What’s happening in markets?
US equities (US500.I and USNAS100.I): soft retailer results weighed on the market
Weak earnings from US retailers stirred up concerns about the strength of the US consumer and weighed on market sentiment in an otherwise quiet session ahead of Nvidia’s (NVDA:xnas) earnings scheduled to report today. Macy’s (M:xnys) tumbled 14.1% as the retailer’s same-store sales and credit card revenues fell sharply in Q2. Dick’s Sporting Goods (DKS:xnys) plummeted 24.2% after the retailer missed in earnings and cut guidance. On the macro data front, existing home sales contracted by -2.2% M/M, weaker than expected. The S&P 500, after opening higher, slid to end the day 0.3% lower at 4,387. The Nasdaq 100 shed 0.2% to 14,908. After the surge on Monday, Nvidia declined by 2.8%.
Treasuries (TLT:xnas, IEF:xnas, SHY:xnas): 10-year notes found bids near 16-year highs
The long end of the Treasury curve found some supports near their 16-year highs in yield. The 10-year yield and the 30-year yield ended the quiet session 1bp and 5bp richer to 4.32% and 4.40% respectively. The front end traded weaker (higher in yields) amid block selling in the 2-year T-note futures (ZTU3) and 5-30-year flattening trades that involve selling the 5-year T-note futures (ZFU3) versus buying the ultra T-bond futures (UBU3). The 2-year yield rose 5bps, bringing the 2-10-year curve 6bp flatter to 72bps.
Hong Kong & Chinese equities (HK50.I & 02846:xhkg): Hang Seng Index supported by a rebound in materials and communication
The Hang Seng Index managed to rally after sliding lower seven days in a row. The Hang Seng Index gained 1% while the Hang Seng Tech Index rose by 2%. Materials, telecommunication, and EV stocks notably outperformed while the benchmark index was modestly higher from yesterday’s close. Zijin Minding (02899:xhkg) and China Gold (02099:xhkg) surged more than 4% while China Nonferrous Mining (01528:xhkg) and Aluminum Corp of China 02600) added more than 3%. China Unicom (00762:xhkg) and China Telecom 0728:xhkg) gained over 2%. In the EV space, BYD (00285:xhkg) surged 6.6% while Xpeng (09868:xhkg) climbed 5%.
In the A-share market, CSI300 gained 0.8%, driven by strength in telecommunication, media, computing, and electronics. Northbound flows registered net selling of RMB6.4 billion, a 12-day streak of selling of A shares by overseas investors.
FX: EUR slumps ahead of PMIs and Jackson Hole
The US dollar was firmer on Tuesday as 2-year Treasury yields climbed further higher, and EURUSD was the G10 underperformer as focus turned to August flash PMIs due to be reported today ahead the Jackson Hole symposium. EURUSD slipped to lows of 1.0833 and EURGBP is now getting in close sight of 0.85 despite GBPUSD returning from 1.28 barrier to 1.2730-levels. Yen stays weak with USDJPY just below 146 despite higher Japanese yields. The yuan is being supported by measures from Chinese authorities and slid to lows of 7.27 from 7.33+, however its back at 7.30+.
Crude oil: demand concerns continue to weigh
Crude oil prices slumped further on Tuesday with WTI back below $80 in the Asian morning and Brent below $84. With concerns around supply tightness easing, focus stays on the demand outlook and with lack of any real support measures from China, demand outlook remains weak. Private inventories saw crude stockpiles down 2.4mn barrels last week which suggests demand is still holding up in the US, but official EIA data today will be in focus. Comments out of Jackson Hole will also be key for oil markets.
European gas: holding up above €40
European Dutch gas remained above EUR40 on continued concerns strike action at key export plants in Australia could disrupt LNG flows. However, with EU stocks storage facilities already 91.3% and demand some 15% below the seasonal average, the risk of tank-tops within weeks may send prices lower as demand for LNG drops ahead of the winter high demand season which is not expected to kick off before early November.
Gold: in focus for Jackson Hole
Surging yields and a stronger dollar continue to weigh on the shine of the yellow metal, and Powell’s comments from Jackson Hole could be key for Gold. Gold however rose back to $1900 in the Asian morning hours with some softening in 10-year Treasury yields overnight and discussions around a common currency at the BRICS summit. If Powell highlights concerns about the banking sector or economic momentum at the symposium, Gold could be one of the key beneficiaries.
What to consider?
S&P downgrades some US regional banks
Ratings agency S&P Global followed Moody's in cutting its credit ratings on some regional lenders with high commercial real estate (CRE) exposure. Ratings for Associated Banc-Corp and Valley National Bancorp were cut on funding risks and higher reliance on brokered deposits, UMB Financial and Comerica Bank on deposit outflows and higher interest rates as well as KeyCorp on the back of constrained profitability. These rising risks for the banking sector could tighten lending standards further weigh on labor markets and consumption spending. Our ‘Stagflation Light’ call for the US is based on these concerns.
Baidu's 2Q23 adverting revenue beats, cloud revenue slows
Baidu's (09888:xhkg) reported a 14.9% Y/Y increase in revenue to RMB34.06 billion in Q2, 2.3% above the consensus estimate of RMB33.29 billion. Adjusted net income grew 44% Y/Y to RMB8 billion in Q2, surpassing the consensus forecast of RMB5.8 billion by 38%. Net profit margin expanded by 5ppt to 23.5% in Q2 from 18.4% in Q1 and was 6ppt better than expected. Excluding iQIYI, Baidu’s core revenue increased 14% Y/Y to RMB26.4 billion, beating consensus by 3%. Core operating margin expanded by 1.4ppt to 25% in Q2 sequentially, 2ppt higher than the consensus estimate.
The growth in its core adverting revenue came in at 15% Y/Y in Q2, a notable improvement from the 6% in Q1. The management is confident that advertising revenue will grow faster 5% Y/Y in H1 versus a consensus forecast of 6%. Its cloud revenue slowed to 5% Y/Y in Q2 from 8% in Q1, due to weaker-than-expected smart transportation revenue from government clients. However, the company expects its cloud revenue to grow faster in Q3 and Q4.
Regarding AI, Baidu is waiting for government approval to expand the user base of its Ernie Bot. The management indicated that once the approval has come, Baidu will apply Ernie Bot to its online marketing service to grow advertising revenue and sell the AI service to enterprises through its cloud service segment.
Baidu’s ADR gained 2.8% last night in New York, around 2.2% higher than its closing level in Hong Kong yesterday.
Nvidia reports today: a crucial juncture for AI stocks amidst soaring demand
The report of Nvidia’s results after the close of the US market today is poised to serve as a pivotal moment for the markets, particularly for the cluster of AI-related stocks that have experienced substantial gains throughout this year. Analysts are anticipating revenue to reach $11 billion, marking a remarkable 65% year-over-year increase. Additionally, the projected EBITDA stands at $6.3 billion, a significant jump from the $924 million reported a year ago. This surge in financial performance can be attributed to the skyrocketing demand for AI research and implementation, which has surged following the successful launch of OpenAI's ChatGPT.
It is worth noting that the driving force behind this demand surge appears to be primarily Chinese technology companies. This trend has gained prominence due to China's recognition of its lag in the AI sector. Fearing potential future export restrictions imposed by the Biden administration, Chinese tech firms are currently amassing modified GPUs from Nvidia. This proactive measure is an attempt to secure a stable supply of crucial components for their AI endeavors.
As the earnings report approaches, the central question revolves around whether Nvidia can sustain its fiscal year outlook. This pivotal moment will unveil whether the initial rush of demand remains consistent or if there are signs of cooling. The market will be closely observing these results to gauge the trajectory of AI-related sectors and the extent of Nvidia's influence within this evolving landscape.
BRICS Summit touches upon expansion, de-dollarization
The meetings between leaders of Brazil, Russia, India, China and South Africa kicked off yesterday with focus on expansion of the bloc and de-dollarization. The leaders of South Africa and China said they had found common ground on expanding the Brics emerging market bloc to strengthen strategic co-operation. However, the idea wasn’t openly accepted by leaders of Brazil and India as it risks diluting their influence in the bloc and embellishing China’s claim to lead the developing world. Putin addressed the summit by video link on Tuesday, saying that de-dollarisation was an “irreversible process”, but a common currency still remains far-fetched, but members may discuss an initiative by the Brics countries to use their local currencies in trade between themselves rather than invoicing in the US dollar.
The US lifted restrictions on 27 Chinese companies and organizations, a sign Washington is extending an apparent olive branch ahead of Commerce Secretary Gina Raimondo’s planned trip to Beijing this month. The US Department of Commerce on Monday removed the Chinese entities — such as chemical firm and lithium battery material maker Guangdong Guanghua Sci-Tech Co., and sensor maker NanJing GOVA Technology Co. — from its “unverified list,” which restricts a company’s ability to buy American technology.
Could Eurozone PMIs bring in further pressure for EUR?
EURUSD has dropped below 1.09, having closed lower for five weeks in a row. EURGBP has also drifted below 0.86 to come back to over one-month lows. Flash August PMIs for the Eurozone will be out today and provide further input on how activity levels are developing amid concerns of increasingly tighter bank lending standards. Manufacturing PMI for EZ fell to 42.7 in July with Germany concerns underpinning, while services PMI also slowed to 50.9 and risks slipping into contraction. Further weakness will keep ECB’s September rate hike in question. UK’s flash PMIs are also due on the same day and stronger figures may be needed for the Bank of England to hike rates by 50bps at the September meeting.
Vietnam’s VinFast sees more wild gains
Vietnamese EV maker VinFast that debuted on the US stock exchange on August 15 after merging with a blank-check company saw another sharp rise yesterday to double and add $44bn in market value. The stock is now up 250% since the listing making it extremely volatile amid a low float. But the listing and its takeup may open doors for more Vietnamese firms to consider international listings.
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