Netflix investors rushing for the exit; markets’ rising fear of slower economic growth in China

What’s happening in markets?

In the US, the Blue Chip Dow Jones rose 0.7%, after IBM shares charged 7% on delivering better than expected results/outlook, while S&P 500 (US500.I) closed 0.1% lower, but importantly held above its 50-day moving average, meaning it could hit higher levels if positive news come out overnight. Meanwhile, the Nasdaq 100 (USNAS100.I) fell 1.2% weighed down by Netflix weaker than expected results/outlook, while the technical indicators also suggest the Nasdaq itself, which operates on the highest PE for any global index (54.6 times earnings) is pressured lower, ahead of more aggressive rates rises.

The Australian share market rose for the 5^th day, and holds at all time high territory, despite Rio (RIO) and BHP (BHP) shares sliding on reporting iron ore exports will drop amid logistics issues. Today, the ASX200 is up 0.4%, with the best performers being those delivering stronger than expected earnings and guidance outlooks; annuity and bond business Challenger (CGF), shares are up 9% with the company guiding for stronger full0year profits at the upper end of guidance ($430-$480m). Global logistics pallets business Brambles (BXB) shares are up 7%, as the 2^nd best performer in the ASX after they upgraded their full year profits and revenue. Brambles, makes 84% of their revenue from the consumer staples sector, selling pallets, guided for underlying profit growth of 6-7%, and revenue to grow at 8-9%.

Asian stocks ex-China/HK remain bid. Japan’s Nikkei (NI225.I) was up over 1% for a third consecutive day of gains as electronics and machinery makers advanced. Asian semiconductor sector stocks such as Japan’s Tokyo Electron (8035) were up after positive results reports from chip equipment makers ASML and ASM Pacific Technology. Singapore’s Straits Times Index STI (ES3) was in gains of over 0.5%, mainly due to higher REIT and reopening stocks. Keppel REIT (K71U) reported higher Q1 net property income and laid the ground for more gains amid improved office market.

Hong Kong and China equities declined on weak Chinese growth. Hang Seng Index (HSI.I) and CSI 300 Index (000300.I) were down more than 1% on increasing investor concerns about sharp deceleration in growth in China.  Hang Seng TECH Index (HSTECH.I) fell more than 3%, with Meituan (03690) and JD.COM (09618) down 6% and 5% respectively.  Mineral producers, Ganfeng Lithium (01772) and MMG (01208) fell 7% and 5% respectively.  Auto names fell over 5% across the board.  CNOOC (00883) fell 3% in Hong Kong trading even though it’s A-shares (600938) surged 29% from the offering price in its Shanghai listing debut today.

USD was on the backfoot yesterday, are we nearing a peak? The USD was lower overnight amid growth worries and hints of inflation peaking. Fed’s Daly did not rule out a mild US recession from the Fed returning interest rates to a neutral level of 2.50% by the end of the year. US 10-year yields were lower by about 10-basis points, but Fed Chair Powell will be on the wires today from the IMF conference and might share some of the growth worries as well. May hike of 50bps is still in the cards, along with probably some more 50bps hikes as well.

Offshore renminbi (CNH) weakened to 6.46 against the dollar.  In addition to the yield spread between the Chinese government bonds versus U.S. Treasuries having turned to negative over the bulk of the yield curve from 2-year to 10-year maturities and the strength of the US dollar against other currencies in the renminbi’s reference basket, the renminbi is pressured by rising concerns about the deceleration in the growth prospect of the Chinese economy. In its latest World Economic Outlook, the IMF revised down China’s 2022 growth rate forecast to 4.4% from 4.8%.  A number of market economists have also been revising down their forecasts from the 5% consensus level towards 4% to 4.5% for 2022 and around 2% for Q2. 

What to consider?

Inflation pressures to be passed to the Consumer, says IBM. IBM CEO Arvind Krishna  says over the next 6-9 months, you can expect logistics, higher oil and higher wage price pressures to be passed on to the consumer. This highlights the global issues companies are facing, and our preference for companies with robust balance sheets, that can sustain higher prices. As for IBM itself, the company is expected to see margins (profits) affected by shipping and inflation (higher wages) over the next 6-9 months.

New Zealand Q1 inflation rose at the fastest pace in 32 years.  Q1 inflation was 6.9% y/y from 5.9% last quarter. Although another 50bps rate hike at the RBNZ May 25 meeting is already priced in, but inflation may be peaking near the 7% mark. NZD fell to 0.6767 from overnight highs of 0.6813 and AUDNZD surged to touch 1.10. AUD also remains supported by a rally in coal even though Chinese demand remains soft.

Geopolitical risk on the rise. Russia said it test fired a new nuclear-capable intercontinental ballistic missile, suggesting that the geopolitical risk is on the rise amid the on-going Ukraine/Russia conflict. Russian forces are now concentrating its efforts to capture eastern Ukraine, while the US & allies are sending more military aid to Ukraine forces.

Trading ideas to consider

Yen is watching the US yields. USDJPY may see 2-way volatility, and gains towards 130 may resume if Fed Chair Powell continues to sound hawkish today after some respite in yields today. BOJ is buying more bonds to cap yields, but the talk of intervention has been enough to keep a lid on yen weakness for now. However, if US 10-year yields continue their march towards the 3% barrier, there will be no stopping the yen bears again.

EV battery shortages are becoming severe. We heard from Rivian’s CEO recently saying that EV-makers will soon experience a dramatic shortage of batteries that could surpass the worst seen in computer chip shortages. Now, Elon Musk has made a public appeal for more investment in lithium mining as well. There a huge demand-supply gap there and this could mean further higher EV prices. A strong consumer, as is evident from the ongoing earnings season, certainly bodes well for higher EV prices in the coming months.

Earnings to watch. Snap (SNAP) kicks off the social media earnings season today and last quarter Snap was the clear winner in terms of growth and beating expectations. It remains to be seen whether this performance can be repeated. The competition from TikTok remains a key risk to watch. Tech shares are suffering following the Netflix (NFLX) debacle, with Meta (FB) and Pinterest (PINS) down 7% each.

BHP (BHP), Rio (RIO), and Vale (VALE3) the world’s biggest mining companies, reported quarterly iron ore shipments fell amid COVID staff shortages and outages, but we see upside in BHP. BHP’s full-year guidance remains unchanged. While Rio (RIO) said the current inflation environment was unlike anything the global economy had witnessed in almost half a century. On a like for like basis, Vale’s full year revenue growth is expected to slow, along with its profits, while BHP’s revenue and profit growth is expected to rise this year (64% gross profit growth, 10% revenue growth is expected), while the market thinks Rio’s revenue will slide this year. That’s something to consider.

Key Asian economic releases this week:

Fri, Apr 22: HK March CPI, RBI meeting minutes