Global Market Quick Take: Asia – June 30, 2023

What’s happening in markets?

US equities (US500.I and USNAS100.I): Bank stocks gain after the Fed’s annual stress test on large banks

Financials, rising 1.7%, topped the gains within the S&P 500 as banking stocks surged after the Federal Reserve annual stress test says that the 23 large U.S. banks were deemed well-capitalized to withstand severe economic and market scenarios. Wells Fargo (WFC:xnys) jumped 4.5% and JP Morgan (JPM:xnys) added 3.5%. The S&P 500 gained 0.5% to 4,396 as technology stocks underperformed. The Nasdaq 100 slid 0.2% to 14,939 while the Russell 2000 advanced 1.2% to 1,881.

Micron (MU:xnas) pared all its post-earnings gains to close 4.1% lower as analysts showed concerns about the pace of the memory chip maker’s recovery. In extended hours, Nike (NKE:xnys) slid over 4% after reporting FY Q4 earnings and FY 2024 revenue guidance missing estimates

Treasuries (TLT:xnas, IEF:xnas, SHY:xnas): Yields jump after Q1 GDP upward revision and decline in initial jobless claims

Large upward revisions to Q1 GDP and its personal consumption component, coupled with an unexpectedly large decline in the initial jobless claims triggered large selling in the 3-month SOFR interest rate futures and the 2-year Treasury notes as traders scrambled to price in more rate hikes for 2023 and less cuts for late 2023 and 2024. The Sep-Dec SOFR spread (SR3U3-Z3) reached the positive territory at one point during the session, completing pricing out any rate cut in 2023, for the first time since the Fed started this rate hike cycle in March last year. The SR3U3-Z3 spread finished the day at -2bps, indicating the 3-month interest rates in September and December 2023 are expected to be nearly at the same level. The market is now pricing in an 84% chance of a July rate hike of 25bps and a peak rate of 5.42% in November.

The curve bear-flattened as the 2-year yield surged 15bps to 4.86% while the 10-year yield climbed 13bps to 3.84%. The 2-10-year spread widened to -106bps at one point before settling 2bps flatter at -103. Large flattening trades were also put on with the selling of Dec 2023 SOFR futures versus the buying of the Sep 5-year T-note futures.

Hong Kong & Chinese equities (HK50.I & 02846:xhkg): Indices decline; ZTE and TCL surge

Hong Kong and Chinese equities faced a downturn after a two-day rally, with the Hang Seng Index declining 1.2% and the CSI300 Index dropping 0.5%. The decline was widespread, particularly affecting the consumer discretionary sector. Li Ning (02331:xhkg) experienced a significant plunge of 6.2%, while Bosideng (03998:xhkg) tumbled 8.2% and China Tourism Group (01880:xhkg) declined by 7.6%. Additionally, lagging sectors included materials, consumer staples, information technology, and China property names.

However, ZTE (00763:xhkg) managed to buck the trend, jumping 7.5% after introducing new wireless AR glasses equipped with AI. TCL Electronics (01070:xhkg) also saw a substantial surge of 10.1%. XPeng (09868:xhkg) gained 1.2%, building on its strong performance from the previous day as the EV maker launched its G6 model.

In the A-share market, manufacturers of robots and robotic equipment surged following the release of an action plan by the Beijing municipal government aimed at boosting innovation and development in the robotic industry. Telecommunication stocks also outperformed.

FX: Data-boost to dollar, SEK drops despite Riksbank hike

The US dollar erased all of its decline from the June FOMC meeting as Fed Chair Powell continued to reiterate his hawkish stance and economic data also suggesting that US economy is still resilient and may need more rate hikes to bring inflation back to target. The biggest drop on the G10 board came in SEK, which fell to record lows after 25bps rate hikes from Riksbank as expected and EURSEK rose to all-time highs of 11.85 as investors remain worried about the impact of more rate hikes on the property market. EURUSD also pushed lower after a set of strong US eco data, and broke below 1.09 with eyes on prelim June CPI due today. Higher Treasury yields brought USDJPY in close sight of 145 and risk of intervention is looming large. Cyclical currencies AUD, CAD and NZD were the outperformers, with AUD also supported by a 0.7% MoM growth in May retail sales suggesting scope for more RBA rate hikes.

Crude oil: a notch higher amid US data strength and inventory draw

Crude oil prices rose slightly on Thursday with a strong set of US data sending more fears of rate hikes by the US Fed, which meant demand concerns. But these concerns were somewhat balanced by a bigger-than-expected fall in U.S. crude inventories. The EIA reported US crude inventories fell by 9.6 million barrels, raising the prospect of tighter supplies in the world’s largest consumer as the travel-heavy summer season heats up. WTI prices still stayed below $70/barrel and Brent below $75 with May PCE and Eurozone inflation to be the next big tests.

Gold: reversed a drop below $1900

Gold saw a dip below the key $1900 mark for the first time since March as US jobless claims and GDP data signaled scope for more rate hikes making it easier for markets to digest Powell’s message. However, buying emerged below the big psychological level and the precious metal reversed back to $1910-levels quickly given there are several reasons to be bullish on Gold in medium-to-long term.

What to consider?

A deluge of strong US data begs the recession question

US initial jobless claims reversed lower to 239k (exp. 265k, prev. 264k), after three consecutive prints above 260k. This has once again raised concerns on whether the pace of cooling in labor markets is enough for the amount of tightening that the Fed has done, and it brough US treasury yields and US dollar decisively higher as pricing for July rate hike rose to over 80%. The final Q1 GDP print was also revised up to 2.0% from 1.3%, well above expectations for a rise to 1.4%. The report noted that the updated estimates primarily reflected upward revisions to exports and consumer spending (revised up to 4.2% from 3.8%) that were partly offset by downward revisions to non-residential fixed investment and federal government spending.

Fed speakers continue to be split

While Fed Chair Powell continued to push for an additional two or more rate hikes, some of the other Fed members sound less sure. Atlanta Federal Reserve President Bostic was on the wires yesterday and he said that he is not ready to rule out further rate hikes if required, but does not see need as he sees the Fed policy to be in place to bring inflation down to 2%. He also said that Powell sees more urgency to hike rates than he does.

US PCE to be the next big test after Powell’s hawkish tilt

This week we have seen an increasingly hawkish stance from Powell and other central bankers, and economic data has also suggested a resilient US economy. This has meant that market is now starting to absorb the message on two more rate hikes and the May PCE report due today will be the next big test for that. While headline PCE is expected to cool to 0.1% MoM from 0.4% in April, the core measure is still expected to tick up to 0.3% MoM from 0.4% in April. As long as there is no upside surprise, markets will continue to challenge Fed’s projection of two additional rate hikes. But if the data is firmer, we could see yields and US dollar pushing higher as pricing for more rate hikes picks up for this year.

Eurozone’s core inflation rebound may not bring EUR higher

The eurozone is set to release preliminary inflation data for June on Friday after German CPI on Thursday remained hot. The harmonized reading came in at 6.8% YoY from 6.3% YoY previously in May. Eurozone’s headline rate of inflation is expected to moderate, but underlying inflation is expected to tick higher. Expectations are for YoY HICP to fall to 5.6% from 6.1%, but with the core metric expected to rise to 5.5% from 5.3%. ECB policymakers continue to be hawkish and make a case for more rate hikes, and a July rate hike is priced in with ~90% probability. A firmer core inflation print could bring that higher and bring 4% terminal rate in play, but may not necessarily mean a push higher for EURUSD as growth concerns have escalated after the disappointing flash PMI for June reported last week.

Japan’s Tokyo CPI comes in softer than expected

Japan reported June Tokyo CPI this morning, and the print was largely cooler than expectations. Headline CPI came in at 3.1% YoY vs. 3.4% expected and 3.2% previous, while core core CPI (ex-fresh food and energy) was at 3.8% YoY vs. 4.0% expected and 3.9% previous. This is a leading indicator for nationwide CPI and suggests room for cooling inflationary pressures, thereby leaving little scope for BOJ policy tweaks as against market conditions where pressure continues to ramp up.

The USD 116 billion increase in the TGA between June 21 and 28 is 79% offset by a fall in the reserve repo balances

As of June 28, Treasury brought its cash balances at the Treasury General Account (TGA) to USD408.6 billion, approaching its target end of June target of USD425 billion. This USD116.5 billion increase, which represents a liquidity drain from the banking system was 79% offset by a fall of USD 91.8 billion in the overnight reserve repurchase agreement balances held by the money market funds at the Fed. During the same period, the Fed’s holding of securities dropped by USD15.8 billion in the ongoing process of quantitative tightening. The reserves held by US banks at the Fed fell by a modest USD27.9 billion to USD 3,176 billion. You can find more details about how the TGA and reverse repos work in this Saxo article.

China's Manufacturing PMI to remain in contraction, non-Manufacturing PMI to decline

The median forecast from Bloomberg’s survey of economists is for the official NBS manufacturing PMI to tick up marginally to 49.0 in June from 48.8 but remain below 50 the threshold below which indicating contraction. The stabilization of demand for commodities and steel as revealed in high-frequency data may have contributed to the projections of a small pick-up. The continuous sluggishness in the property sector and the potential deceleration of the initial post-reopening boom in services activities may have caused economists to project a decline in the non-manufacturing PMI to 53.5 in June from 54.5 in May. The NBS PMIs are scheduled to release today at 9:30 a.m. local time.

Nike’s FY Q4 earnings and FY 2024 revenue guidance miss estimates

Nike reported FY Q4 net income of USD1.03 billion, falling 28.5% from a year ago. EPS dropped to USD0.66, down 26.7% from USD0.90 in the same quarter last year and below the USD0.68 anticipated by analysts. The sportswear giant provides the fiscal year 2024 revenue guidance at mid-single digits while analysts were projecting a 6% increase. The results disappointed investors, seeing its shares sliding over 4% after the results announcement.

The FBI concludes Chinese balloon used for Spying, contradicting Beijing's weather monitoring claim

According to officials, the FBI's analysis revealed that the Chinese balloon, which traversed over the sky of multiple states in the US from January 28 to February this year, was filled with U.S. equipment and Chinese-manufactured sensors and other equipment to gather photos, videos, and other data for transmission to China. These findings support Washington’s suspicion that the balloon was intended for espionage purposes, contrary to Beijing's claim of weather monitoring.

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