Global Market Quick Take: Asia – July 26, 2023

What’s happening in markets?

US equities (US500.I and USNAS100.I): GE and 3M surge, RTX declines; Alphabet beats estimates, Microsoft faces Azure concerns

The S&P500 increased by 0.3% to reach 4,567, while the Nasdaq100 rose by 0.7% to 15,561. General Electric (GE:xnys) surged 6.2%, propelling it to a new 5-year high. This surge was fueled by their impressive Q2 results, which surpassed estimates, and an optimistic outlook for the future. 3M (MMM:xnys) also performed well, with a gain of 5.3%. The company exceeded expectations on margins and provided full-year guidance that topped analysts' forecasts. Conversely, Raytheon (RTX:xnys) faced a sharp decline of 10.2%. This decline was triggered by the company's decision to cut its free cash flow outlook, which was attributed to potential production flaws with its Pratt & Whitney jet engines.

After the market closed, Alphabet (GOOGL:xnas) surged over 6% as its Q4 FY23 revenue surpassed analyst estimates. On the other hand, Microsoft (MSFT:xnas) declined nearly 4%. Despite beating earnings expectations, the growth in the Azure cloud-services business disappointed investors.

Treasuries (TLT:xnas, IEF:xnas, SHY:xnas): Yields climb modestly on a rise in consumer confidence

Ahead of the FOMC, Treasuries slid as yields rose modestly by around 1bp across the yield curve, following the Conference Board consumer confidence jumping to a two-year high and the IMF’s upward revision of the US growth outlook. The 2-year yield closed at 4.88% while the 10-year yield was at 3.88%.

Hong Kong & Chinese equities (HK50.I & 02846:xhkg): Markets squeezed higher after Politburo meeting

The modestly dovish signals coming out of China’s Politburo meeting on Monday in particular about the property market triggered a short squeeze in China property stocks, seeing recent top losers Country Garden Services (06098:xhkg) and Longfor (00960:xhkg) each surge around 26%. Chinese banks jumped, led by a 10.6% advance of China Merchants Bank (03968:xhkg). Brokerage firms advanced, led by CICC (03908:xhkg) which gained 9.1%.

China Internet stocks also faced a short squeeze, with Baidu (09888:xhkg), JD.Com (09618:xhkg), Meituan (03690:xhkg), Bilibili (09626:xhkg) soaring around 8%-12%. EV makers Xpeng 09868:xhkg) and Nio (09866:xhkg) jumped 10%-12%. Southbound flows, however, registered a net sale of HKD6.1 billion.

In the A-share market, the CSI300 Index added 2.9%, led by real estate, financials, construction materials, home appliances, and autos. Northbound buying reached RMB19 billion, the highest since November last year.

FX: EUR weakness extends, AUD gains on China stimulus

The dollar traded nearly flat on Tuesday after some gains earlier on EUR weakness as German Ifo further escalated concerns on the state of the economy. EURUSD touched lows of 1.1021 before recovering back to 1.1050. Meanwhile, CNH and AUD gained on China stimulus announcements. USDCNH broke below 50DMA to dip below 7.14. AUDUSD jumped higher to test 0.68 as metals got a push higher on China stimulus hopes, but Q2 CPI will be a test today. Expectations are for inflation to soften to 5.4% YoY in Q2 from 5.6% previously with trimmed mean down to 6.0% YoY from 6.6% in Q1. GBPUSD also surged higher to 1.29 handle pushed higher by a slide in EURGBP to 0.8570 from 0.8640.

Crude Oil: caution ahead of the Fed decision

Crude oil prices closed higher again overnight, with sentiment still supported by China’s stimulus measure announcements. Meanwhile, supply tightness concerns also continue to underpin. Russia’s seaborne crude exports from Baltic and Black Sea ports fell to 1,17mb/d in the week to 23 July. This is its lowest level in seven months, as Moscow implements the recently announced production cuts. But oil prices seen trading slightly lower in Asian morning as caution sets in ahead of the FOMC meeting later today and fears that another rate hike may be signalled. WTI just below $80/barrel while Brent still above $83.

Metals: extending gains on China’s property sector boost

Copper and iron ore extended yesterday’s rally after China pledged support for its beleaguered property sector. Markets were buoyed by the fact that statement left out the slogan of “housing is for living, not for speculation”, a sign that they are considering further easing restrictions on the property sector. Copper rose to $3.90 and may be on the way to test a minor resistance at $3.95.

What to consider?

US consumer confidence beats estimates

The Conference Board Consumer Confidence data for July rose to 117 from 110.1 in June, upwardly revised from 109.7 and beating the consensus forecast of 112. The jump was broad-based with Present Situations index rising 160 from 155.3 and reaching its highest levels since early 2020. Expectations index also jumped materially to 88.3 from 80 (revised higher from 79.3) to reach early 2022 highs. Signs of tightness in the labour market reemerged, where the percentage of respondents who said jobs were hard to get fell back nearly to cycle lows, with the widely-followed differential (jobs plentiful minutes jobs hard to get) widening significantly in July from its post-COVID lows in June.

German Ifo adds fuel to Eurozone’s economic concerns

The German IFO survey for July was out yesterday showing a worse than expected drop in the Current Assessment part of the survey, which dropped to 91.3 from 93.7 in June (and versus 93.0 expected). The Expectations component was slightly better than expected at 83.5 vs. 83.4 expected, but still falling directionally from the upward revised 83.8 (from 83.6) in June. Meanwhile, the ECB’s quarterly bank lending survey showed a record drop in corporate loan demand (to lowest since 2003 start of the survey), with demand for mortgages and consumer credit also coming in lower.

Alphabet beat on better results from Google Search and YouTube

Alphabet reported Q2 revenue of USD74.6 billion, surpassing the consensus estimate of USD60.3 billion and rising 7% from the last year quarter. Revenue from the Google Search segment increased 5% Y/Y to USD42.6 billion. The revenue from Google Cloud surged 28% Y/Y to USD8.0 billion while revenue from YouTube increased 4% Y/Y to USD7.7 billion. The Network segment, however, saw a 5% Y/Y decline in revenue to USD7.9 billion. Both the Google Search and YouTube segments exceeded expectations, while the Cloud segment growth was in line and consistent with the momentum seen in Q1. Q2 GAAP EPS came in at USD1.44, 9% above the consensus of USD1.32.

Microsoft Q4 FY23 beat but growth in Azure cloud-services business slows

Microsoft reported Q4 FY 23 revenue of USD56.19 billion and GAAP EPS of USD2.69, beating the consensus estimates of USD55.5 billion and USD2.56 respectively. While the 27% Y/Y growth in its Azure cloud-services business was in line with previous management guidance, it decelerated from the 31% Y/Y growth in the previous quarter and disappointed investors. 

General Electric earnings and outlook beat due to recovery in renewable-energy and jet engines

General Electric’s adjusted EPS in Q2 came in at USD0.64, surpassing the consensus estimate of USD0.46. The company revised the full-year EPS guidance upward to USD2.10-2.30, from below USD2 and above the USD2.05 median forecast by analysts. The management attributes the improved performance to recovery in orders for renewable-energy equipment and jet engines.

European luxury brand LVMH reports US sales weakness

The European luxury brand company LVMH, reported Q2 2023 earnings with revenues of 21.21 billion Euros, surpassing the expected 20.6 billion Euros. However, sales in the U.S. fell by 1% in Q2 after +8% growth in the first quarter. The sentiment on US luxury consumer pulling back was also reported by other brands such as Richemont and Burberry. The company stated that it doesn't anticipate further price increases in the near term. Despite the drop in U.S. sales, LVMH expressed satisfaction with its Q2 performance in China. LVMH closed down 4% in NY.

Meta: online advertising is the key

Meta (META:xnas) is scheduled to report earnings on Wednesday. Analysts forecast an 8% Y/Y revenue boost at USD 31.08 billion and a 24% Y/Y surge in EPS at USD 3.06. The recovery of the US online advertising business is contributing to Meta's growth. One major concern for Meta is its comparatively less developed AI advancements. Investors will closely listen to the management call to get insights into any new developments in this area.

Battery-maker CATL reports 63% higher profits

Electric vehicles have been gaining traction lately on increasing penetration supported by government subsidies and more affordable prices. Chinese battery maker CATL reported Q2 earnings with net income rising 63% on revenue increase of 56% to 100 billion yuan, both beating estimates. Tesla is CATL’s top customer, while Ford, Volkswagen, Hyundai and Nio are also on the list. ETFs like Global X Lithium and Battery Tech (LIT) offer a diversified exposure to EV battery makers.

FOMC meeting: Can the Fed still surprise hawkish?

The FOMC is expected to hike rates by another 25bps today, but the key question revolves around whether this will be the last rate hike of the cycle. Data has remained mixed with inflation trends softening but labor market remains tight suggesting that the pace of disinflation may remain short of expectations. Market is still not pricing in another rate hike that the Fed signalled in its dot plot, which if reaffirmed could be a hawkish surprise. Still, inflation is slowing broadly and the uncertainty of monetary policy transmission lags would make it difficult for the Fed to surprise hawkish. Stress in the regional banking sector also remains, as signalled by the disappointing earnings form banks like Comerica and Regions Financials. Dovish shifts in the statement could come from job gains not being characterized at “robust” or growth risks seen to be increasing, and these could mean further pressure on the dollar. A clear signal of a September skip could however loosen financial condition further.

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