APAC Daily Digest: What is happening in markets and what to consider next – August 15, 2022
APAC Strategy Team
Summary: U.S. equities continued their moves higher since the weaker-than-expected CPI data last Wednesday in anticipation of a more dovish path of Fed rate hikes. Aiding the rally in U.S. equities was the better-than-feared corporate earnings for Q2. In Asia, China (including Hong Kong) and Singapore lagged as the Philippines, Thailand, and India outperformed.
What is happening in markets?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I)
U.S. equities spent the day grinding higher steadily throughout the day on Friday, Nasdaq +2.1%, S&P 500 +1.7%. Investors took note of the fall in treasury yields and continued to cheer on the slower inflation prints last Wednesday and piling in stocks on the notion of a dovish adjustment to the anticipated path of Fed interest rate hikes. VIX declined to 19.5, the first time back below 20 since April. For the week, Nasdaq 100 gained 2.7% and S&P 500 was 3.3% higher.
Equities were also helped by better-than-feared corporate results. 457 or over 90% of capitalization S&P 500 companies reported and 52% of them had earnings beating consensus estimates by at least 1 standard deviation.
U.S. treasury fell and credit spreads compressed
The U.S. treasury yield curve bull flattened on Friday taking the 2-10 year spread more than 8bps more inverted to minus 42bps. After the University of Michigan survey showed a bounce in consumer sentiment, driven by the expectations component and a modest decline in the short-term inflation expectations (though longer-term inflation expectations edged up), 2-year yields rose 2bps to 3.24% while 10-year yields dropped 6bps to 2.83%. The money market curve is pricing in 61 basis points for the September FOMC. Fedspeak on Friday (San Francisco Fed Mary Daly & Richmond Fed Thomas Barkin) reiterated whether 50bps or 75bps for the September FOMC is data-dependent and the Fed’s resolve to fight against inflation.
As VIX fell and the markets were in a risk-on mode, credit spreads tightened on Friday and for the week. During last week, U.S. high-yield bond spread contracted about 10bps, the ICE BofA U.S. high-yield option-adjusted bond spread down to 446bps, and the Bloomberg Barclays high-yield option-adjusted spread compressed to 432bps.
Hong Kong’s Hang Seng (HSIQ2) and China’s CSI300 (03188:xhkg)
Last Friday, Hong Kong and mainland Chinese equities treaded water between moderate gains and losses. Sportswear and EV names gained. Li Ning (02332:xhkg) climbed 4.8% after reporting better than expected 1H results with sales growing by 22% and net profits 12% higher than last year. The solid sales growth was led by online sales and wholesale business. China’s EV sales volumes grew 124% YoY (wholesale) and 117% YoY (retail) in July, much faster than the growth of the overall passenger vehicle market and having a penetration rate of 26.7%. XPeng (09868:xhkg) and Nio (09866:xhkg) surged by more than 4%.
In semiconductors, Hua Hong (01347:xhkg) reported strong results with better-than-expected revenues and gross margins, driven by higher average selling prices (ASP) on an improved product mix. The management maintained a positive outlook and considered weakness in demand to be controllable. On the other hand, SMIC (00981:xhkg) inline results but the company noted that orders from some of its customers could fall meaningfully in the near term due to high inventories and saw a recovery only coming at around the end of 2022 or early 2023. SMIC fell 3.6%.
Over the last week, Hang Sent was flat and CSI300 gained 0.8%, lagging the U.S. and other Asian markets. Companies that accounted for 16% of the total market capitalization of Hong Kong, Shanghai, Shenzhen, and Chinese ADRs have reported 1H22 results with earnings growing by 4% YoY in 1H22 and 8% YoY in 2Q22.
Dollar broadly weaker last week
The USD reversed some of the week’s losses on Friday, ending higher at 105.60 as Fed speakers continued to push back against easing expectations for next year. NZDUSD was the biggest gainer of the week on the G10 board with the RBNZ meeting this week likely to see its fourth consecutive 50bps rate hike. AUDUSD followed closely amid gains in commodities and a risk-on sentiment. USDJPY remains stuck in a broad 130-140 range. EURUSD faces further pressure this week as the water level at Germany’s Rhine River continues to hinder trade in the region.
Crude oil prices (CLU2 & LCOV2)
Crude oil prices made a strong recovery last week as demand concerns were somewhat eased with better-than-expected data, lower gasoline prices in the US, a weaker dollar as well expectations of Fed’s rate cuts next week that helped improve the growth outlook. In addition, the International Energy Agency (IEA) lifted its global consumption estimate by 380 kb/d, saying soaring gas prices amid strong demand for electricity is driving utilities to switch from expensive gas to fuel-based products. Meanwhile, OPEC may struggle to raise output in the coming months due to limited spare capacity. However, a slight reversal was seen on Friday with WTI futures pressured lower towards $91.50 and Brent futures back below $98/barrel amid Iran supply concerns.
Copper gains may be checked again
Copper led the base metals higher last week amid signs of a peak in US inflation being interpreted as resulting in a Fed pivot next year. However, gains were trimmed on Friday amid slowing credit growth in China, and further risks are seen as China’s rising Covid cases plunged more areas into tighter restrictions and complete lockdowns. Still, we remain bullish long term and only a close below 341.60 will turn the short-term trend lower.
What to consider?
University of Michigan’s positive surprise aided the risk-on sentiment
The University of Michigan headline rose to 55.1, well above the expected 52.5 and prior 51.5, while expectations also topped consensus, bouncing to 54.9 from 47.3 (exp. 48.4), but conditions dropped to 55.5 from 58.1 (exp. 59.0). Regarding the consumer inflation expectations, encouragingly, the year-ahead metric eased for a second consecutive month, falling to 5.0% from 5.2%, which is the lowest level since February. Although, the 5-10yr metric rose to 3.0% from 2.9%, consistent with its range over the past year despite remaining high relative to its pre-pandemic pattern. The report isn’t a complete surprise, given lower pump prices are helping to improve the sentiment.
China’s aggregate financing and loan data decelerated
China’s growth rate of outstanding aggregate financing slid marginally to 10.7% YoY from 10.8% in June. Outstanding loan growth fell to 11.0% YoY from 11.2% YoY in June. When looking at the sequential changes of new aggregate financing and new RMB loans made in July, the deceleration was more remarkable. New aggregate financing dropped to RMB756 billion in July from RMB5,173 billion in June and new RMB loans fell to RMB679 billion in July from RMB2,810 billion in June. The decline of household medium-to-long-term loans to RMB149 billion in July from RMB417 billion in June or RMB397 billion in July 2021 reflected a weak property sector. Corporate loan demand was still weak. New loans to corporate sector in July plunged to RMB288 billion from June’s RMB2,212 billion.
Five central state-own enterprises applied for voluntary delisting from the New York Stock Exchange
After the Hong Kong market close, PetroChina (00857:xhkg/PTR:xnys), China Petroleum & Chemical Corporation, also known as Sinopec (00386:xhkg/SNP:xnys), Sinopec Shanghai Petrochemical (00338:xhkg/SHI:xnys), Aluminum Corporation of China, also known as Chalco (02600:xhkg/ACH:xnys), and China Life Insurance (02628:xhkg/LFC:xnys) announced that they had notified the New York Stock Exchange (“NYSE”) that they will apply for delisting of their American depository shares (“ADSs”) from the NYSE. It is expected that the American Depository Receipt (“ADR”) programs will be terminated between September 1 and October 16, 2022, and the ADSs issued under these ADR programs can be surrendered for their underlying H shares, which will continue to trade in the Stock Exchange of Hong Kong (“SEHK”). More details can be found in our recent article.
President Xi is expected to meet with President Biden in November
The Wall Street Journal, citing officials involved in the preparation, says that President Xi and President Biden will meet on the sidelines of either the G20 meeting in Bali, Indonesia or the Asia-Pacific Economic Cooperation summit in Bangkok Thailand in November.
Hong Kong Real GDP’s final figures were revised upward but the 2022 full-year forecast was trimmed
The final reading of Q2 Hong Kong Real GDP growth came in at -1.3% YoY or +1.0% QoQ seasonally adjusted non-annualized, which is slightly improved from the preliminary figure of 1.4% released at the beginning of the month. The Hong Kong SAR Government however revised its full-year forecast down to between 0.5% growth and -0.5% contraction citing the worsening external trade environment and ongoing cross-boundary transport disruptions.
Japan’s Q2 GDP unimpressive
Japan reported Q2 GDP this morning, which came in below expectations at 2.2% q/q sa annualized (vs. 2.6% expected) but higher than Q1’s -0.5% amid relaxation in Covid curbs helping to spur a recovery in consumption. This run rate of growth may however remain tough to maintain given the fresh surge in pandemic cases in Japan, even though the government has stayed away from announcing any major further restrictions. Soaring inflation is also curtailing the spending power of households, as energy prices continue to surge and yen remains near its record lows.
Meituan and Li Auto are expected to report
Meituan (03690:xhkg) and Li Auto (LI:xnas/2015:xhkg) are expected to report Q2 results today.
BHP reports earnings
Australia’s biggest miner BHP is scheduled today, and a cut in H2 dividend is likely on the cards.
Aramco profits soar on higher oil prices
State oil giant Saudi Aramco reported a soaring 90% rise in second-quarter profit on Sunday, beating analyst expectations and propelled by higher oil prices, volumes sold and refining margins. The company expects "oil demand to continue to grow for the rest of the decade, despite downward economic pressures on short-term global forecasts”. This further pushes up the performance of the energy sector in the Q2 earnings season, even as the technology earnings faltered.
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