Global Market Quick Take: Asia – August 17, 2023

What’s happening in markets?

US equities (US500.I and USNAS100.I): markets decline with rise in bond yields

The S&P 500 Index dropped by 0.8% while the Nasdaq 100 Index plunged by 1.1% on higher Treasury yields and concerns about the spill-over effect on global demand from weakness in the Chinese economy. Consumer discretionary, communication services and real estate were the worst-performing sectors within the S&P500. Target (TGT:xnys) surged as much as 8.2% after an earnings beat but paired some of the gain to end 2.9% higher. Walmart (WMT:xnys) reports on Thursday. After the close, Cisco (CSCO:xnas) reported quarterly revenue and EPS beating consensus and rose around 2% in the extended hour trading.

Treasuries (TLT:xnas, IEF:xnas, SHY:xnas): Yields rise on strong industrial production and FOMC minutes

US Treasuries continued the recent selloff and bear steepening trend, with the 2-year yield 1bp higher at 4.97%while the 10-year yield rising 4bps to 4.25%. Selling initially emerged after the largest increase in industrial production since January this year and intensified following the release of the July FOMC minutes which suggested the Fed might continue raising interest rates.

Hong Kong & Chinese equities (HK50.I & 02846:xhkg): ): Hang Seng Index slides amid concerns about the Chinese shadow banking sector

The Hang Seng Index declined for the fourth consecutive day as pessimism regarding China’s economy and risks in the Chinese property and shadow banking sectors continued to impact market sentiment. However, the decline of the benchmark index on Wednesday was driven by weakness in financials and consumer stocks. Chinese banks and insurance companies fell due to investor concerns about their exposures to the trust industry, which is a key play in the Chinese shadow banking sector. Home prices in the top 70 cities in China fell by 0.23% month-on-month in July. The downward revision of China's 2023 GDP growth forecasts by JPMorgan and Barclays to 4.8% and 4.5%, respectively, also weighed on market sentiment. As a result, the Hang Seng Index saw a significant decline of 1.4%. Heavy selling was also on EV names, with Nio (09866:xhkg) falling 5.5%. Coupled with declines in the Internet space, the Hang Seng Tech Index lost 1.3%. Chinese property stocks rebounded, with Longfor (00960:xhkg) and Country Garden (02007:xhkg) added 3.7% and 2.5% respectively. Buying from the mainland dried up on Wednesday as the Southbound flows turned to a net sale of HKD4.6 billion.

In A shares, the CSI300 declined by 0.7%, dragged down by telecommunication, media, semiconductors, computing and electronics while property, construction materials, and non-bank financials rebounded.

FX: JPY on intervention watch at YTD lows

USDJPY spiked higher to fresh highs of 146.49 at the time of writing to reach fresh YTD highs, overtaking the 76.4% retracement level at 146.12. There were some signs of a verbal intervention yesterday, but traders continue to test the patience of Japanese authorities in the absence of any major BOJ tweaks. GBPUSD was the G10 outperformer on double dose of hawkish data this week, and touched highs of 1.2766 before reversing back lower amid structural headwinds. AUDUSD testing 0.64 handle ahead of employment data and NZD fell below 0.5920.

Crude oil: extending downside on China concerns and hawkish FOMC minutes

Markets were in a risk-off again amid sustained China concerns and FOMC minutes suggesting more rate hikes may be on the cards. This prompted oil traders to shrug off concerns emanating from tightening supplies or the impending hurricane season (discussed below), as well as another large drawdown in inventories. EIA data reported that US commercial crude oil stockpiles fell 5.96mn barrels last week. A data-light day ahead but dollar trajectory will be key for the commodities complex.

Gold: breaking below $1900

Gold dropped below key $1,900/oz level as the FOMC minutes were hawkish at the margin keeping the door wide open for more rate hike. Higher yields and a two-month high in the USD dented investor demand for the precious metal. Better-than-expected economic data has also weighed on safe haven demand. June lows of $1891.80, which also coincide with the 38.2% retracement, will be the first target now ahead of key support at $1865.

What to consider?

FOMC minutes suggest Fed tightening cycle is not over

Fed’s July meeting minutes were hawkish at the margin, with most officials seeing “significant” upside risks to inflation that may require more tightening. However, a number of participants warned of the risks of accidentally tightening policy too much. Meanwhile, a number also saw economic risks becoming more balanced but overall it noted that uncertainty remains elevated and future policy decisions are to be driven by the totality of data. Overall, mixed views from policymakers but suggesting more evidence of inflation softening may be needed to bring policy ease. Meanwhile, US industrial production jumped 1.0% in July (prev. -0.8%), above the expected 0.3%.

UK CPI comes in hotter-than-expected

After a strong wage report, yesterday’s July CPI for UK also exceeded expectations. Headline CPI came in at 6.8% YoY from 7.9% YoY previously, but higher than the 6.7% expected. Core CPI was unchanged from the June level at 6.9% YoY vs. 6.8% expected. The hot core print coupled with Tuesday's hot wages data has only emphasised hawkish expectations for the BoE with a 25bps fully baked in for September, with about 25% probability of a larger 50bps move.

Atlantic hurricane season may be getting underway

The peak of Atlantic hurricane season begins in mid-August but so far this year has been light with just four named storms. Peak of the season is around September 15, and it is expected that the remainder of the 2023 Atlantic hurricane season will to be busier than originally anticipated, partly due to warming ocean waters, according to the National Hurricane Center. The NOAA outlook calls for a 70% chance of 14 to 21 named storms, with six to 11 reaching hurricane strength and two to five major hurricanes. This could potentially tighten the US gasoline market and disrupt oil production and trade flows.  

Australia’s labor data in focus

AUD has been the G10 underperformer so far in this quarter amid the listless Chinese recovery and RBA’s pause. Australia’s labor market data is out today and may show continued risks of a tight labor market, aiding inflationary pressures which face upside risks in H2 on a sharp rise in electricity tariffs in July and unfavourable base effects. Overall employment change is expected at 15k from 32.6k in June with unemployment rate rising to 3.6% from 3.5%.

Cisco beats in revenue and EPS

Cisco reported quarterly revenue of USD15.2 billion, an increase of 16% Y/Y, and 1% above the consensus of USD15.05 billion. A better-than-expected performance in Secure, Agile Networks revenue countered a revenue miss in Internet for the Future. Adjusted EPS grew 37% Y/Y to USD1.14, beating consensus USD1.06 by over 7%. The company provided guidance for the current quarter revenue of USD14.5-14.7 billion, in line with expectations. The adjusted EPS guidance of USD1.02-1.04, however, was better

Tencent reports strong advertising, offset by weaker gaming revenue

Tencent (00700:xhkg) reported in-line results for Q2. Revenue increased by 11% Y/Y to RMB149 billion, 1.8% below the consensus estimate of USD151.96 billion. Online adverting revenue surprised positively, giving a 34% Y/Y growth, much better than the 23% anticipated. Online gaming revenue, however, came in slower with a 5% Y/Y revenue growth, below the 8% projected by the consensus estimates. Adjusted EPS increased 34%, beating consensus.

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