely be driven by the Japanese yen in the next few days as the Bank of Japan meeting kicks off today. While China’s Q4 GDP scheduled to release today was expected to slip to 1.6% Y/Y, more than half of Chinese provinces are setting 2023 GDP growth targets at above 5.5%. The rally in industrial metals paused amid profit-taking ahead of the Lunar New Year.
Closed for U.S. holiday
Closed for U.S. holiday
CSI300 rose 1.6%, led by brokerage, household appliances, pharmaceuticals, and semiconductor names. Northbound net buying through Stock Connect was RMB15.8 billion on Monday, the 9th day in a row of net buying for a total of around RMB80 billion. Coal miners, autos, and media stocks retraced. Hong Kong’s Hang Seng Index had a choppy session, rising initially to make a new recent high but failing to hold and sliding to losses in the afternoon before closing nearly flat. The news that the Chinese regulators allowed Didi to resume registration of new users failed to boost the sentiment for internet stocks. On the other hand, Meituan (03690:xhkg) slipped 3.3% as investors feared that the company’s ride-hailing business might lose market share as Didi returns. Hardware names, AAC (02018:xhkg) up 11.4%, Techtronic (00669:xhkg) up 6.2%, and Sunny Optical (02382:xhkg) up 4.0%, stood out as top performers. The automaker, Brilliance (01114:xhkg) tumbled 8.2% after announcing a special dividend of HKD0.96 per share from the disposal of its stake in Brilliance BMW below the street estimate of HK$1.5 per share.
USDJPY was seen fluctuating around 128.50 in the Asian morning session as Bank of Japan meeting kicks off with speculations of a further policy tweak continuing to build. GBPUSD also failed at another attempt on 1.2300 while AUDUSD returned below 0.7000 ahead of the key China activity data due today, despite January consumer confidence coming in higher at 84.3 from 80.3 previously. A break above 0.7000 could bring the tough resistance of 0.7125 in focus. NZDUSD testing a break above 0.6400.
Crude oil prices eased on Monday with WTI falling below $79/barrel and Brent back towards $84/barrel as profit-taking emerged after the 8% rally last week. The World Economic Forum’s annual meeting began with warnings of global recession. This was aided by signs of stronger Russian supply. Seaborne crude exports soared by 30% to 3.8mb/d last week, the highest level since April. India was the biggest buyer, snapping up 33 times more crude than a year earlier. There is a lot to digest in the oil markets, with demand concerns and sanctions on Russian supply and risks of OPEC production cuts. Meanwhile, volatility in gas prices also underpins, suggesting crude oil prices can continue to see two-way price action in this quarter.
US natural gas settled back above $3.50, higher about 7% on Monday with risks of cold weather at the end of the month. European gas however fell sharply on a strong supply outlook. Dutch front month futures were down more than 15% as full stockpiles in China eased concerns of supply tightness in the LNG market. Chinese importers are trying to divert February and March shipments to Europe amid weak prices at home and high inventories. This is despite a cold snap expected this week.
The key steel making ingredient, iron ore (SCOA) has fallen 5.3% from its high, including Tuesday’s 0.4% slide, which takes the price to $118.90. Still the iron ore price holds six months highs and is up 56% from its low. The pullback was triggered by China’s top economic planner, the NDRC accusing market participants of hoarding and price gouging after the iron ore price strongly rallied from October’s low in anticipation of demand picking up from China easing restrictions. Iron ore inventory levels are still lower than they were a year ago, which fundamentally supports iron ore price. And the technical indicators indicate the longer term rally could continue. The 50 day moving average is approaching the 200 day moving average. Historically when the 50DMA cross the 200 DMA buying has picked up. Also consider iron ore majors shares, BHP, Rio Tinto Fortescue are holding in record high territory, as investors remember China has made such accusations in the past of price gouging, and the iron ore price previously recovered over the medium to longer term.
A slight recovery in the US dollar on Monday paused the strong rally that has been seen in industrial metals so far this year. Copper fell as signs of weak demand persist. The Yangshan copper cathode premium over LME has declined to USD31.50/t, compared with the 10y average of USD72/t. Stockpiles of copper in Shanghai Futures Exchange warehouses are also higher. HG copper dipped back to $4.14 from highs of over $4.20 last week. Aluminium bucked the trend to push higher as inventories continue to fall. Expectations of stronger demand as China reopens also boosted sentiment. Rio Tinto (RIO) reported 4Q iron ore shipments of 87.3mt, +3.8% YoY vs est 86.2mt and still sees 2023 shipments of 320-335mt while mined copper output guidance raised to 650-710kt from 500-575kt previously.
While the reopening of China from Covid containment is a highly positive development for the Chinese economy, the initial shockwave of infections could be significantly disruptive to economic activities in the near term. The median forecast of economists surveyed by Bloomberg on China’s Q4 GDP growth is 1.6% Y/Y decelerated from 3.9% Y/Y in Q3. Disruption in production activities resulting from infection-induced absence from work is expected to drag the growth of industrial production to 0.1% Y/Y in December from 2.2% in November. Retail sales are expected to shrink 9% Y/Y in December, decelerating further from -5.9% Y/Y in November as dining, retailing, and deliveries were slowed by inflection. Full-year fixed asset investment is expected to come at 5%, down from 5.3% in the first 11 months of the year.
According to China’s Securities Daily, the 28 provinces and municipalities that have released their 2023 GDP targets set them at 6% on average. Hainan is the most aggressive with a 9.5% target. According to data from the Shanghai Securities News, more than half of the 31 provinces and municipalities that have released 2023 work reports, are setting their GDP growth targets above 5.5% for 2023. Economically important provinces of Zhejiang, Jiangsu, Guangdong, and Shandong set their targets at above 5%.
The rally in cable has cooled off recently even as the decline in USD has continued. The pair is looking for direction and there may be some key catalysts to watch this week. Bank of England Governor Andrew Bailey spoke on Monday at the Treasury Select Committee hearing, saying that the risk premium on UK assets after the Truss government’s policy shock in September has gone. Still, confidence remains fragile, and risks also remain from China’s chaotic exit from Zero Covid, the continued fallout from the war in Ukraine and the shrinking of Britain’s labor force. Focus will now turn to economic data, with labor market data due today, CPI on Wednesday and retail sales on Friday. Any signs that labor market is cooling or CPI has topped out could mean the BOE could start to consider a slower pace of rate hikes going forward, and that could see the 200DMA in GBPUSD at 1.2000 get threatened.
Japan is looking to overhaul its security policy as geopolitical threats in the region and globally grow. PM Kishida’s G7 tour last week saw multiple deals not just with the US, but focus was also seen on enhancing military ties with Germany, Canada and France, including mutual troop access with the UK and upgrading of defence ties with Italy. The plan to build more nuclear reactors is also a step in that direction. Japan and India also held their first joint air drills as they step up military exercises with other countries amid concerns about China's assertiveness. Japan is looking to boost its 2023 defence budget substantially to a record 6.8 trillion yen, an increase of 20%. This further supports our optimistic view on our Defence equity theme basket as further deglobalization continues to suggest defence spending will remain a key focus.
According to the Wall Street Journal, Ryan Cohen has built a stake in Alibaba. Cohen is a Canadian investor who is know for investing and attracting a large crowd of retail investors to invest in meme-stocks such as GameStop. His buying into Alibaba may attract retail investors from North America to follow.
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2024: The wasted year
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.
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.
