Summary: After a weak 20-year Japanese Government Bond auction, UK Gilts selloff, and surprise resurgence of the Philadelphia Fed business outlook, US Treasuries sold off. The 10-year yield surged to 4.33%, a 2007 high. US equities fell for a 3rd day, S&P500 down 0.8%, Nasdaq down 1.1%. The energy sector was the lone S&P gainer. Crude oil rebounded after a 3-day decline. Adyen, a European payment firm, plummeted by 40%. Japan's July CPI met predictions. China Evergrande seeks Chapter 15 protection in New York to shield assets from creditors during restructuring.
US equities declined for three days in a row amid rising bond yields. The S&P500 Index dropped by 0.8% to 4,370 while the Nasdaq 100 plunged 1.1% 14,715. Energy stood out as the only S&P sector that gained during the session, with Exxon Mobil (XOM:xnys) and ConocoPhillips (COP:xnys) gaining nearly 2%. Home builders pulled back. Retail giant Walmart (WMT) fell 2.3% in spite of an earnings beat and guidance raise. Moderna (MRNA:xnas) surged by 7.4% after announcing positive clinical trial results for its updated COVID-19 vaccine. Cisco (CSCO:xnas) gained 3.3% following the earnings beat the previous day. The VIX rose by more than 1 point to reach 17.89.
Following a weak 20-year Japanese Government Bond auction, a selloff in the UK Gilts, and the surprise return of the Philadelphia Fed business outlook to the expansionary territory, Treasuries sold off with the 10-year yield surged to as high as 4.33%, the highest since 2007, at one point before paring some and to end the session 2bps cheaper at 4.27%. Selling concentrated in the belly through the long end as the 2-year yield dropped by 4bps to 4.93%. The 2-10-year curve steepened by 6bps to -65bps.
As reiterated in this week's Quick Take, the focal point for investors has broadened from concerns about the Chinese economy and the property market to the country's substantial shadow banking sector, which stands at a formidable size of approximately RMB 20 trillion. The Hang Seng Index gapped down at the open and traded down to as much as a 2.3% loss to below the critical 18,000 level, reaching 17,900 before recovering to end the Thursday session flat.
The bounce was led by consumer names. Beer brewers topped the Hang Seng Index performance with China Resources Beer gaining 4.3% and Budweiser adding 2.5%. Sportswear manufacturer and retailer Li Ning (02331:xhkg) advanced 3.4%. Tencent added 1.2% after mixed quarterly results while JD.COM (09618:xhkg) shed 1.4% on margins miss. The Hang Seng Tech Index rose 0.8%, led by EV makers’ 3%-4% gains. Luggage maker Samsonite surged 9.7% after an earnings beat. Southbound buying from mainland investors was strong, reaching HKD9.9 billion.
In the A-share market, the CSI300 Index staged a dramatic reversal, finishing 0.3% higher. The rally was driven by defense, robotics, semiconductor, and heavy industrial equipment names.
USDCNH reversed from highs of 7.35 back to support at 7.30 amid reports that China told state banks to escalate Yuan intervention this week. Yen was also firmer, with USDJPY back below 146 from highs of 146.56 as a 20yr JGB auction saw particularly poor demand, with lower accepted prices and the widest tail since 1987. Steady gains in Treasuries still supported the dollar, and AUD and NZD remained the worst G10 performers. AUDUSD is testing 0.64 handle while is close to 0.59. GBPUSD still sustaining strength above 1.27.
Crude oil prices saw a rebound on Thursday after three days of sell-off on concerns from China property sector and economic trajectory, while US economic data has remained strong bringing yields and US dollar higher. Still, supply tightness concerns continue to underpin and recent inventory data has hinted at drawdowns as well. China also reported a draw on crude oil inventories in July, the first signs of a pickup in demand. Asian refineries continue to snap up available cargo from the North Sea. WTI back above $80 and Brent moving towards $85.
Dutch payment processor Adyen reported H1 revenue growth that was the slowest since its initial public offering, spooking concerns about its stretched valuation and a steep sell off of ~40%. Investors were also cautious about Adyen’s hiring spree and competition from US rivals such as Stripe amid an environment of slowing economic growth. Revenues for H1 rose 21% to €739.1mn, vs. €754mn expected. H1 EBITDA margin came in at 43%, below expected 48.6% and last year’s 59%.
US initial jobless claims slowed to 239k from 250k in the prior week, coming in a notch below the 240k expected. The 4-week average, however, rose to 234k from 232k. Continued claims data for the preceding week saw an uptick to 1.716mn from 1.684mn, above expectations of 1.7mn. Data suggests a still-tight labor market.
Japan’s July CPI numbers had little sign of relief on inflationary pressures. While the prints came in-line with expectations across the board, headline CPI stayed firm at 3.3% YoY and core slightly lower at 3.1% from 3.3% in June. The core-core measure, which excludes fresh food and energy, was at 4.3% YoY from 4.2% previously again putting focus on BOJ’s assumption that inflation is transitory.
Yesterday’s 20-year JGB auction tailed by 6bps, the biggest tail since 1987, pricing with a yield of 1.38% as investors demand more yield while the BOJ adjusts its yield curve control policy. Rising JGB yields put upward pressure on global bonds. US 10-year Treasuries tested their 2022 high at 4.32%.
Walmart's revenue increased by 5.7% to USD161.6 billion, exceeding consensus estimates by 1%, while Q2 EPS reached USD 1.84, a 4% Y/Y increase and 8% above the anticipated $1.70. Notably, gross margins expanded by 40bps to 24%, surpassing the estimated 23.5%. Looking ahead, the company forecasts Q3 revenue growth at 3% (in line with expectations), EPS within the range of USD1.45 to 1.50 (versus consensus of USD1.49), and a 1% rise in operating income (below the consensus of 2%). Walmart revised its full-year EPS guidance to USD6.36 to 6.46, up from the previous range of USD6.10 to 6.20.
Deere (DE:xnys) is strategically positioned to attain robust growth, primarily attributed to successful product launches in precision agriculture and its solid pricing power. The upcoming result announcement is expected to shed light on the company's dealer inventory management and new product pipeline. The consensus is projecting a 9% Y/Y increase in revenue to USD14.11 billion and a 33% Y/Y growth in adjusted EPS to USD8.185.
On Thursday in New York, China Evergrande Group (03333:xhkg) sought protection under Chapter 15 of the US Bankruptcy Code which shields non-US companies from creditors when they are working on debt restructurings.
The Federal Reserve’s Economic Policy Symposium in Jackson Hole, Wyoming, is scheduled for August 24-26. This year’s theme "Structural Shifts in the Global Economy" and Fed Chair Jerome Powell is expected to speak on August 25 at 10am ET. Other central bank heads will also be likely on the agenda. From recent commentaries, it appears that central bankers will keep the flexibility to hike rates further, while clearly avoiding committing to cut rates soon. Still, thoughts on economic momentum could be key and rising credit risks may warrant some dovishness.
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2024: The wasted year
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
