Global Market Quick Take: Asia – May 30, 2023

What’s happening in markets?

US equities (US500.I and USNAS100.I): closed for Memorial Day holiday

Cash equity markets were closed for Memorial Day holiday. S&P 500 eMini futures (ESM3) rose 0.3% and Nasdaq100 eMini futures (NQM3) gained 0.5% after President Biden and House Speaker McCarthy reached a deal to lift the budget ceiling.

Treasuries (TLT:xnas, IEF:xnas, SHY:xnas): closed for Memorial Day holiday

US Treasuries returned from the long weekend seeing mixed reactions to the budget ceiling deal. While fading flight to safety demand saw the 2-year yield rising 2bps to 4.59%, yields on the 10-year declined by 3bps to 3.77% as the curb on federal spending could lower economic growth.

Chinese equities (HK50.I & 02846:xhkg): online gaming stocks surge as broader markets decline

Hong Kong equities resumed trading after the extended weekend, and much to the dismay of investors, they continued their downward spiral, despite the recent upward trajectory of US markets. Prior to the holiday break, Hong Kong had already been grappling with lacklustre returns. The benchmark Hang Seng Index endured another setback, plunging by 1% to 18,551, marking yet another low point in 2023.

One notable casualty within the Hang Seng Index was Meituan (03690:xhkg). Despite delivering better-than-anticipated revenue growth and impressive earnings figures for Q1, the leading food delivering company experienced an 8.1% tumble, making it the index's biggest loser. Investors, whose faith in China's economic recovery is waning by the day, focused on Meituan's underwhelming in-store margins and lackluster guidance.

In contrast, NetEase (09999:xhkg) enjoyed a surge of 7.2% after reporting adjusted net income of RMB 7.6 billion, surpassing the Bloomberg consensus by 33%. The company's robust performance was buoyed by its successful margin expansion efforts. Additionally, the online gaming sector received an added boost from Nvidia's recent introduction of innovative generative AI products, which enable seamless verbal interaction between gamers and in-game characters.

The positive momentum extended to A-share online gaming developers as well. Kaiser (China) Culture (002425:xsec) and Kingnet Network (002517:xsec) both registered an impressive surge of 10%, hitting the daily limit. Similarly, Giant Network (002558:xsec) increased notably by 8%. On the other hand, solar and wind power names faced a downturn, while A-share oil and gas stocks gained ground. The CSI300 Index slipped by 0.4% to 3,834, remaining marginally above recent lows.

FX: Holiday-thinned trading keeps dollar range-bound

As risk-on sentiment ensued after the debt ceiling deal late on Sunday, dollar was pressured somewhat lower in Asia before making a recovery overnight in thin Memorial Day holiday markets. AUDUSD managed to stay above 0.65 but focus shifts to China’s PMIs and Australia’s April CPI due Wednesday. The sharp surge in US Treasury yields lately has also brought about fresh pressure on the Japanese yen but USDJPY traded slightly lower to 140.20 from fresh highs of 140.92 earlier in Asia on Monday. EURUSD also still supported at 1.07 and GBPUSD still around 1.2350, but FX moves can be substantial as markets return today and focus returns to passage of the debt ceiling deal ahead of Friday’s non-farm payrolls.

Crude oil: focus on OPEC

Oil prices also have their focus on the response from the Congress on debt ceiling deal, and edged higher as efforts were made to avert a US default. WTI futures rose to $73 but there was no settlement as Monday was a holiday. Brent traded above $77 amid thin holiday markets. Focus is on the OPEC 3-4 June meeting, with increasing prospects of a production cut, after Russia also walked back on comments that OPEC wouldn’t intervene at the June meeting. Russian Deputy Prime Minister Alexander Novak said they will engage in discussions with partners to determine what is best for the market. This follows Saudi Arabia’s Energy Minister warning short speculators to “watch out”.

What to consider?

US debt ceiling deal back in focus today as Congress returns from holiday

While Biden and McCarthy got to an in-principle debt ceiling deal over the weekend, both will still have to secure enough backing from the Republican leaders and the White House to avert US default. The deal immediately triggered a backlash from rightwing conservatives. The first critical test will be a vote in the House expected on Wednesday. The Senate is due to follow with votes that could slip into next weekend. If no legislation is enacted by June 5, the US will run out of cash to pay all its bills, which could rattle financial markets and increase the risk of a recession.

Economists expect China’s manufacturing to contract and non-manufacturing to slow

Investors are now presented with a fresh set of insights aimed at discerning the trajectory of China's much-anticipated economic revival, ascertaining whether the weakness exhibited in April's data was merely a transient blip or indicative of a waning recovery. Economists surveyed by Bloomberg forecast that both the official NBS manufacturing PMI and the private Caixin manufacturing PMI will register at 49.5, marginally below the pivotal 50 mark, thereby remaining within contractionary terrain. Notably, economists have taken cognizance of the decline in the Emerging Industries PMI, which retreated from 53.1 in April to 50.7 in May. In addition, South Korea's exports to China, widely considered a bellwether for China’s manufacturing sectors, have recorded a contraction of 23.4% Y/Y during the initial 20-day period of May.

Meanwhile, economists in the Bloomberg survey expect continued expansion in non-manufacturing activities, albeit at a more moderate pace. The NBS non-manufacturing PMI, encompassing construction and services, is projected to decelerate from April's reading of 56.4 to 55.3 in May. Similarly, the Caixin services PMI is anticipated to dip from 56.4 in April to 55.2 in the same month.

Australia’s April CPI could rise, but AUD could find it hard to turn back higher

The monthly CPI for Australia is due on Wednesday, and April inflation is expected to tick higher to 6.4% YoY from 6.3% YoY previously when food prices saw notable gains. A weaker-than-expected print could confirm the bias from the Reserve Bank of Australia to pause at the next policy meeting on June 6. This would mean AUDUSD could also extend its down move further below 0.65 handle. However, if the print come out to be firmer-than-expected, it will complicate the task of the RBA. RBA Governor Lowe will be delivering a speech on Tuesday, a day before the Australian CPI is released, as he appears before the Senate in Canberra at 09:00AEST.

China rejects US invitation for defence chiefs meeting in Singapore