What’s happening in markets?
US equites move above key levels, extending their rally ahead of the final day of trade for Q1
Sentiment got boost on Thursday for two reasons, firstly President Biden called for regulators to set up reforms to safeguard the banking system and reinstate safeguards for banks with assets between $100 billion and $250 billion. Secondly, sentiment was also boosted by hopes the Federal Reserve can slow its campaign to hike rates, with further signs the labor market is cooling amid US weekly jobless claims rising 7,000 to 198,000. This resulted in the US dollar easing against most currencies.
Despite the cooling employment data, Fed officials reiterated their resolve to lower inflation. The S&P 500 gained 0.6% closing above its 50-day moving average for the second day, reflecting that momentum in the rally is picking up, while the Nasdaq 100 rose 0.9%, pushing further into a bull market territory.
Treasuries end mixed after a muted session
The 2-year yield edged up 2bps to 4.12% while the 10-year yield 2bps to 3.55% in a muted session. Fed’s Kashkari and Collins both reiterated that the Fed has “more work to do” to bring inflation down to the 2% target while Fed Barkin said he is undecided. Flight to quality bids for the front end of the Treasury curve fades and the PCE data today is in focus.
Hang Seng Index and CSI300 end higher on Thursday despite a choppy session
Hang Seng Index recouped all the early losses and more, ending the Thursday session 0.6% higher. Energy, property, and materials led the advance while healthcare stocks were laggards. PetroChina (00857:xhkg), surged 7.8%, on an earnings beat and share buyback plan. China property stocks advanced, with Country Garden Services (06098:xhkg) climbing 7.4% and Country Garden (02007:xhkg) advancing 5.1%.
The sentiment towards Alibaba (09988:xhkg) remained buoyant and shares of the e-commerce giant continued to advance for the second day following the reorganization plan, finishing the day 2.5% higher. Hang Seng Tech Index gained modestly by 0.6%.
Meanwhile, healthcare stocks underperformed following China lowered drug prices by over 50% on average in a review of the centralized procurement of drugs. Digital health platform names led the slide with Alibaba Health (00241:xhkg) down 7.9%, JD Health (06618:xhkg) down 3.6%%, and Ping An Healthcare (01833:xhkg) down 2.6%. EV names were among the top gainers.
In A-shares, CSI300 rallied 0.8% %, driven by household appliances, lodging, and tourism names. The three mega-cap oil and gas and coal mining stocks advanced.
Australia’s share market looks to end the week higher, for the first time in eight weeks
The ASX200 has pushed up for the 5th straight day and looks like it will resume its uptrend, with the RBA expected to leave interest rates unchanged next week. The ASX200 has importantly moved above its 21-day moving average for the second day in a row, signifying that momentum and buying is picking up. If the ASX200 closes above its 100-day moving average next week, that could also signify the rally can continue.
Crude oil moves up on a lower US dollar and demand concerns lingering
With the US dollar weaker against major peers, oil gained ground, rising to its highest level in two weeks. It also comes as export disruptions picked up. French strikes forced the government to tap its strategic fuel stocks, while Middle East supply woes are unlikely to resume this week, with Iraq's crude flows from Turkey remaining at a standstill. That said, oil volatility could likely continue. Germany's ex-Gazprom unit is vying to boost LNG volume it handles; and is open to signing purchase agreements for up to 25 years in a bid to securing Energy for Europe. The company said it’s close to finalizing a supply deal with a US partner.
Gold gains ground ahead of the US’ next inflation gauge being released
Gold prices move to higher ground, supported by a weaker US dollar and lower bond yields, with investors keeping their eyes peeled for the US inflation data (PCE), to gauge the Federal Reserve’s next move. Markets are pricing in a 50-50 chance the Fed will keep rates at current levels at its May meeting. That said, if core PCE comes out lower than expected, it will suggest the Fed has less work to do, to tighten monetary policy. And if the Fed pauses, that would be a catalyst for bond yields to move lower, and the gold rally to gain pace.
What to consider?
Is inflation still a problem in the US?
The Fed’s preferred inflation gauge, the PCE, will be out for February today. Core PCE is expected to rise 0.4% MoM in February, cooling vs. the +0.6% in January, while the year-on-year rate for core PCE is seen steady at 4.7%, as per Bloomberg consensus. The PCE print will likely have to be extremely hot to shift focus away from banking troubles.
Hotter-than-expected data from Japan
Tokyo-area CPI came in hotter than expected with headline CPI at 3.3% Y/Y in March (vs consensus 3.2%; February 3.4%), Tokyo CPI ex-fresh food at 3.3% Y/Y (consensus 3.1%, February 3.3%), and Tokyo CPI ex-fresh food and energy at 3.4% Y/Y (consensus 3.2%, February 3.1% revised). Retail sales grew at 6.6% Y/Y in February, above consensus (5.8%) and prior month (6.3%). Industrial production grew 4.5% M/M and the Y/Y decline slowed to -0.6% from prior month -3.1%.
US Banks shift borrowings from the discount window to the new term funding facility
US Banks’ borrowing at the Federal Reserve was at USD 343 billion as of March 29 and the average balance was at USD 358 billion over the Wednesday week. While US banks’ borrowing at the discount window dropped to USD 88 billion as of Wednesday from USD 110 billion the prior week, their borrowing balance of the new Bank Term Funding Program (BTFP) increased to 64.4 billion from USD 53.7 billion over the week. The BTLP offers up to 1-year funding and values the collateral securities at par rather than at their market value. Foreign banks’ borrowing at the foreign repo facility provided by the Fed declined to USD 55 billion from USD 60 billion.
China’s PMIs are expected to moderate while staying in expansion
According to the survey by Bloomberg, the March PMI data scheduled to release today in China are to moderate from the strong levels in February. In March, the official NBS Manufacturing PMI is expected to come in at 51.6 (February: 52.6), and Non-manufacturing PMI to lower to 55.0 (February: 56.3).
The March Emerging Industries PMI released earlier decelerated to 56.1 from the elevated 62.5 in February. Steel demand data coming out recently also suggested potentially some deceleration in manufacturing and construction activities in March. Seasonality may have made an impact as well as expert orders tended to be front-loaded and only to pick up gradually again after the Chinese New Year.
Why the RBA will likely pause rate hikes next week, despite seven Australian banks cutting rates
Australian’s households are somewhat experiencing a pressure cooker moment, despite inflation cooling more than expected. Did we forget that inflation remains at 30-year highs and the RBA warned the ‘full effect’ of its 10 interest rate rises have yet to be seen. Already over 1 million mortgages have been deemed ‘at risk’ and another 880,000 Australians roll off fixed mortgages to variable, which will likely cause a shock to many Australians back pockets. Seven Australian banks have already cut mortgages rates, yet we believe the RBA will be forced to pause rate hikes and then cut later this year. With Australia’s households the second most indebted in the world behind, Sweden, we explore what a rate hike pause could mean for investors and traders in our article.
Tesla looks to build a battery plant in the US with China’s battery leader CATL
Tesla is looking to build a battery plant in the US, with China’s battery giant, CATL. This is similar to what Ford announced last month. Given EV batteries are the most expensive component of an EV, CATL's technology is sought after, as it makes lithium iron phosphate batteries, that are cheaper than the nickel-based batteries used in the West. Tesla has been in talks with the White House in recent days, to clarify the rules and potential funding support as part of the Inflation Reduction Act. Tesla is deep in expansion mode, deploying $22 billion in cash to crank up production, while scoping ways to lower costs, and contend with increasing EV competition.
JD.COM spins off, Alibaba reportedly plans IPO for its logistics unit
JD.COM filed for listings of subsidiaries Jingdong Property and Jingdong Industrial at the Stock Exchange of Hong Kong. Separately, Alibaba is reportedly preparing to get its logistic unit, Cainiao Network Technology listed in Hong Kong.
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