Global Market Quick Take: Asia – July 20, 2023

What’s happening in markets?

US equities (US500.I and USNAS100.I): banks rally on regional bank results; Netflix plunges on downbeat sales guidance

Key benchmark indices pared initial gains and finished mixed, with the S&P500 gaining 0.2% while the Nasdaq 100 ticked down by 0.1%. Real estate, utilities, and consumer staples were the top winning sectors among the S&P500. Banks extended their rally after U.S. Bancorp (USB:xnys), M&T Bank (MTB:xnys), Citizens Financial (CFG:xnys), and Northern Trust (NTRS:xnys) reported largely in line to better than expected pre-provision net revenues and stabilization in deposits. Northern Trust jumped 13.4% while US Bancorp and Citizens surged over 6%. The SPDR S&P Regional Banking ETF (KRE:arcx) extended its recent rally to gain 3.1%%.

Movements in megacap tech stocks were muted in the regular section pending for earnings to be released post-close. In the extended-hours trading, Netflix (NFLX:xnas) tumbled around 8% after Q3 sales guidance missing estimates. Tesla (TSLA:xnas) shed around 4% on lower margins. IBM (IBM:xnys) slid 1% after reporting Q2 revenues below estimates.

Treasuries (TLT:xnas, IEF:xnas, SHY:xnas): the long end gains amid economic data and auction results

US Treasuries gained after a choppy session. The market rallied, and yields fell initially following the rally in UK Gilts after UK inflation slowed more than expected. The softer-than-projected US housing starts and permits data helped extend the rally. Yields started to climb and pair early market gains after the announcement of several large corporate bond insurance. A strong 20-year auction, however, triggered a recovery in the long end of the curve. The 2-year yield finished unchanged while the 10-year yield dropped by 4bps to 3.75%. The 2-10 yield curve flattened by 4bps to -101.

Hong Kong & Chinese equities (HK50.I & 02846:xhkg): ): China property stocks rebound

The Hang Seng Index extended losses, falling over 1% at one point, but it managed to recover most of the losses and finished 0.3% lower. The turnover reached HKD112 billion, the highest level in a month, and net buying from the Southbound flows reached HK16.5 billion, the highest level since early 2021. China property stocks rebounded rebound after several days of losses following a broker report that warned about the risk of a short squeeze in the battered sector. Longfor (00960:xhkg), Country Garden Services (06098:xhkg), Country Garden (02007:xhkg), and China Vanke (02202:xhkg) bounced back more than 2%. This was in contrast to the poor sentiment and selloff in developers’ USD bonds as Greenland defaulted and Shui On Development reportedly might be seeking an extension of its bonds.

Among China Internet stocks, Kuaishou (01024:xhkg) and Alibaba (09988:xhkg) stood out with gains of 1.2% and 0.7% respectively while most others registered moderate losses. Sportswear names traded lower, driven by Anta’s (02020:xhkg) 1.8% decline as Q2 sales growth disappointed. OOIL (00316:xhkg) advanced 5.1% as Asia-Europe container freight rates climbed.

In the A-share market, the CSI300 ticked down by 0.1%, with gains in property, construction materials, media, and industrials offset by telecommunication, electric equipment, electronics, and defense weaknesses.

FX: GBP slumps supported the US dollar

The US dollar found renewed support and was pushed higher due to the slump in sterling following softening UK inflation report. GBPUSD took a look below 1.29 from 1.3050-levels before a slight recovery subsequently. EURGBP jumped sharply higher to test 100dma at 0.87 from 0.862 before settling at 0.866 later. EUR dipped below 1.12 with more ECB commentary turning cautious. Stournaras warned that more tightening could hurt the economy and just one more 25bps hike would be enough, Simkus called on the need for a July hike with debate still over September, while Nagel warned about pulling back from tightening too quickly. USDJPY tested 140 ahead of CPI due tomorrow. AUDUSD paring some of the overnight loss to rise back above 0.6780 as AU employment data is awaited.

Crude Oil: reversed from highs on strong USD

Crude oil prices reached fresh highs yesterday after cooling UK CPI pressured yields, relieving some of the inflation and demand concerns. Supply tightness concerns also underpinned with reports suggesting that Russian oil exports for July have been set at 370k BPD below the quarterly plan initially set out. But gains in crude oil were reversed later as USD strength weighed, and EIA inventory report had little impact. EIA data showed US stockpiles of crude oil fell 708kbbls last week, less than expected. China LPR decision to guide oil traders in the Asian session today.

Wheat: heating geopolitical climate

Wheat futures jumped Wednesday by 8.5% after Russia's defense ministry released a memo on Telegram indicating all vessels sailing to Ukraine ports in the waters of the Black Sea will be "regarded as potential carriers of military cargo" beginning on Thursday. Reports also suggested intense drone and missile attacks from Russia on Ukraine’s critical port infrastructure including grain and oil terminals. This adds to concern after the Black Sea deal was terminated earlier this week.

What to consider?

UK June core CPI falls unexpectedly

After the prior two months saw UK core CPI spiking to new multi-decade highs, the June data finally showed some relief, as the core reading dropped to 6.9% vs. 7.1% expected and 7.1% in May, with the headline also lower than expected at +0.1% M/M and 7.9% Y/Y vs. 0.4%/8.1% exp. and 8.7% Y/Y previous. Gilts jumped while sterling tumbled on the news as odds of a 50bps rate hike in August decreased and terminal rate expectations were lowered to 5.8% from over 6% earlier.

Apple finally jumps on to the AI bandwagon

Reports suggested that AppleGPT or Ajax may be the generative AI tool that Apple is working on. The company has been slow to get into the AI chatbot game after the success of OpenAI's ChatGPT. Details in the report were thin and no timeline for the launch was given.

Tesla earnings: Beat on top and bottom line, but margins and free cash flow disappoints

As expected, Tesla’s profit margin slipped in Q2 as price cuts weighed. However, the EV maker beat revenue and EPS forecasts, with Q2 revenue of $24.9bn (vs. $24.46bn expected) reaching a record high. Q2 adjusted EPS came in at 91c vs. 81c expected. Gross margin was however lower than expected at 18.2% (vs. 18.8% exp) and free cash flows also disappointed at $1.01bn (vs. $2.18bn exp). Tesla reaffirmed production guidance of 1.8mn units this year, but this was underwhelming as Musk earlier hinted that capacity is for 2mn units. The company said that Cybertruck remains on track to begin initial production later this year at Gigafactory Texas but delivery details lacked, and commitment to AI was reaffirmed with $1bn spending plan laid out for Tesla’s in-house supercomputer, Dojo. Results may prove to be underwhelming compared to expectations given the recent stock rally.

Netflix earnings: Blowout subscriber growth, but dismal revenues and guidance

Netflix earnings got a fillip from crackdown on password sharing which helped add 6mn subscribers, nearly three times what analysts had forecast. Revenue came in at $8.19bn, +2.7% YoY missing estimates of $8.3bn while EPS of $3.29 beat estimates for $2.85 and was above $3.20 a year ago. Guidance was also on the weak side, with the company predicting that revenue would climb to $8.5bn in the third quarter, missing analyst forecasts for $8.7bn. Stock had gained more than 8% in the five days leading up to the earnings release, and it dropped by more than 8% in post-market trading after earnings report.

BOJ policy expectations: Japan CPI on watch

The expectations of a July tweak in yield curve control from the Bank of Japan are rampant and June inflation due this Friday could be key. If there are signs that inflation is cooling, as was evident in the Tokyo CPI readings for June, that could further take the pressure off the BOJ. Nonetheless, BOJ remains adept at surprising the markets and will likely tweak its YCC policy when the market pressures are possibly not pressing its nerves in order to maintain credibility. Consensus expectations have marked headline CPI for June to remain unchanged at 3.2% YoY while the ex-fresh food measure is expected to be a notch higher at 3.3% YoY from 3.2% previously even as ex-fresh food and energy is seen lower at 4.2% YoY from 4.3% previously.

Greenland defaults; Shui On Development reportedly seeks extension

Chinese developer Greenland failed to repay USD22.5 million or 5% of the outstanding principal of a bond on June 25. Separately, Morrow Socali, the financial advisor also to China Evergrande, is contacting bondholders on behalf of Shui ON Development potentially seeking an extension of a bond due November this year.

China sent out another pledge to support the private sector

On Wednesday evening, the Communist Party of China leadership and the State Council jointly issued a statement to pledge support to private enterprises. The statement reaffirmed the conciliary stance adopted by the Chinese leadership toward the private sector since the Central Economic Work Conference last December.

For a detailed look at what to watch in markets this week – read our Saxo Spotlight.

For a global look at markets – tune into our Podcast.