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.
APAC Strategy Team
Summary: The European energy crisis faces a Lehman moment, and Europe will engage in a large-scale fiscal expansion to counter the high energy prices. Any production cuts at the OPEC+ meeting may further tighten the energy markets. EU emergency meeting at the end of the week will be key to addressing the short-term pain and riding out the winter demand, and tough decision may be ahead. A jumbo ECB rate hike, along with another tightening move by the RBA, will also pave the way for the Fed meeting later this month. China’s trade and inflation data is also due this week but the resurgence of the pandemic is further weighing on the economic outlook and garners greater attention. NIO and Bilibili earnings will be in focus.
The European Central Bank meeting will be in focus after plenty of chatter around front-loading rate hikes in the last few days. Most members have come out in support of a 75 basis point rate hike for the September, and the market pricing suggests 125 basis points between September and October meetings (so one 75bps and one 50bps). Only Philip Lane seemed to strike a different tone, saying that he would prefer step-by-step hikes to make sure the financial markets have time to absorb the tightening in a measured manner. August inflation for the Euro area, reported last week, also suggested further price pressures with a 9.1% YoY print from 8.9% YoY previously.
The panic button on European energy crisis has been pressed. With Russia cutting off gas supplies, even the built-in storage levels will not be able to meet the winter demand. Many businesses have reported shutdown, and households are reeling under a cost crisis. As a result, government support has started to flow in with Germany unveiling a €65 billion package to shield consumers and businesses from energy price hikes on Sunday. The package will be paid for via an energy windfall tax and bringing forward a planned 15% global minimum corporate tax. Sweden and Finland have announced liquidity guarantees of USD 23bn to electricity companies. All eyes are now on the EU emergency meet scheduled for Friday, 9 September, which may include discussions around price caps or rationing. The EU should also take this as an opportunity to address the long term energy supply issues, and a possible discussion around nuclear supplies may be warranted.
Oil prices have seen a downward pressure last week following demand concerns with China announcing fresh lockdowns and North Asian and Euro-area PMIs disappointing. However, the supply situation seems to have worsened over the weekend with a possible scale back in Russian exports due to the G7 price cap. The prospect for additional barrels from Iran also hangs in the balance after Iran said the US response was “not constructive”. The OPEC+ meeting today attracts greater attention after Saudi Arabia openly floated the possibility of cuts to output. But the recent price action and dwindling Iran situation suggests we could see a price supportive action from OPEC.
The week kicks off with Caixin Services PMI, which is expected to stay in the expansion territory (Bloomberg consensus: 54.0). The most watched data will be the August aggregate financing and RMB loans. Chinese policymakers are determined to boost loan growth. After the disappointing July loan growth data, the PBoC cut its policy medium-term lending facility rates unexpectedly. The release date of the credit data is not fixed but it is expected to come between Sept 9 to 15. Analysts are expecting new RMB loans in August to come in at RMB1,500 billion (Bloomberg survey) versus RMB679 billion in July. The outstanding RMB loans are expected to grow 11% YoY in August, the same rate as last month. New aggregate financing is expected to rise to RMB2,100 billion versus RMB756 billion in July, but much lower than the RMB2,989 billion in August 2021.
China’s exports in August would probably come in weaker (Bloomberg consensus: 12.3% vs 18.0% in July) as container throughput data suggested. The resurgence of pandemic control restrictions, production disruptions due to power rationing, and a high base last year could have contributed to the deceleration.
PPI is expected to fall sharply to 3.2% (Bloomberg consensus) in August from 4.2% in July. Base effect and a decline in coal prices in August could be factors contributing to the deceleration in producer price inflation. CPI, however, is expected to edge up to 2.8% in August from 2.7% in July. Analysts suggest that favourable base effect was offset by vegetable price increases amidst the heatwave.
Chengdu, a city of 21 million residents and the largest city in western China, is under lockdown to fight an outbreak of Covid-19 cases. Shenzhen, the southern technology and manufacturing hub has imposed a number of restrictions on business operations and the mobility of its residents. Likewise, Guangzhou, Tianjin, Shanghai, Urumqi, Wuhan, Dalian, and Shijiazhuang are imposing various degrees of restrictions and PCR test requirements. Investors will watch the development of these pandemic control measures closely this week.
Australia’s central bank holds its monthly meeting tomorrow (Sept 6), with the RBA expected to raise rates by 0.25% (according to Bloomberg Economics) in a bid to slow inflation. However, futures market pricing suggests a 0.4% hike will be made, which will take the cash rate to 2.25% (up from 1.85%). Pricing also suggests the RBA will raise rates from 1.85% to ~3.2% by December 2022, before taking rates to 3.8% in July 2023. If the RBA does raise rates by an additional ~2% between now and July 2023, the average $600,000 mortgage will cost another A$727 / month or A$8,724 a year. But the RBA believes that consumers will be able to absorb higher interest rates allowing the A$10 trillion property market to avoid forced sales, given that many mortgage holders have already made advance repayments. However, pricing in the property market suggests it is struggling to absorb the 1.75% in hikes from May. In August property prices fell at their quickest pace since 1982, and levels of construction activity saw their biggest decline since 2016. Australian households are some of the most indebted in the world with household debt to GDP sitting at 126% (vs US Debt to GDP 80%), leading us to think that debt to income ratios could spike to their highest levels since the GFC. For investors, it’s worth noting; we continue to monitor the health of local banks as well as property stocks and property ETFs, which will likely come under further pressure. Conversely, we continue to see upside for energy prices (which is the biggest component of inflation). For traders, this could flow into currency markets where we will be watching the AUDEUR, and AUDCNH pairs.
Australian economic growth is expected to have shown the A$2.2 trillion economy grew at 1.2% in the second quarter through to June (consensus estimate), and 3.8% from a year earlier. Second quarter GPD will likely get a boost from record retail sales, and a pickup in overseas travel. However, construction costs and hampered residential construction activity could weigh on the headline GPD figure. Policy makers are trying to avoid a hard landing, while at the same time slowing runaway record inflation. A Bloomberg survey suggests Australia could avoid a recession, but data suggests there could still be a 23% chance of one over the next 12 months.
The week kicks off with Kingsoft (KC:xnas) reporting on Tuesday. Analysts in general expect that the recent resurgence of Covid-19 pandemic control measures has negatively affected enterprise cloud business. On Wednesday, automakers NIO (NIO:xnys/09866:xhkg) and Brilliance China Automotive (01114:xhkg) are going to report results. Investors will focus on NIO’s margins (which disappointed in Q1) and the management’s updates on 2022 delivery guidance. The highlight for the week in corporate earnings may be Bilibili (BILI:xnas/09626:xhkg) reporting on Thursday. The median forecast of analysts surveyed by Bloomberg is calling for a 9% growth in Q2 revenue to RMB4.9billion and a larger loss of RMB1.74 billion (vs RMB1.12 billion in Q2, 2021).
Apple (APPL:xnas) is holding its annual fall event, dubbed “Far Out” this year on Wednesday, Sept 7 at 10:a.m. pacific time. In the event, Apple is due to reveal its iPhone 14. There is speculation that iPhone 14 will come with mobile satellite connectivity, working with a satellite company, Globalstar (GSAT:xase).
China: Caixin China PMI Services (Aug)
S&P Global Worldwide manufacturing PMIs
Australian Retail Sales (Jul)
Thailand Core Inflation (Aug)
Singapore Retail Sales (Jul)
Eurozone Retail Sales (Jul)
S&P Global Construction PMIs
United Kingdom BRC Retail Sales Monitor (Aug)
Japan Household Spending (Jul)
Philippines Inflation Rate (Aug)
Australia RBA Interest Rate Decision
Germany Factory Orders (Jul)
Taiwan Inflation Rate (Aug)
China: Exports, Imports & Trade Balance (Aug.)
China: Foreign reserves (Aug)
Australia GDP Growth Rate (Q2)
Japan Coincident Index Prel (JUL)
Germany Industrial Production (Jul)
United Kingdom Halifax House Price Index (Aug), BBA Mortgage Rate (Aug)
Italy Retail Sales (Jul)
Eurozone GDP (Q2)
United States MBA Mortgage Applications (02/SEP), Balance of Trade (Jul), Fed Beige Book
Canada Balance of Trade (Jul), BoC Interest Rate decision
Japan GDP (Q2), Eco Watchers Survey (Aug)
Australia RBA Gov Lowe Speech, Balance of Trade (Jul)
Eurozone ECB Interest Rate Decision, ECB Press Conference
United States Jobless Claims (Sep), Consumer Credit (Jul)
New Zealand Electronic Retail Card Spending (Aug)
China: CPI & PPI
China: Aggregate Financing, New Yuan Loans, Money Supply (Sept 9 to 15)
Brazil Inflation Rate (Aug)
Canada Employment Change (Aug)
United States Wholesale Inventories (Jul)
Russia GDP (Q2), Inflation Rate (Aug)
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