Equities climbed on falls in bond yields and positive earnings surprises
APAC Strategy Team
Summary: U.S. treasury yields fell sharply after the Philly Fed survey surprised the market on the downside and hit the lowest level since May 2020. U.S. 10-year notes closed 15 basis points lower at 2.88%. Tesla (TSLA) surged 10%, leading charge higher of S&P500 (up 1%) and NASDAQ100(up 1.4%), following reporting stronger than expected results. Markets shrugged off the ECB’s larger-than-expected 50bp rate hike. Crude oil traded down on Libya’s resumption of oil export.
What’s happening in markets?
EURUSD downside returns
EURUSD saw a knee-jerk reaction to ECB’s 50bps rate hike, also helped by relief on gas supply front as Nord Stream started flowing again at about 40% capacity, much like before the maintenance. However, as we have noted earlier, EUR rallies will unlikely be sustainable given that the Eurozone economy faces far worse economic risks than the U.S., and now political risks are intensifying as well. Faster tightening by the ECB only suggests that the window to tighten is diminishing fast, and EURUSD was seen back around 1.02 levels in Asia. July PMIs due in the day ahead and may likely be a further dampener for the single currency as recession concerns inflate for some of the countries in the region.
USDJPY tested the 137 support
The slump in US yields overnight spelled some relief for the Japanese yen. USDJPY slipped to 137 although some of the decline was retraced in the Asian morning as dollar strength returned. With Bank of Japan being one of the very few central banks still sticking to an easy money policy, the pain for the yen isn’t over, however. The key level to watch is 140, beyond which the potential for a currency intervention will increase.
Hong Kong and mainland China stocks were little changed; autos and shipping gained
Stocks in Hong Kong and mainland China had lackluster trading this morning. Autos in general outperformed. Li Auto (02015:xhkg) and NIO (09866:xhkg) were 2%-3% higher. The Cyberspace Administration of China released its verdict on Didi Global with a RMB8 billion fine, saying Didi had neglected to comply with specific regulatory demands and avoided oversights from regulators and committed offences under the Cybersecurity Law, the Data Security Law, and the Personal Information Protection Law. Market took it positively as investors believe that it might pave the way for Didi Global to seek listing in Hong Kong. Hang Seng TECH Index (HSTECH.I) opened nearly 2% higher but paring gain to end the morning session only 0.5% higher.
What to consider?
European Central Bank (ECB) hiked by 50 basis points to 0% - a first in 11 years
This is the end of zeronomics, the natural experiment of negative nominal interest rates. This is certainly a relief for the banking and financial sector. We are a bit puzzled on the future of forward guidance. Until the last moment, most ECB Governors hinted at a 25 basis points interest hike. There was clearly a case for a 50 basis points hike, however. We believe the pace of interest hike will be unpredictable in the coming months, thus resulting in higher volatility in financial markets. As expected, the ECB unveiled its anti-fragmentation tool : the Transmission Protection Instrument (TPI). There are mostly four country’s criteria for the ECB’s TPI : 1) compliance with EU fiscal rules. The recipient must not be in excessive deficit procedure, for instance ; 2) absence of severe macroeconomic imbalances ; 3) the trajectory of government must be sustainable ; and 4) sound and sustainable macroeconomic policies. The likelihood is high that Italy will not meet these criteria when the general election will come in September/October. But who cares. The TPI is actually a perfect black box. The ECB will decide when to apply, how to apply, and whether or not to sterilize according to zero real binding. The below rules are just there to placate any potential legal challenge on the German constitutional court. This is not « whatever-it-takes » anymore. This is « whatever-we-want ».
Italy’s prime minister Draghi resigned
After a week of pollical uncertainty and tension, Italy’s president Mattarella finally accepted Draghi’s resignation on Thursday and dissolved the parliament. Italy will hold a general election in the coming months. Opinion polling suggests that Giorgia Meloni’s far-right Brothers of Italy is most likely to win in the election and that may lead t a centre-right coalition. The spread of BTP (i.e. Italian government bonds) blew out by as much as 25 basis points before settling 19 basis points wider at 232 basis points.
US data continues to send out warning signals
A big fall in the July US Philly Fed and rise in initial jobless claims is dampening the Q3 GDP growth outlook. Philly Fed printed -12.3 for July, significantly below the expected 0.0 and the prior -3.3. Both new orders (-24.8 from -12.4 prev) and employment (19.4 from 28.1 prev) showed a big drop, suggesting a 75bps rate hike at the next week’s FOMC meeting is still more likely than a bigger 100bps move. US bond yields slid sharply on the data, with 10Y back below 2.9%. Some are expecting a Fed pivot, but we believe that's still too far. Remember the horrible inflation print we got earlier, and we reiterate that the Fed will need to continue to raise rates, and force the economy into some form of a recession. July PMIs are on watch today, both in the US and the Eurozone.
Could equity sentiment cool following more signs the US economy is showing signs of fatigue, while company outlooks get darker? The latest results from Snap (SNAP) show big business is reluctant to spend on advertising in 2022. Not only do we think markets are on edge for more company’s outlooks dropping, with Twitter’s results ahead. But caution is in the air ahead of Apple’s and Microsoft’s results next week. While critically, the Fed is due to hike rates next week, with US GDP and Eurozone GDP out for Q2 could show the US is getting is closer to a recession, along with the EU area.
President Biden tests positive for Covid
U.S. president Biden is confirmed positive for Covid and is having mild symptom, according the White House. Biden is isolating at the White House and continue to work.
Japan’s inflation above target again
Japan headline CPI came in at 2.4% for June, as expected and above BOJ's target of 2%. Core CPI edged up to 2.2% y/y in June from last month’s 2.1% despite government subsidies helping to slow price gains. Even as the drivers of inflation are broadening and consumer pain is visible, the print is unlikely to nudge the Bank of Japan to tweak its monetary policy yet. Market bets against Japan’s easy policy have also eased off, and even as the Japanese yen stays near record lows, that's not enough to move Kuroda, not this side of 140 at least. Still, Bank of Japan remains a low probability, high impact event which is worth watching in H2.
The four reasons equity markets could pivot lower and what to watch
Although the Nasdaq 100 , S&P 500 and Asia Pacific markets are up off their lows, (including with ASX200), which have been supported by some geopolitical tensions easing with gas flows resuming from Russia. But we are cautious as firstly- property demand destruction kicked in, from higher rates in the US and Australia, while China is in the midst of a property crisis. So we see banking sentiment bank and discretionary sector sentiment weakening ahead, with the reverse wealth effect to become an issue. Secondly, we think financial conditions will continue to tighten this year, with underlying inflation likely to persist. The interest rate futures markets are also telling us interest rates will peak later this year. This means, equity gains in sectors that are interest rate sensitive, could turn to losses; given the Fed and RBA could rise rates more than expected. Thirdly; consider, although the US 10 year government bond yield is shy of 3%, that’s a better yields than the US equity market. Meanwhile, the 10 year Australian Bond yield is at a 8 -year higher, offering 3.5%. That’s a better yield than tech stocks, and than Telstra (TLS) and ResMed’s (RMD) combined (which many Aussie investors hold. And the fourth consideration; is that most companies (excluding energy companies) are guiding for an earnings slowdown in 2022. We expect this to continue. Equity side; 20% of the S&P500 companies reported so far, with average earnings growth declining 6%, and Stand outs with most earnings growth - industrials – 152% earnings growth and energy sector with 40% earnings growth. And also consumer discretionary earnings are up 47%.
How have Saxo clients been positioning this in stocks and CFDs?
Across the APAC region, most Saxo clients were net buyers of stocks, with rally in stocks that’s been supported by US bond yields falling off their highs and for inflationary pressures (oil) falling. Tesla (TSLA) has seen the most trades at Saxo APAC. Tesla (TSLA) produced 259K EVs (down 15%qoq and up 25% yoy) in Q2 2022 and reported revenue of $16.9 billion (down 10% qoq and up 42% yoy), which was 2% above market expectations. Tesla shares are 31% up off their lows, in a technical uptrend. But until commodity costs come down further and revenue rises, we remain cautious of a long term strong rebound. The most bought EV company however across APAC this week was Ford (F). Separately, we also saw an increase in buying in Apple (Apple), ahead of the giant reporting quarterly results next week. Not only could Apple be a winner if the in Chips Act is approved and made into law by August 8. But it’s new subscription services, means revenue can grow quicker; allowing it to take market share from retailers and telcos who sell Apple devices.
Potential trading and investing ideas to consider?
Oil and tech earnings in the week ahead
With oil prices staying higher in the second quarter, earnings for oil majors. including Shell, Exxon Mobil, TotalEnergies and Chevron, remain on watch for next week. Shell already flagged last week a potential $1 billion gain from soaring margins at the unit that processes crude into fuels and chemicals. TotalEnergies has also said recently that its refining business had an “exceptional” performance in the period. More importantly, forward guidance will be key as oil prices gains have stalled for now and some governments are demanding increased taxes on energy companies. Tech earnings will also accelerate into the next week, and we will possibly hear more of cuts in spending and hiring plans.
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