Summary: US inflation reaffirmed the disinflation theme, leaving little scope for markets to expect another Fed rate hike. Equities rallied at the open but most of the gains were reversed later, while Treasuries sold off amid a poor 30-year auction. Disney rallied and Alibaba also delivered an earnings beat. USDJPY approaching 145 again while GBP traders may be focused on UK GDP release scheduled for today.
US equity markets rallied at the open after a largely in-line CPI report but failed to sustain the gains and ended the session little changed. The S&P 500 Index settled at 4,468, flat to the prior day's close while the Nasdaq 100 Index edged up 0.2% to 15,128. Hawkish-leaning comments from Fed officials and a rise in Treasury yields weighed on the market sentiment. Disney (DIS:xnys) stood out as the best-performing stock within the S&P 500, rising 4.9% as investors welcome the entertainment giant’s plan to raise subscription prices.
Treasuries pared all the brief post-CPI gains approaching the 30-year bond auction deadline and then sold off after the bonds were awarded at 4.189% which was 1.4bps cheaper than the market level at the time of the auction deadline. The 30-year bond yield ended the session 8bps higher at 4.25%. The 10-year yield surged 10bps to 4.11% while the 2-year yield edged up 3bps to 4.84%.
Hong Kong and mainland stock markets rebounded from early losses, showing resilience as investors shrugged off the Biden administration's anticipated executive order aimed at restricting US investments in China. The narrower-than-expected scope of the restrictions matched pre-announcement predictions, leading to muted market impact. The Hang Seng Index ended the session nearly unchanged, with gains in telecommunication and financial stocks counterbalanced by weakness in industrial and property sectors.
Notably, airline stocks demonstrated robust gains following China's decision to lift tourist group travel restrictions for approximately 80 countries, in addition to the 70 countries earlier this year. Air China (00753:xhkg), China Southern Airlines (1055:xhkg), and Cathay Pacific (00293:xhkg) each surged around 3%. Cathay Pacific, which had reported a 13-year high profit for H1 the day prior, received additional support from its strong financial performance. Conversely, Techtronic (00669:xhkg) experienced a sharp decline of 17% after reporting a profit and margin reduction in H1, coupled with a more cautious revenue outlook.
In the A-share market, coal miners, oil and gas companies, securities brokerages, and airline stocks outperformed notably. However, industries such as home appliances, automotive, and food and beverage lagged in performance. The CSI300 managed a modest uptick of 0.2%.
Higher bond yields after a poor 30-year Treasury auction underpinned weakness in the Japanese yen. USDJPY rose to fresh highs of 144.89, with resistance at 145 and June high of 145.07 approaching. Intervention fears may prompt some profit taking here, but the Japanese authorities may continue to be patient. NZD weakness also extending and NZDUSD may target 0.60 handle. AUDUSD dipped to lows of 0.6510 in Asian morning hours as RBA Lowe delivered testimony and tried to keep the door open for further tightening but was comfortable with the path of inflation. GBPUSD broke below 1.27 and may target early August lows of 1.2621 with Q2 GDP data eyed today.
Natural gas prices eased on Thursday with Dutch TTF back below EUR 38 as fears of LNG strikes in Australia cooled. US natural gas reversed from the $3 mark back to $2.75 as EIA reported an increase of 29bn cubic feet in weekly natural gas storage.
Crude oil prices dipped over 1% on Thursday despite US inflation data reaffirming the disinflation trend without spelling recession fears clearly. This suggests focus is still on supply side, but technical levels may have prompted some profit-taking. OPEC data suggests the market is heading for a 2mb/d deficit in the second half of the year, and may prompt further gains. But so far fund flows suggest short covering, and limited fresh longs suggesting the rally may remain capped.
Even as softer inflation prompted gains in Gold just after the release, these were reversed amid a rise in yields and gains in equity markets. Gold slipped to over 1-month lows at $1910.94 and key support ahead at $1900 where the June low and the 200-day moving average meet.
US inflation for July came in softer-than-expected as headline rose by 3.2% YoY (exp. 3.3%), slightly above last month’s 3.0% YoY as base effects turned unfavourable. Headline MoM saw a steady gain of 0.2%. Core metrics were as expected as they came in at 4.7% YoY and 0.2% MoM. While the release continued to provide little reason for markets to start expecting another Fed rate hike in September, it was worth noting that shelter costs still contributed to 90% of the increase in July. The disinflation theme mostly rests on the assumption that shelter costs will come down amid the lagged effect of housing, while other components stay low. Rising oil prices may make the August print look uglier, and that is released just ahead of the Fed’s September meeting. However, if credit conditions tighten further in H2, then the disinflationary impulse will likely continue.
Capri (CPRI:xnys), a counter in Saxo’s luxury goods theme basket, soared 56% on Thursday after Tapestry (TPR:xnys), the owner of Coach and Kate Spade, agreed to pay USD8.5 billion to acquire Capri, the parent of Versace, Michael Kors, and Jimmy Choo brands. The share price of Tapestry tumbled 15.9%.
Alibaba’s ADR (BABA:xnas) surged 4.6% (+2.8% from the closing level in Hong Kong on Thursday) after the company released robust financial results for Q1 FY24. The company's total revenue rose 14% Y/Y rise, reaching RMB 234.2 billion and significantly surpassing the market consensus forecast of RMB 223.8 billion. The e-commerce giant’s adjusted EBITDA grew 32% Y/Y, to RMB 45.4 billion, exceeding the consensus estimate of RMB 39.6 billion by 15%. Adjusted net profit soared 48% Y/Y to RMB 44.7 billion, 16% ahead of the consensus forecast of RMB 38.4 billion. Noteworthy margin improvements were evident as well, with the adjusted EBITDA margin rising to 19% from the previous quarter's 12%, while the adjusted net profit margin increased to 19% from 13%.
The growth of Taobao-Tmall's Customer Management Revenue (CMR) outperformed expectations, registering a 10% increase. This result was attributed to merchants' heightened willingness to invest in advertising. Meanwhile, Taobao and Tmall's EBITDA increased by 9% Y/Y, reaching RMB 49.3 billion. Cloud revenue demonstrated a positive upswing, marking a 4% Y/Y growth.
Additionally, in Q1 FY24, Alibaba spent USD 3.1 billion in share repurchases, which exceeded the preceding quarter's amount by over 50%. This development has heightened investor expectations of an enhancement in the company's share buyback plan.
Initial jobless claims rose to 248k from 227k, above the expected 230k while continued claims dipped to 1.684mln (prev. 1.7mln) underneath consensus of 1.707mln. The increase however remains modest compared to the pace of tightening we have seen, and risks remain tilted towards further loosening of the labor market if credit conditions deteriorate.
China's securities regulator reportedly will convene discussions with property developers and banks today due to heightened concern about the deterioration of developers’ liquidity or even solvency. Notably, Country Garden has not been included in the list of those invited.
China's Ministry of Culture and Tourism has revealed the lifting of pandemic-related restrictions on group tours for about 80 countries, encompassing the US, UK, Germany, Japan, South Korea, and Australia, in addition to the 60 countries announced in February this year. This move is poised to bolster tourism revenue in these nations while also boosting sales within the luxury goods sector.
Economists surveyed anticipate a deceleration in July's new RMB loans to around RMB 780 billion. This follows a robust surge to RMB 3,050 billion in June but remains higher than the RMB 679 billion recorded in July 2022. Despite regulatory encouragement for increased lending by banks, subdued loan demand is expected due to a gradual economic rebound and challenges in the property sector. Aggregate financing is projected to moderate to approximately RMB 1,100 billion in July from June's RMB 4,220 billion, partially attributed to seasonal factors.
Singapore’s Q2 GDP growth was slashed in the final estimate to 0.1% QoQ and 0.5% YoY, vs. the initial estimate of 0.3% QoQ / 0.7% YoY. Growth forecast for 2023 was also trimmed to a range of 0.5-1.5% from 1.5-2.5% range earlier amid expectations for demand from key external economies to remain weak ahead.
UK’s second quarter GDP is due to be released on Friday and consensus expectations point to a further economic slowdown after Q1 GDP remained marginally in expansion with growth of 0.1% QoQ. While retail sales and a recovery in construction boosted growth in Q2, the decline in manufacturing and the weakening momentum in services provided an offset. Some drag is also likely from strikes and an extra bank holiday in May. Concerns of the UK economy dipping into a recession will likely continue to gain traction as higher interest rates filter through the economy, and inflation in the UK still remains one of the highest in the G7 countries, suggesting the Bank of England will have to bring the economy to a recession to get a lid on price pressures.
Saxo's Chief Investment Officer, Steen Jakobsen, has introduced the concept of stagflation light . This term suggests an upcoming economic phase featuring higher inflation than predicted by swaps, coupled with increased unemployment and reduced real GDP growth. While early, our conviction is based on the belief that green transformation policies, fragmented supply chains, and dwindling cheap labor will drive inflation, while MMT-style policies may hinder GDP growth due to escalating debt. Listen to this podcast for a detailed explanation from Steen Jakobsen.
Although historical data remains limited, a discernible pattern has emerged, indicating that defensive sectors such as healthcare, consumer staples, utilities, and energy tend to outperform other sectors during periods of stagflation. For a more in-depth exploration of equity performance amidst stagflation, we encourage you to delve into an article by Peter Garnry, Saxo's Head of Equity Strategy.
For a detailed look at what to watch in markets this week – read our Saxo Spotlight.
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Chief Investment Strategist
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Chief Investment Strategist
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Chief Investment Strategist
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Chief Investment Strategist
Quarterly Outlook
Head of Fixed Income Strategy
Quarterly Outlook
Head of Commodity Strategy