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Global Market Quick Take: Asia – April 18, 2023

Macro
APAC Research

Summary:  The sideway trading in equities continued and VIX slumped to sub-17 levels even as Fed tightening bets picked up and Treasury yields surged. Higher USD brought EUR, JPY, crude oil and gold, all lower. Bank earnings continue to be a key focus after Charles Schwab and State Street reported deposit outflows, and Bank of America and Goldman Sachs will be on tap today along with the first look at tech with Netflix earnings. Focus in the Asian session on RBA minutes and China’s Q1 GDP release.


What’s happening in markets?

US indices (US500.I and USNAS100.I): remained buoyant and the volatility index retreats

The major indices made modest moves with the S&P500 closing at fresh cycle highs after rising for the sixth day and moving further above its 21-day moving average, suggesting buying momentum remains, even in the face of possible further Federal Reserve rate hikes. That said, higher US government bond yields capped gains. It’s worth highlighting that broad market fear, as measured by the volatility index, has fallen for the fourth day, with the VIX index trading at its lowest level since July 2022, on a weekly basis.

So far this earnings season five banks have reported results, and delivered earnings growth that beat expectations, and that’s supporting the KBW Bank ETF (KBWB), rise off its lows. A technical indicator for the ETF, the RSI, moved back above a level that suggests buying could potentially pick up. That said, we need to see better-than-expected results and outlooks from Bank of America, Goldman Sachs and Morgan Stanley who report Tuesday and Wednesday, to support this from a fundamental perspective. Charles Schwab’s results released overnight were better than expected, and followed the better-than-expected result streak, from Citigroup, JPMorgan Chase, and Wells Fargo, as Fed hikes have boosted banks interest income.

Treasuries (TLT:xnas, IEF:xnas, SHY:xnas): yields surge on a strong Empire manufacturing survey

Treasury yields started moving higher in London hours and decisively jumped when New York came in with the release of a jump of the Empire manufacturing index to 10.8 from the previous month’s -24.6 and consensus estimate of -18. Further, Fed’s Barkin wants to see more evidence of inflation returning to the 2% target. Block selling emerged on the 2-year futures and SORF contracts to price in an almost done deal for a 25bp hike at the May meeting increase in the odds of a June rate hike. Yields surged 8 to 10 basis points across the curve, with the 2-year and 10-year finishing at 4.19% and 3.60% respectively.

Chinese equities (HK50.I & 02846:xhkg): rally ahead of key data

Hang Seng Index and CSI300 Index both advanced, rising 1.7% and 1.4% respectively, led by financials, and consumer names. HSBC (00005:xhkg) gained 2.3% and leading Chinese bank names rose between 1.5% and 3%. Hang Seng TECH Index added 2.2% with eCommerce and EV names driving the advance. Meituan (03690:xhkg) surged 4.7% and other mega-cap China internet stocks climbed over 1%. EV maker XPeng (09868:xhkg) soared 12.5% on plans to cut costs. Nio (09866:xhkg) and Li Auto (02105:xhkg) gained around 6% and leading traditional automakers also advanced with Great Wall (02333:xhkg) surging 6%, ahead of the Shanghai Auto Show. The resource space did well on Monday. Base metal miner MMG (01208:xhkg) gained 4.5% and Petrol China (00857:xhkg) added 4.9% ahead of China’s GDP and activity data today.

Australian equities on watch: should the RBA backflip and change its tone

Australia’s benchmark index, the S&P/ASX 200 opened 0.4% lower at 10.30am Sydney time, weighed by a 2% drop in oil after the US dollar rose (triggered by higher US interest rates concerns). Woodside shares are down the most today, out of the mega-caps, with Woodside shares falling below its 50-day moving average, keeping traders on their toes with some expecting a further pull back. Elsewhere, gold stocks are being sold down, with traders taking profits after the gold price pulled back. Newcrest Mining shares technical indicators suggest buying momentum could be slowing, so that’s something to keep an eye on and could be a catalyst for investors to take profits and for traders to put in options for downside protection. Also keep in mind, we do see higher gold prices over the medium-to-longer term. The RBA meeting minutes will be dissected for clues today, that RBA can keep rates on hold. The risk is, should the minutes highlight rates will likely rise again, the ASX200 could face selling pressure, especially as the market has priced no further rate hikes are on the table, with the market expecting a rate cut in July.

FX: USD strength builds, AUD in focus with RBA minutes and China activity data on tap

The USD strength sustained in a broad-based manner on Monday as yields surged further with a better-than-expected NY Fed Empire State manufacturing survey, and EURUSD fell further below the 1.10 handle and GBPUSD breaking below 1.24 as eyes turn to labor market data due later today. USDJPY rose to 1-month highs of 134.57, bringing the 61.8% retracement level of 134.75 in focus ahead of the big 136 handle as BOJ chief Ueda appears in parliament today at 10am Tokyo time. AUDUSD was somewhat more resilient and remained stuck around 0.67 ahead of RBA minutes and China Q1 GDP report due for release today.

Crude oil: slumped 2% on improving supplies, China data on watch

Crude oil prices plummeted ~2% in the overnight session as demand concerns picked up with more Fed tightening bets coming through amid a host of economic indicators still showing strength. Concerns are also brewing on Asia demand, with reports suggesting that refiners in the region are considering cuts to output amid a dramatic drop in profit margins. Supply concerns meanwhile eased with possible resumption of oil export from Iraq's semi-autonomous Kurdistan region via Türkiye's Ceyhan oil terminal. Russian crude exports also bounced back above 3 million barrels per day last week. WTI prices slid below $81/barrel and brent was below $85, and focus today will be on China’s Q1 GDP and March activity data.

Gold and silver: correction deepens as Fed tightening bets pick up

Precious metals were pressured lower on Monday as US yields surged further with the 10-year yields touching highs of 3.6% as the NY Fed’s manufacturing survey indicated further economic strength and room for Fed to keep rates higher-for-longer. Gold plunged to $1981 before a rebound to 1990+ levels, while silver touched lows of $24.80 before reversing to $25. Correction risks remain after metals reached overbought territory, and focus will be on this week’s PMI data as key along with a host of Fed speakers.

 

What to consider?

RBA meeting minutes will be a focus; the risk is that the market has priced in rates won’t rise, and cuts are on the table 

As mentioned in our Spotlight, the RBA meeting minutes will be dissected for clues the RBA can keep rates on hold. Just beware, that should the minutes highlight interest rates could likely rise again, the AUD could knee-jerk higher, especially as the market has priced no hikes are on the table, with a rate cut to be made as early as July. Should the RBA give any hawkish surprise, the AUDUSD resistance at perhaps 0.67 could be tested. If it rises above that, eyes will be on the AUD potentially crossing its 50-day moving average. 

Bank earnings: Mixed report from Charles Schwab but a disappointing one from State Street

Focus remains on regional banks reporting earnings this week, after we got an early insight last week on Friday with strong results from JP Morgan, Citigroup and Wells Fargo. But the regional bank earnings have started on a more mixed footing amid deposit outflows. Charles Schwab, which was under pressure during the recent banking crisis, has reported today Q1 net revenue in line with estimates and EPS of $0.93 vs est. $0.90. But the US broker also reported Q1 deposits that declined to $325.7bn down from $366.7bn in Q4 2022 and down from $465.9bn a year ago highlighting that it has been hit hard on the funding side. Meanwhile, State Street reported lower net interest income, deposits and fee revenue in Q1, and customers withdrew a net $26 billion from State Street’s investment products in the quarter, compared to expectations of a $8bn inflows. Its deposits fell to $39 billion from $44 billion, and expectation is for another drop of $4-5 billion in Q2.

Samsung reportedly considering shift to Bing from Google

The New York Times reported that Samsung is considering moving from having Google as the default search engine in the smartphones it makes (in 2022, the number was 261 million handsets) to Microsoft’s Bing. The possibility of enhancing Bing’s performance with the addition of the technology of OpenAI, in which Microsoft has a stake, increasingly threatens Google’s dominance in the search engine service. Google (GOOGL:xnas) dropped by 2.7% and Microsoft (MSFT:xnas) gained 0.9% on Monday.

China's March activity data and GDP are expected to show an acceleration in growth

China's March economic activity data is expected to show an acceleration in growth, partly attributable to the base effect following strict lockdowns that began in major cities in March last year. According to a Bloomberg survey, the median forecast expects a notable rise in retail sales growth to 8.0% Y/Y in March, up from 3.5% in the prior two months. The favorable base effect and a boost from services are expected to contribute to this growth. Additionally, surveyed consensus on industrial production anticipates an acceleration in growth to 4.7% Y/Y in March, compared to 2.4% in January and February. The same survey forecasts fixed asset investment to grow by 5.8% year-to-date, slightly higher than the 5.5% in the first two months of the year. Furthermore, economists surveyed by Bloomberg anticipate China's Q1 real GDP growth to recover to 3.9% Y/Y, up from 2.9% Y/Y in Q4.

UK labor data to be the next key test for GBP

May hike from the Bank of England still remains in play with about a 80% probability, but commentary from officials has remained mixed. While economic momentum continues to pick up compared to recession calls being made late last year, this week’s data will be a key test for how much room there might be for further tightening. Labor data out on Tuesday and traders will be looking for signs on whether wage growth has peaked. Bloomberg consensus expects March employment change to come in at 48k from 98k in February, with the 3-month unemployment rate remaining steady at 3.7%. Weekly earnings is expected to grow 5.1% YoY in the three months to March from 5.7% previously. GBPUSD has plunged below 1.24 amid recent USD strength but supports are still far at with 100DMA and 50% retracement of the recent rally sitting just below 1.22.

Netflix to set sentiment in technology stocks

This week the Q1 earnings season gets very important with key earnings from Netflix on Tuesday which will set the stage for sentiment in technology stocks ahead of next week’s technology earnings. Analysts expect Netflix to report revenue growth of 4% y/y in Q1 and EPS of $2.87 down 10% from a year ago. Netflix is in the midst of a turnaround case which involves less password sharing for higher revenue monetisation, an advertisement-based model generating revenue of customers that do not want a subscription, and finally less own content production to reduce investment needs. All these actions are positive for shareholder creation.

 

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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