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Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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Market Insights Today: Mega week of data, central bank meetings & earnings; China returns – 30 January 2023
APAC Research
Summary: Megacaps drove NASDAQ higher to outperform on Friday, and will be in focus this week as Apple, Amazon and Google report results. US PCE data was broadly as expected, but details sounded an alarm on the weakening consumer again. Still, range-bound trading in yields and dollar continued, but that may come into question as we enter a pivotal event-driven week. China returns from Lunar New Year holiday and focus on consumption and imports drives gains in commodities. Geopolitical tensions on watch with explosions in Iran.
What’s happening in markets?
Nasdaq 100 (NAS100.I) and S&P 500 (US500.I) finished higher; Tesla, American Express surged
Nasdaq 100 climbed 1% and S&P 500 edged up 0.3% on Friday, bringing the benchmarks to advance 4.7% and 2.5% respectively over the week. Tesla (TSLA:xnas) led the charge higher with an 11% gain on Friday, extending its post-Q4-result rally. American Express (AXP:xnys) reported Q4 EPS of USD2.07, missing the consensus estimate by 6.6% and falling 5% Y/Y but raising its dividend by about 15% and providing upbeat guidance for 2023 and aspirations for 2024. The shares of the card payment and travel company surged 10.6%, making it the second biggest gainer within the S&P 500, behind Tesla on Friday. On the other hand, Intel (INTC:xnas) tumbled 6.4% after an earnings miss and downbeat guidance. Toy maker Hasbro (HAS:xnas) plunged 8.1% on lower revenue and layoffs.
Yields on US Treasuries (TLT:Xmas, IEF:xnas, SHY:xnas) finished mixed on Friday
Treasuries got cheaper by 4bps to 6bps across the curve during Asian hours on a stronger-than-expected Tokyo-area CPI before paring losses throughout New York hours. The much anticipated PCE deflators were in-line with expectations and did not create much fanfare. Yields on the 2-year and 5-year finished the Friday session 2bps cheaper and those on the 10-year were 1bp cheaper. However, the 30-year outperformed with a strong rally in the New York afternoon to finish 2bps richer.
Hong Kong’s Hang Seng Index gained 2.9% in a holiday shortened week
Hang Seng Index gained 2.9% in a shortened week to start the Year of the Rabbit while the mainland bourses remained closed for the Lunar New Year holiday. Hang Seng China Enterprises Index rose 3.9% and Hang Seng TECH Index surged 5.4% for the week. Most of the gain was registered on Thursday as investors reacted on their return to the encouraging high-frequency data on a strong recovery in traveler traffic and holiday consumption in mainland China during the Lunar New Year holiday. On Friday, Hang Seng Index traded sideways and managed to add 0.5% to the weekly gain. Chinese developers and Macao casino operators were among the top gainers on Friday. Country Garden (02007), rising 6.2%, was the best performer within the benchmark Hang Seng Index after the developer secured a 3-year bank loan. Another leading developer Longfor (00960:xhkg) surged 4.3%. Sands China (01928:xhkg) climbed 4.1%.
The China reopening drives the biggest monthly jump in Australian stocks since 2020
Australia’s share market, the ASX200(ASXSP200.I) is outperforming the S&P500 and Nasdaq, with a gain of 16% from its low - while also recording its biggest monthly gain since November 2020, (up 6.4%). Australia’s market - a dividend and commodity play, as well as being an investment proxy for China's reopening could also continue to outperform the US this year, given its heavy in materials such as iron ore, copper and aluminium, as well as financial companies - benefiting from higher interest rates. Mining giant BHP Group expects 17% dividend growth, Fortescue Metals sees higher sales in the first half of 2023 to China. Also consider, the iron ore price hit a new 2023 on the notion demand will rise. However, the iron ore (SCOA) price could be at risk of short-term correction, given it has rallied up almost 70%. So consider potentially taking profits given BHP shares are up 46% from their July low, Rio Tinto’s up 43%, Fortescue is up 53%. Although there is a risk of a short-term correction, as supply is lower than a year ago, the price over the longer term seems underpinned. Also consider sales to China have been increasing with Fortescue reporting greater buying of port side iron ore to 4.0mt (in the prior quarter), while guiding for H1 sales to rise to 9.3mt. Lastly, consider Australian insurers, banks and financials will likely benefit from the RBA’s rate hikes - QBE and WBC are expected to report profit jumps of over 30%.
FX: Dollar at risk of a breakout this week
The USD has been range-bound over the last two weeks, but mega week ahead with a slew of key data (ISM, jobs) and events (Fed, BOE and ECB) to be key catalysts. USDJPY testing a break above 130 again, with JGB yields hitting the new 0.5% yield cap again. USDCAD testing November lows of 1.3300 as oil prices gained traction again. EURUSD and GBPUSD will be watching not just the Fed meeting, but also the ECB and BOE meetings this week. EURUSD is struggling to take out 1.0920 but the scope for a hawkish surprise remains limited. GBPUSD keeps 1.2450 on the line.
The AUDUSD is down 0.2% to 0.7100 US. We continue to watch if the 50 day simple moving average crosses above the 200 day, marking a ‘golden cross’, which could lead to another quick run up. However should the Fed be more hawkish on Wednesday (in US time) the rally in the AUDUSD could be reversed. As for Australian economic news to watch; Australia retail sales are out for December on Tuesday, building approval for December are out on Thursday.
Crude oil (CLG3 & LCOH3) prices recover as China reopens
WTI crude prices jumped back over the $80/barrel mark early in Asia after slumping lower on Friday and closing the week with its first loss for the year amid technical factors. However, focus has moved back to China’s return today, with reports of consumption and import recovery taking the headlines. Pivotal week ahead with a slew of data and central bank meetings, which will continue the argument between recession and soft landing, driving energy markets. Meanwhile, OPEC+ meeting will also be on watch although no material changes are expected. The recent surge in geopolitical tensions may be at play as well with the explosions in Iran. Brent futures rose back above $87/barrel.
What to consider?
Pivotal week for equities; Fed meets, Apple, Amazon and Alphabet report earnings
It’s a critical and hugely pivotal week for markets with Fed meets, the ECB, and BOE to decide on interest rates. Thinking about US equites, for the bullish narrative to continue we firstly need to see a 0.25% hike as expected (taking rates to 4.75%) and we need the FOMC to indicate they are at the end of their tightening and avoid the words “we have more work to do”. Secondly, major tech company earnings are out from Apple, Amazon and Alphabet which could set the tone and direction for equities. We need to see optimistic outlooks. However if we see a margin squeeze and damper outlooks like Microsoft last week, we could see equities change direction. So when it comes to trading and investing, you may like to consider taking profits and buying downside optionality (puts). Considering for example Apple is up 12%, Amazon is up 21%, while the S&P500(US500.I) and the Nasdaq 100 (NAS100.I) are up 13%. And consider tight stops.
Fed’s inflation gauge, PCE, rises as expected but keeps services in focus
The Core PCE Price index rose 0.3% MoM, in line with expectations and up from the prior pace of 0.2%, while YoY cooled to 4.4% from 4.7% previously, also in line with expectations. While this confirmed that the Fed could continue to take comfort in the inflation trajectory, the breakdown showed that services inflation remains sticky. The prices for goods showed a continued decline, falling 0.7%, accelerating from the prior decline of 0.4% in November. However, the services prices, accelerated to +0.5% from +0.4%. The other key concern was the miss in personal consumption, highlighting that the consumer may be starting to pull off after a similar signal from the breakdown of the GDP data last week. December Personal consumption fell 0.2% (exp. -0.1%), with the prior revised lower to -0.1% from +0.1%.
Lunar New Year consumption in China rose 12.2% from last year
According to the VAT data released by the State Taxation Administration, sales in consumption-related industries grew by 12.2% during the Lunar New Year holiday from the same lunar calendar period last year. Sales of goods grew 10% and services consumption climbed 13.5% Y/Y. Dining-in spending surged 53% Y/Y. Tourist agency sales soared 130% Y/Y, and tourist hotel lodging was up 16.4% Y/Y. Budget hotel sales increased by 30.6%. Movies’ box office exceeded RMB6.7 billion.
China reiterated its push for domestic consumption; extended stimulus measures from its monetary toolbox
China’s State Council, in a meeting chaired by the outgoing Premier Li Keqiang, pledged to boost domestic consumption as a key driver to support economic growth in 2023. Separately, the People’s Bank of China extended some lending facilities to support investments that reduce carbon emissions, develop clean use of coal, and the transport and logistics industries.
The Netherland and Japan agreed to join the U.S. to restrict advanced chip-making technology export to China
After months of discussion since the U.S. imposed export controls over advanced chip-making machinery to China, the Netherlands and Japan agreed to join the U.S. on such restrictions. The Netherlands’ ASML and Japan’s Nikon Corp and Tokyo Electron are dominant players in advanced chip-making machinery.
Surge in rice prices threatens food inflation in Asia
Due to disrupted wheat supplies from Ukraine and strong demand, Thai rice, a benchmark for Asia, has soared to its highest in almost two years. Rice is a staple for half the world, and while wheat soared to a record in March last year, rice was subdued for most of 2022, constraining food inflation in Asia. Meanwhile, the Rough Rice contract traded in Chicago is up 21% year-on-year and, apart from a brief covid outbreak spike in 2020, trades near a 14-year high.
Explosions in Iran could raise geopolitical tensions
There are reports of multiple drone strike targeting factories in Iran. Reports state that the drones came from an Israeli airbase in Azerbaijan. Many of the reports are centered around Isfahan, which is a central city that's reportedly home to some military plants, perhaps the ones supplying drones to Russia for the war in Ukraine.
Intel (INTC:xnas) earnings missed and gave downbeat guidance
Intel reported an 8% Q/Q and 28% Y/Y decline in Q4 revenue and non-GAAP EPS of USD0.10, 47% below the street consensus of USD 0.19. Inventory overhang in servers and CPU in PCs adversely affected Intel’s results. The chip-making giant guided revenue to fall 22% Q/Q and 40% Y/Y and a non-GAAP loss of USD0.15 per share in Q1 2023. The management did not provide full-year guidance, citing a lack of visibility.
Australia’s biggest pure play Copper company reported quarterly output hit a record
Oz Minerals’ (OZL) quarterly copper output hit a record high and it sees higher production over 2023, while slightly less gold production compared to 2022 while also guiding for slightly higher costs. However, raw materials price strength in copper and gold could likely underpin its revenue and earnings growth. Also consider the company is recommending it is taken over by BHP.
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