Equities: New extremes and a challenging opportunity set
Discover insights on the future of equity markets in Q1 2024 and navigate the potential recession with strategic investment choices.
Summary: U.S. banking stocks tumbled on Silicon Valley Bank’s liquidity crisis and bond portfolio losses as well as the winding-down of Silvergate Capital, a crypto-focused bank. The KWB Bank index tumbled 7.7%. Yields on the 10-year Treasuries dropped to 3.90%. All eyes today are on the Bank of Japan meeting and the U.S. employment report.
Banks were front and center in yesterday’s sell-off in U.S. equities. Financials plunged 4.1% and were the biggest loser among the 11 S&P 500 sectors. The KWB Bank Index tumbled 7.7%, its biggest drop since June 2022. The S&P 500 broke below its 200-day moving average, a key support level, and ended 1.9% lower, while the Nasdaq 100 shed 1.8%.
SVB Financial (SIVB:xnas), parent of Silicon Valley Bank, suffered a record 60% crash in share prices after the bank said it suffered from a liquidity crisis and sold off a swad of securities in a portfolio that’s been hit by significant losses. Silvergate Capital (SI:xnys) plunged 41.8% following the crypto-focused bank said that it was winding down and returning deposits to customers. Bank of America (BAC:xnys) plunged 6.2%; JP Morgan Chase (JPM:xnys) shed 5.4%.
Oracle (ORCL:xnys) dropped 4.1% in extended-hour trading following reporting inline revenue and earnings beat but a miss in cloud license and on-premise license.
A bounce in initial jobless claims to 211K (consensus 195K) from 190K triggered the short-covering in the front end ahead of the employment report which is scheduled to release on Friday. The buying intensified as banking stocks tumbled on woes on Silvergate Capital and SVB Financial. Large block buying emerged in the June 2023 SOFR contracts. Yields on the 2-year plunged 20bps to settle at 4.87%. The 10-year yield dropped 9bps to 3.90%. The 2-10-year yield curve steepened to -97bps,
Hang Seng Index dropped 0.6% and CSI 300 Index slid 0.4%. China’s CPI softened to 1% Y/Y and PPI declined 1.4% Y/Y in February did not excite investors with monetary stimulus expectations but added to the worries about the strength of the economic recovery in China. China consumer names were under selling pressure. Restaurant chains Xiabuxiabu (00520:xhkg) and Haidilao (06862:xhkg) plunged 7% and 4.5% respectively. China Resources Mixc Lifestyle Services, a leading property management name, dropped 4.7% and was the biggest loser within the Hang Seng Index on Thursday.
The latest announcement from the Netherlands to impose additional restrictions on exports of advanced microchip equipment to China and the U.S. moving close to banning TikTok caused concerns of escalation of the technology friction and geopolitical tension between China and the U.S. The Dutch company ASML is the world’s largest and most dominant supplier of advanced chip-making equipment including the immersion DUV lithography machines in the latest export ban.
State-owned telcos continued to rise, with China Telecom (00728:xhkg) surging 4% and China Mobile (00941:xhkg) climbing 3.1%. COSCO China Shipping Energy Transportation (01138:xhkg) jumped 12.5% as investors anticipated the Chinese tanker and dry bulk shipping operator to benefit from increases in freight rates.
In A-shares, consumer stocks were among the biggest losers with Chinese white liquor, retailer, catering, and tourism stocks leading the charge lower. Semiconductor names gained on anticipation of import substitution.
Despite the S&P500 sliding 3% Monday to Thursday, the ASX200 is managing to hold almost steady, and is down 0.2% Monday to Friday (at the time of writing). Today most sectors are under water today, bar the defensive, Utility sector, while Financials down the most following alarm bells being rung in the banking sector on Wall Street. Pressure is also being felt in lithium stocks after CATL’s results beat expectations. Meanwhile BHP is trading 2% lower, despite the iron ore (SCOA) price moving up 1% to $129.10.
The rise in jobless claims on Thursday saw yields dipping lower, taking the dollar off the recent highs as well. The Japanese yen saw a recovery with lower yields, and focus now shifts to Bank of Japan meeting which can cause significant volatility. USDJPY finding support at 136 for now after reaching 3-month highs earlier this week on Powell’s hawkish testimony. GBPUSD rose back above 1.19 ahead of UK data dump today likely to show that a recession has been delayed, but focus will shift to NFP later as the key USD driver. CAD remained the underperformer, with USDCAD rising to 1.3830, as Fed-BOC divergence widened and oil prices remained weak.
WTI prices ended the day below $76/barrel after touching highs of $78 earlier, while Brent dipped below $82 from $84 earlier. Even as the jobless claims data cooled, markets were in a flight to safety mode ahead of NFP as jitters on a tighter monetary policy remained. Demand concerns remained despite crude inventory recording its first weekly fall after several weeks of gains. EIA inventory report showed crude stocks down 1.7mn barrels last week vs. expectations of +1.6mn. Signs of a pickup in Chinese demand also remain mixed. The highs earlier in crude oil prices were reached on the back of supply concerns arising out of French refineries because of the nationwide strikes in France.
Gold caught a bid in the run upto the jobless claims release last night, reversing higher from near its support levels at $1800 to reach $1835. Focus turns to NFP today after Fed Chair Powell in his testimony this week opened the door to a 50bps rate hike in March. Now, data will need to confirm the need for that, else expectations may be quick to reverse. Support at 100DMA at $1806 remains key to hold.
Initial claims rose 211k in the week of 4th March, above the 190k prior and the 195k expected. It was the first time that the jobless claims came above the 200k mark since January, and it was the highest claim YTD. The continued claims also rose to 1.718 mn from 1.649 mn, coming in above estimates as well. While this may have raised some concerns that the US labor market is softening, the print is still strong and eyes now turn to the February payrolls data out today in the US. Our full preview is here, which says that Overall message, despite a potentially softer headline print, is likely to be that US labor market is still tight and there are millions of open positions even as layoffs continue to ramp up in some of the sectors. Headline jobs are expected to come in again at 200k+, but risk of disappointment remains given the scope of correction from +517k in January. A strong print could further cement the case for a 50bps rate hike this month.
Investors were spooked by Silicon Valley Bank announcing its taking emergency steps to shore up capital after suffering a $1.8 billion after-tax loss in the first quarter. SVB sold about $21 billion of securities from its portfolio and plans to raise $2.25 billion. SVB’s shares tumbled 60% on the announcement, taking its shares to its lowest level since September 2016, while erasing $9.6 billion in market value. This reflects the pain of higher interest rates and tighter liquidity on the venture capital start-up bubble and how that’s heavily flown right to banks - who are also now suffering a liquidity crisis. It seem a vicious cycle. While, at the same time, people’s trust in the financial system is weakening, which is why we saw the banking sector heavily sold off on Thursday, with the KWB Bank Index tumbling 7.7%, its biggest drop since June 2022. Not only have we seen floundering prominent startups go bust – such as FTX, but banks have been making exuberant investment in such firms for years. This is all despite banks slowing their pace of investing and offering stingier terms. This not only reflects the hot air been blown into starts up - yet banks have become heavily reliant on such risky and volatile businesses.
Also on Thursday, another California lender, Silvergate Capital Corp, which is targeting cryptocurrency firms, such as FTX, announced its winding down operations, following the meltdown of its financial strength, after digital assets plunged, seeing Silvergate lose billions in deposits. After announcing plans to liquidate, it says it will repay all deposits in full. Silvergate was previously scrutinised by regulators for its dealings with fallen crypto giants FTX and Alameda Research. Silvergate shares sank 40%.
While data and commentary from officials has been less supportive of the case for further tweaks in Bank of Japan policy, outgoing governor Kuroda is known for his surprises. At his last meeting on Friday, he may want to part with some sparks resulting in a numb yen in the run upto the meeting. We discussed all this and more in our central banks note this week, and significant scope of two-way volatility in the yen is seen.
China’s CPI growth slowed to 1% Y/Y in February, much lower than the consensus estimate of 1.9%. Growth in food prices decelerated to 2.6% Y/Y from 6.2% Y/Y while growth in non-food prices halved to 0.6% Y/Y in February from 1.2% in January. PPI slide 1.4% Y/Y in February, bringing the producer prices deeper into deflation.
The US and India are looking to sign an agreement to boost coordination of their chip industry to focus further on information sharing and policy dialogue, as India forges ahead to boost its presence in the global technology supply chain amid China’s crackdowns on the private sector and growing geopolitical issues.
China’s Contemporary Amperex Technologies Limited (CATL), the world's biggest battery maker and Tesla’s battery supplier, delivered results eclipsing estimates, amid stronger EV demand, while its results also cement CATL as the industry leader. Net income surged 93% y/y, to 30.72-billion-yuan, vs 28.8 billion yuan expected – with both its power battery and energy storage division’s revenue growing far more than expected amid clean energy demand. Power battery revenue rose to 236.59 billion yuan, up from the 91.49-billion-yuan same time last year - while exceeding the 228.46-billion-yuan consensus expected. That said, its power battery gross margin came in at 17.2%, on par with estimates – as EV sales growth in China slowed in Q4 as the economy was hit by a wave of COVID-19 infections with Tesla cutting output in Shanghai, with CATL suffering rising inventory. That said, CATL’s outlook seems bright and it’s continuing its global expansion, planning to set up 13 production bases, including in Germany and Hungary, with five R&D centres. It recently licensed its LFP battery technology for Ford to use in a new $3.5 billion EV battery plant – which Ford will run in Michigan.
We expect CATL’s results will continue to grow strongly given COVID disruptions came to an end. Fitch suggests EV sales in China will account for 35% of vehicles sales this year, up from 27% in 2022. EV sales grew 60% in 2022 to 10.4 million units and are expected to reach 13.9 million units this year, with most growth in China, according to Bloomberg. This also reflects strong demand for EV batteries ahead, as well as the key battery components including lithium, copper, graphite and aluminium. You can explore some of the companies in this space in Saxo's Lithium- Powering EVs equity theme basket.
CATL's had 37% share of EV battery global market in 2022, which is testament to its cheaper-to-produce lithium-iron-phosphate batteries. In joint second place, South Korea’s LG Energy Solution and China’s BYD Co, with a 13.6% share each.
JD.COM gave a downbeat Q1 revenue guidance citing cautious Chinese consumers
JD.COM (09618) reported Q4 revenue of RMB 295 billion, rising 7% Y/Y, in line with consensus estimates. Benefiting from a 1.4pp Y/Y improvement in operating margin to 2.5%, the e-commerce giant’s non-GAAP net profit came in at RMB 7.66 billion, a 115% increase Y/Y and nearly 40% above consensus. However, the share price of its ADRs plunged 11.3% overnight or 6.2% from its Hong Kong closing price on Thursday, on downbeat guidance on Q1 revenues. JD.COM expects JD Retail’s sales to fall by a low-to-mid single-digit percentage Y/Y in Q1, below analysts’ estimates of 1-3% growth. The Company’s management said the sentiment of Chinese consumers is still fragile and consumers have become more prudent on discretionary items. Reopening might also divert some of the online purchasing to off-line consumption such as dining and traveling.
For what to watch in the markets this week – read or watch our Saxo Spotlight.
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