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Global Market Quick Take: Asia – May 10, 2023

Macro
APAC Strategy Team

Summary:  US equity and fixed income markets demonstrated limited volatility in the lead-up to the release of the CPI report. The asset markets, however, bore the weight of hawkish remarks from Fed Williams. In the ongoing political impasse regarding the US debt ceiling, there has been no noticeable advancement subsequent to the meeting between Biden and McCarthy. China experienced a significant decline in imports during April, exacerbating fears surrounding the durability of its economic resurgence and dampening anticipation of a robust surge in commodity demand from the country. Despite this, crude oil prices saw an upswing due to the United States' intentions to replenish its strategic reserve.


What’s happening in markets?

US equities (US500.I and USNAS100.I): range-bound ahead of CPI

Major U.S. equity indices were ranged-bound as investors were waiting for the CPI report scheduled to release on Wednesday. S&P500 shed 0.5% and Nasdaq 100 retreated 0.7%. Declines in the material, information technology, and healthcare sectors weighed on the benchmark S&P 500 while industrials managed to bounce 0.2%. Regional banking stocks stabilized somewhat and the SPDR S&P Regional Banking ETF (KRE:arcx) finished the session sliding 0.4%. Palantir Technologies (PLTR:xnys) surged 23.3% after the software developer gave upbeat guidance and outlook for it AI products.

Treasuries (TLT:xnasIEF:xnasSHY:xnas): pared losses after a strong 3-year auction

The meeting between President Biden and House Speaker McCarthy ended without making any progress in the debt ceiling negotiation. New York Fed president Williams pushed back on the idea of any rate cut happening this year. His hawkish comments weighed on the SOFR interest futures. On the coupon curve, selling (yield higher) was concentrated ahead of the auction deadline of the USD40 billion 3-year notes at 1 p.m. New York. The results from the auction turned out to be strong, awarded at 3bps richer than the level of the auction deadline with the highest bid/cover ratio in five years. The 2-year pared some of its early losses after the auction results and finished 2bps higher in yield at 4.02%, after hitting 4.07%. The 10-year yield ticked up 1bp to 3.52%. Today all eyes will be on the CPI report.

Chinese equities (HK50.I & 02846:xhkg): retreat as imports plunge 

A 7.9% plunge in China’s imports in USD terms in April weighed on equities as investors were concerned about if the economic recovery in China was losing momentum. Stocks in both Hong Kong and mainland bourses took a decisive dive after returning from the lunch break and having digested the import data. Hang Seng Index tumbled 2.1% and CSI300 finished the day 0.9% lower.

Semiconductors, healthcare, and sportswear were among the top losers within the Hang Seng Index, with SMIC (00981:xhkg) leading the decline and falling 7.4%. Chinese banks and brokerage stocks, which had risen substantially over the prior several sessions lost stream and came off from their recent highs.

Hang Seng TECH Index fell by 3% driven by declines in EV names and China Interest stocks. Despite the latest data showing China’s retail passenger vehicle sales rose 55.5% Y/Y in April, auto stocks slid. China Internet names were mostly lower, with Tencent (00700:xhkg) and Alibaba (09988:xhkg) down more than 3%.

In anticipation of more widespread increases in the regulated retail prices for residential used natural gas in China, share prices of residential gas suppliers bucked the decline of the market, with Hong Kong and China Gas (00003:xhkg) surging 6.3% and China Resources Gas (01193:xhkg) adding 2.3%.

In A-shares, semiconductors and media were among the top losers. The SOE names and non-bank financials which had outperformed in prior sessions lost momentum on Tuesday.

FX: Little of note ahead of CPI due today

US dollar was marginally bid on Tuesday as yields rose amid the extension of the debt-ceiling standoff and hawkish comments from Fed’s William (voter). EURUSD is back below the critical 1.10 handle ahead of the CPI release today, while USDJPY stays above 135. GBPUSD has been the outperformer with Bank of England meeting eyed this week, staying near the year-high of 1.2669. AUDUSD continues to find trouble moving above 0.68, with China’s trade data also proving underwhelming.

Crude oil: stronger with US to refill strategic reserves

Crude oil prices were pressured lower earlier on Tuesday coming from the weak China import data for April which showed that oil imports were down 18% MoM and 1.45% YoY. But prices bounced higher on the announcement to refill the US strategic petroleum reserve (SPR). The SPR is currently at a four-decade low after the government withdrew 180mbbls following Russia’s invasion of Ukraine. In addition to direct purchases, the Energy Department said part of its strategy includes a return of oil from previous exchanges requested by refiners facing disruptions earlier this year. Meanwhile, supply disruptions in Canada continue, with the impact on oil output from wildfires reported to have increased to 319kb/d, according to Reuters. WTI back above $73.50 while Brent is testing $77.50.

 

What to consider?

Debt ceiling standoff continues

President Joe Biden said on Tuesday he made clear in a meeting with top Republican lawmakers that a US default "is not an option", as both sides failed to reach a breakthrough on the country's debt limit when Republican House Speaker Kevin McCarthy and Mitch McConnell, the Senate minority leader, met with Biden at the White House. The two sides will meet again on Friday, and volatility is likely to stay. We noted the possible outcomes here and the potential market impact.

China imports plunge in April

China’s exports in USD terms rose 8.5% Y/Y in April, above the expected 8.0% but decelerated from 14.8% the prior month. In terms of destinations, exports to Japan improved to +11.6% Y/Y in April from -4.4% Y/Y in March and exports to Russia picked up as well. Exports to ASEAN however slowed substantially to 5.3% Y/Y in April from 35% Y/Y in March.

The biggest surprise was the plunge of imports by 7.9% in USD terms, much worse than the 0.2% decline expected and raising concerns about the lack of strength of the economic recovery. Crude oil imports plummeted to -26.8% in USD terms and -1.4% in volume terms in April. The import of soybean in volume terms declined 10.1% Y/Y, turning negative for the first time this year.

US NFIB small business survey shows weakest confidence in over a decade

The NFIB measure of small business optimism fell to 97.4 in April from 98.7 in March, hitting a decade low. The report noted that over 60% of surveyed small businesses continued to face difficulties in finding experienced workers in April. About 17% plan to create new jobs in the next three months, which is above March when the banking turmoil started. But wage inflation signals were still apparent as 40% of the surveyed firms reported raising wages in April and 21% plan to raise in the next three months. The report doesn’t show any outright recession concerns, while inflation still needs to stay on a watch.

Singapore’s OCBC Bank beats Q1 estimates and raises margin outlook

Oversea-Chinese Banking Corp (O39:xses) reported a gain of 39% in Q1 net income to S$1.88bn, which was above the estimated S$1.74bn. Higher net interest income underpinned, and guidance for 2023 net interest margin was raised marginally to 2.2% from 2.1% earlier, in contrast to other banks like DBS Group (D05:xses) and UOB (U11:xses) which are hinting at a softer outlook for the year.

US CPI on the radar – look for reactions from USDJPY and NASDAQ100

The Fed has signalled a data-dependent mode in its rate hike cycle last week, which could well mean a pause at the next meeting. Market has continued to price in aggressive rate cuts for this year despite Chair Powell’s comments clarifying that rate cuts won’t happen this year. Market surely knows something, and the answer may well lie in the banking crisis or the debt ceiling talks. Still, inflation has to cool materially to justify the current market pricing for the Fed. Bloomberg consensus expects core CPI at 5.5% YoY/0.4% MoM from 5.6% YoY/0.4% MoM previously. Our Head of FX Strategy, John Hardy, has put together the reaction function for key FX pairs over the last four CPI releases. An upside surprise in core data will be USD positive and could bring USDJPY to test 136-levels, and could spark a risk-off in equities, particularly NASDAQ 100. A softer print meanwhile can bring USDJPY back lower to 134 and a relief rally in equities.

 

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

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

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