Market Insights Today: BOE warns investors, USDJPY blows past 146 – October 12, 2022
APAC Strategy Team
Summary: Bank of England’s warning to end intervention sent an offered tone to bonds and equities towards the overnight session close, and added to the tightening risks that are being seen globally. Fed’s Mester reiterated hawkish comments as well, sending yields and dollar higher at the Asia open. USDJPY blew past 146, raising intervention threat again although yen crosses remain lower. Crude oil prices also plunged amid dollar strength and China lockdown concerns. Sterling and other UK assets look poised for a tough day ahead, and FOMC minutes are also due, which might mean ripples across global markets.
What’s happening in markets?
The Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) indices declined for the 5th day
US stocks erased earlier gains as bond yield rose and incoming Q3 earnings and the CPI on Thursday added to the risk-off sentiment. The S&P500 skidded for the 5th day on further tech selling, ending 0.65% down, while the Nasdaq 100 index fell 1.2%. As for the biggest laggards in the S&P 500 sectors, for the second day in row, both the Casino and Gaming and Semiconductor sectors were among the biggest losers down ~4.7% and ~4.3% respectively, gaining downside momentum. Meanwhile, investors continued to top up defensive sectors, buying into the Food Retail and Drugs sectors for the second day in a typical risk-off fashion.
Noteworthy US company news and moves
General Motors (GM) plans to compete with Tesla’s (TSLA) solar Powerwall business by offering its own sun-generated storage system starting late next year. Tesla shares fell 2.9%, while GM closed almost unchanged. Also making headlines, Uber (UBER) and Lyft (LYFT) plunged 10% and 12% respectively after the US Department of Labor proposed to tweak the way it determines if workers are classified as employees or contractors. Amgen (AMGN:xnas) rose 5.7% after an analyst upgrade citing the potential of its experimental weight-loss drug. Chip maker, KLA (KLAC: xnas) plunged 6.2% after saying the company will stop sales to China-based customers form Wednesday, including South Korea’s SK Hynix’s operations in China.
U.S. treasury yields (TLT:xnas, IEF:xnas, SHY:xnas) finished a choppy session with long-end yields higher
After reaching 4% during Asian hours, the 10-year yields retraced to as low as 3.87% at around mid-day New York before bouncing back to finish the day 7bps higher at 3.95%. The move higher in yields in the afternoon was first triggered by the Bank of England Governor Baily pushing back on calls to extend the emergency bond-buying programme and repeated the BoE’s prior day announcement to stick to the Oct 14 end day of the programme. He told the audience at the Institute of International Finance annual meeting in Washington that he had warned U.K. pension funds that only three were left to wind up positions. In addition, poor 3-year U.S. treasury note auction results in the afternoon caused some traders to adjust their positions ahead of the 10-year and 30-year auctions on Wednesday and Thursday. 2-year yields finished the day unchanged at 4.31% and the 2-10 year curve bear steepened to -36.
Hong Kong’s Hang Seng (HSIU2) retreated as China’s CSI300 (03188:xhkg) stabilized
Stocks traded in Shanghai and Shenzhen bourses stabilized and traded little changed from yesterday’s closes, with power generation and lithium producers gaining. CATL rose 6% and led the share prices of the lithium space higher after the company preannounced Q3 net income surging 169-200% Y/Y to RMB8.8-9.8 billion. Eve Energy (300014:xsec) gained 6.2% and Guangzhou Tinci Materials (002709:xsec) soared 10% limit up. China National Nuclear Power (601985:xssc) surged 7.3% after the company reported a 7.2% Y/Y electricity output growth in the first 9 months of the year. On the other hand, Hong Kong’s Hang Seng Index continued to slide, falling 2.2% with financials, China Internet names, EV makers, and China property developers dragging down the benchmark. The tightening of pandemic control in large cities including Shanghai and the editorials on the mouthpiece People’s Daily reiterating the country’s adherence to the Dynamic-Covid-Zero policy two days in a row dashed the notion of reopening held by some analysts and investors. Airline stocks dropped from 1.4% to 9.1%. Macao casino stocks plunged from 3% to over 5%. Reportedly short selling increased in China Internet names, with Alibaba (09988:xhkg), Tencent (00700:xhkg), JD.COM (09618:xhkg), Meituan (03690:xhkg), Bilibili (09626:xhkg) declining from 3% to more than 9%. Chinese developers, Country Garden (02007:xhkg ) and Longfor (00960:xhkg) were the two largest losers in the Hang Seng Index.
Australia’s ASX200 (ASXSP200.1) is tipped to fall 0.3% (futures). Focus on Bank of Queensland results, fertilizer companies and oil
So far this week, the ASX200 has fallen 1.7% outperforming global markets, with the most selling in the Tech Sector, while the most gains have been in Consumer Staples, Materials and Industrials, with fertilizer and agricultural stocks rising the most on supply concerns. The Bank of Queensland (BOQ) reported a 5% drop its cash profit for the full year, while the closely watched metric of banking profits, its net interest margin reduced to 1.74% with the bank blaming increased competition on its margin falling. Loan growth in housing rose 7%. The group also declared an impairment of $13 million. That being said, the BOQ and other regional banks are seeing more loan growth when compared to the big four banks year on year. Elsewhere, it’s worth watching oil stocks today after the oil price fell back to $88 after the USD roared up again. Also keep an eye on gold stocks that are likely to come under further selling. While iron ore companies could be worth a look after a strike in Africa hit the countries top iron ore port.
Yen past the previous intervention level, GBPUSD dropped below 1.10
USDJPY was seen rising above 146 in early Asian trading hours after the US yields surged higher overnight after BOE’s Governor Bailey warned on end to intervention (read below). The gilt market was closed by the time his comments came, but the US treasuries reacted to it and so the response from the yen could be expected. The Japanese yen has been trapped below this intervention threat level for weeks, but the pressure to the upside will continue to soar amid fresh surge in dollar and yields as dollar’s safe haven bid continues to play. Other yen crosses, however, remain below at sub-142 levels vs. 144 at the time of September intervention and AUDJPY below 92 vs. 97-levels previously. Response on Bailey’s comments was also seen in the sterling which dropped below 1.10 for the first time in October.
Crude oil (CLX2 & LCOZ2) down about 3%
Oil prices slumped on Tuesday amid further gains in the US dollar towards the NY session close and reports on China’s fresh lockdowns ahead of its key Communist Party meeting that begins later this week. WTI futures slid below $90/barrel, while Brent was below $94 after touching $98+ levels on Monday. Geopolitical tensions however appear to be escalating, with Putin warning further missile attacks on Ukraine. Meanwhile, US-Saudi tensions also remain key to monitor after the OPEC+ production cut announced last week.
What to consider?
Bank of England’s Bailey warns intervention to end on Friday
Bank of England Governor Bailey gave a “three day” deadline to investors to wind up their positions that they can’t maintain because the central bank will halt its intervention at the end of this week as planned. There had been some expectations that the BoE might extend the purchases to quell financial instability in the UK, but Bailey did not give way on those. This also comes as a hint that QT may begin later this month as planned. There is hardly any silver lining visible for UK assets at this point.
Fed’s Mester stays hawkish, FOMC minutes ahead
Cleveland President Loretta Mester (2022 voter) reiterated the hawkish rhetoric saying that the Fed has yet to make any progress on lowering inflation and policy needs to be moved to restrictive levels and the biggest policy risk is that the Fed does not hike enough. She does not expect Fed rate cuts in 2023. As we have been saying, she also remarked that “at this point the larger risks come from tightening too little.” FOMC meeting minutes from the September 21 meeting will be released today and will likely continue to send out hawkish signals.
China’s outstanding RMB loans grew at 11.2% Y/Y in September, above expectations
China released its September credit data last evening. New aggregate financing in September came in at RMB3,530 billion, much stronger than the RMB2,750 billion expected (Bloomberg Survey) and RMB2,430 billion in August as well as the RMB2,903 billion in September 2021. It brought the growth rate of the aggregate financing to 10.6% Y/Y, higher than the 10.5% in August. New RMB loans rose to RMB2,470 billion, above RMB1,800 billion expected and RMB1,250 billion in August. An acceleration in loans to the corporate sector, which rose to RMB1,910 billion in September from RMB875 billion, drove the overall loan growth. Outstanding RMB loans in September grew 11.2% from a year ago. The instructions as well as window guidance from the regulators to urge banks to lend to infrastructure projects, manufacturing industries, and the property sector contributed to the better-than-expected growth in corporate loans.
IMF’s warning on global growth
After recession threats from Jamie Dimon and Paul Tudor Jones, now the IMF has said there is a growing risk that the global economy will slide into recession next year as households and businesses in most countries face “stormy waters” and the “worst is yet to come”. The institute has said that global growth will slow from 6.0% in 2021 to 2.7% in 2023, being the weakest growth since 2001. The IMF also warned of an increased risk of rapid, disorderly repricing in financial markets, which is exacerbated by existing vulnerabilities and a lack of liquidity.
China signaling it will stick with the Dynamic Covid Zero policy after the CCP’s national congress
People’s Daily published for the third day in a row this week to reiterate the Chinese authorities’ determination to adhere to the “Dynamic Covid Zero” policy and pledge not to “lie down” passively. It warns that any relaxation of pandemic control would result in a large number of inflection and death and a collapse in the healthcare system so the insistence on Dynamic Covid Zero is the best way to protect people’s lives and health which are of utmost importance. The series of articles is apparently to dash the speculation of relaxation of pandemic control after the Chinese Communist Party’s national congress next week. In the meantime, as Covid cases bounced above 2,000 after the National Day golden week holiday during which many people travelled around the country. Large cities, including Shanghai and Shenzhen tightened pandemic control measures somewhat.
Fertilizer supply at risk amid fresh Russian tensions and Hurricane Ian aftermath
Amid fresh tension from Russian upon Ukraine, fertilizer producers have once again been put in the spotlight on supply concerns. Equities in APAC involved in phosphate/fertilizers rallied yesterday as a result. So perhaps it’s worth watching stocks in the sector again today, such as Nufarm (NUF), and Orica (ORI) which are this weeks best performers on the ASX. The phosphate fertilizer mining industry’s supply has already been put at risk after Hurricane Ian hit Florida, impacting more than 1 billion ‘stacks’ of supply. And recall that Russia is the world’s largest supplier of nitrogen-based fertilizers, but its supply has slimmed from embargoes after launching attacks against Ukraine. Perhaps the market is thinking more development are to come, so it's worth watching to see how this space develops.
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