Summary: Weak China sentiment reverberated through the markets, bringing US equities lower while Treasuries were volatile amid a very strong US retail sales report but Fitch warning of more bank downgrades. UK’s wage dynamics cemented a September rate hike and inflation data could bring the focus on a 50bps hike, but GBP could not hold the gains. Commodities were challenged by China data, Brent slid below $85 while Gold is testing the $1900 support.
US equities closed lower on Tuesday despite a very strong retail sales report, potentially because of continued weakness coming through from China’s economic data reverberating through markets. Banking stocks tumbled as Fitch warned of possible downgrades, with Comerica, Zions and Citizens Financial group all down over 4%. Major banks JPM and BAC were also more than 2% lower on the day.
Homebuilders out outperformed on the back of Berkshire stake initiations on D.R Horton, Lennar and NVR, while Nvidia extended its rally with more sell-side optimism ahead of its earnings report on August 23. Home Depot reported better-than-expected quarterly results, but sentiment was hurt by a weak demand outlook.
Initial downside pressure on Treasuries from a strong beat in US retail sales was reversed and 2year yields ended 1.5bps lower while 10year was up 2bps amid concerns that more US banks could be downgraded by Fitch.
While investors are still digesting the renewed fears of credit event risks from the property sector and the shadow banking system signified in trust companies and wealth management products, China’s activity data came in weaker than the already downbeat expectations. The surprise cuts on the policy 1-year Medium-term Lending Facility (MLF) rate and the 7-day reverse repo (OMO) rate failed to generate any fanfare. The Hang Seng Index dropped by 1%. Materials, properties, consumer staples, and financials were top losers while Chinese telcos advanced. Mainland investors were net buyers of HKD6.8 billion in the Southbound flows.
In the A-share market, the CSI300 shed 0.2% after falling as much as 1.2%. The strong rebound in the afternoon was driven by securities firms, banks, and pharmaceutical stocks. Northbound flows registered a net sale of RMB9.8 billion.
GBPUSD rose to highs of 1.2753 after a strong wage report on Tuesday cemented a rate hike for the September BOE meeting. However pair reversed back to the 1.27 handle subsequently, and inflation data will be on the radar today. Weak China sentiment, lower wage index and less hawkish RBA minutes weighed on AUDUSD which dipped to 0.6450, reversing from 0.65+ after China’s announcements to cut rates and consideration to cut stamp duty for stock trades. NZDUSD also plunged to 0.5950 and RBNZ announcement will be eyed today.
Crude oil prices slid on Tuesday to two-week lows, with Brent falling below $85/barrel as weakness in China’s economic data reverberated through the markets, spelling a broader risk off. Selloff came despite private inventories showing a large crude draw of 6.2mn barrels vs. 1.7mn barrels expected. Crude inventories at the Cushing hub are seen to be falling to their lowest level since April and there has been a sharp rise in refining margins in recent weeks. More measures from Chinese authorities are awaited, and focus today will also be FOMC minutes.
European gas jumped sharply for the second time in a week amid concerns of disruptions to LNG supplies. Discussions between union officials and Woodside progressed slow and concerns that a lack of an agreement by Friday could see industrial action commence underpinned. With the threat of possible strikes looming, the facility operated by Chevron Corp is also holding back some supply from the spot market, adding to the tightness.
Fitch Ratings warned on Tuesday that dozens of U.S. banks, including JPMorgan, the largest bank in the country, could be at risk of sweeping rating downgrades. Fitch lowered its "operating environment" rating for U.S. banks to AA- from AA in June, citing pressure on the country's credit rating, regulatory gaps exposed by the March regional bank failures and uncertainty around interest rates. Fitch said that higher borrowing costs and tighter lending standards have created a pressure cooker environment for many bank and non-bank businesses with large corporate debts.
Retail Sales slumped into the negative territory in an M/M seasonally adjusted terms of –0.06% while slowed to 2.5% Y/Y (vs 4.0%) in July from 3.4% in June. Industrial production growth slowed to 3.7% Y/Y (vs consensus 4.3%) in July from 4.4% Y/Y in June. Fixed asset investment growth slowed to 1.2% Y/Y(vs consensus 3.2%) in July from 3.3%. The weakness went beyond the property sector as infrastructure investment tumbled to 5.3% Y/Y in July from 11.7% in June, probably due to a lack of funding at the local government level. China’s urban unemployment rate increased to 5.3% in July from 5.2%. Meanwhile, the National Bureau of Statistics suspended releasing the breakdowns of the unemployment data including the widely watched youth unemployment to “review and optimize its survey methodology”. The last data point of the youth unemployment rate as at 21.3% in June.
While market participants were expecting some rate cuts for the rest of the year, the timing of today’s cuts on the policy 1-year Medium-term Lending Facility (MLF) rate to 2.50% from 2.65% and the 7-day open market operation reverse repo rate to 1.8% from 1.9% were a surprise. The People’s Bank of China might be increasingly concerned about the credit event risks in the property sector as well as the re-emergence of cracks in the shadow banking sector and decided to pull out this policy tool again just two months after the previous rate cut was earlier than most had expected.
Headline retail sales rose by 0.7% in July, accelerating from the upwardly revised 0.3% and above expectations of 0.4%. The core measure, ex-autos, was an even bigger surprise and rose 1%, above the 0.4% expected and 0.2% prior. The super core, ex gas and autos, rose 1% (prev. +0.4%), while the control metric, which feeds into the GDP numbers, was also hot, rising 1.0% (exp. 0.5%, prev. 0.5%). Atlanta Fed GDP Now estimate for Q3 be revised up to 5.0% from 4.1%, previously signalling little scope for now for Fed to pivot to rate cuts.
After a blowout Japan GDP print yesterday, the Reuters Tankan survey reported today highlighted an improvement in sentiment from large manufacturers and non-manufacturers. Large manufacturing sentiment index rose to +12 in August from +3 in July, and outlook was also strong at +14 in the next 3 months. Non-manufacturing sentiment, meanwhile, surged to +32 in August from +23 in July and is seen at +26 in three months. Firms still faced challenge to pass on high input costs.
UK labor data for July was reported yesterday, and there were only modest signs of a cooling while wage pressures continued to complicate the inflation trajectory. The number of payrolled employees increased by 97k in July against consensus estimates of a 12k drop, while the June figure was also revised higher to 47k from -9k previously. Unemployment rate ticked up to 4.2% in 3m to June from 4.0% previously but the biggest shock was the average weekly earnings which came in at 8.2% YoY for the 3m to June from 7.2% previously and 7.4% expected. A September pause from the BOE now looks unlikely and more than a 25bps rate hike is priced in by markets.
July inflation print is also out today where disinflation trends may be more apparent given household energy bills declined sharply in the month amid the resetting of the OFGEM price cap. However, services CPI is the bigger focus for Bank of England and holiday season may have kept it elevated. If that drives core CPI to come in higher than expected, we could see BoE’s September rate hike pricing touching 50bps.
The RBNZ announcement is due on Wednesday and rates are likely to stay unchanged with inflation softening and unemployment rate rising since the July meeting. However, the bank will likely reaffirm that the OCR will need to remain at a restrictive level for the foreseeable future. Focus also on the Bank's forecasts, specifically the 'track' of the cash rate ahead to gauge when interest rate cuts could begin.
Home Depot (HD:xnys) exceeded 2Q23 EPS expectations with USD 4.65 (4% above consensus USD 4.45). Revenue was USD42.9 billion, beating the consensus of USD42.1 billion despite a 2% Y/Y decline. Comparable sales dropped 2% Y/Y, better than expected -3.5%. Demand was weak for pricier items but stronger for smaller project-related categories. Operating margin fell 111 bps Y/Y to 15.4%, better than the anticipated 15.1%. Gross margin dropped 8 bps Y/Y to 33.0%. The management provided full-year guidance of 2%-5% decline in revenue and a 7%-13% Y/Y decline in EPS. A $15B share repurchase plan was also announced.
This week in the US, one of the key focal points of earnings announcements is Cisco (CSCO:xnas), which is set to illuminate the substantial corporate investments made in networking equipment and solutions. According to market consensus data from Bloomberg, analysts are projecting a 15% rise in revenue, reaching USD 15.05 billion. Additionally, the anticipated growth in adjusted earnings per share (EPS) is approximately 28%, reaching USD 1.06.
Investor concerns regarding Tencent (00700:xhkg) revolve around slower year-on-year games revenue growth, potentially affecting overall acceleration due to new game competition and mixed feedback on Valorant China. Furthermore, uncertain macroeconomic recovery is reflected in estimated ad revenues despite positive WeChat trends. Growth prospects for Tencent's 2Q cloud division appear restrained, with a comparatively slower rollout of consumer AI applications compared to rivals Alibaba and Baidu. The gradual Prosus divestment of its Tencent stake is also shaping the investment landscape. Anticipating the results announcement today, the market consensus foresees a 13% Y/Y revenue increase to RMB 151.96 billion and 26% Y/Y growth in adjusted EPS, reaching RMB 3.71.
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Chief Investment Strategist
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Chief Investment Strategist
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Chief Investment Strategist
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Head of Fixed Income Strategy
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Head of Commodity Strategy