Market Insights Today: – Profit-taking in a risk-off session, higher inflation in Spain, central bank decisions and corporate earnings ahead, US-China tech war - 31 January 2023

What’s happening in markets?

Nasdaq 100 (NAS100.I) and S&P 500 (US500.I) declined in a risk-off session

Markets see red on concern FAANG’s will bite into markets, while caution is around that markets mispriced the Fed will cut rates later this year, plus end-of-month rebalancing hits. The risk is the Fed says it has “more work to do”, which could send equities into a tailspin. Ahead of the Fed, ECB, and BOE meeting this week, for the first time in 2023, with the central banks potentially setting the course of interest rates for the year, risk management resulted in traders and investors booking profits, which dragged the S&P500 down 1.3% and the Nasdaq 100 2.1%.  Tesla (TSLA:xnas) dropped 6.3% after Ford Motor (F:xnys) cut prices of its electric vehicles in response to Tesla’s recent price cuts. Nvdia (NVDA:xnas) plunged 5.9% alongside with other chip makers on the risk of an escalation of the U.S.’ ban on exporting chips to China.

We think there the short-term correction may last for a while though we are bullish equities in Q1 overall, so potentially consider taking profits and buying downside optionality (puts), and consider tight stops. Secondly, the worry is that major tech company earnings will continue to slump. This is probably why profit-taking in Meta, Apple, Amazon and Google parent Alphabet is occurring ahead of reporting results. Ultimately, we think their outlooks could set the tone for equities this year. Click here for more on US earnings.

Yields on US Treasuries (TLT:Xmas, IEF:xnas, SHY:xnas) higher on Spanish inflation upside surprise

U.S. Treasuries sold off in price with yields 3bps to 5bps higher across the curve following the rise in European bond yields triggered by an increase in Spain’s EU harmonized CPI to 5.8%, a full percentage point above market expectations. The Treasury Department announced a Q1 borrowing plan of USD 932 billion, larger than its previous estimate of USD 576 billion released in last October. The yield on the 2-year rose 4bps to 4.23% and that on the 10-year climbed 3bps to 3.54%.

Hang Seng Index retreated; CSI300 pared opening gains

Falling 2.7% on Monday, the Hang Seng Index gave back almost all its gain from last week. The Politico story on the Biden administration’s plan to ban U.S. investments from investing in certain high-tech areas in China, such as AI, quantum, cyber, 5G, and advanced semiconductors triggered profit-taking in mega-cap China internet stocks. Alibaba (09988:xhkg), tumbling 7.1% and Tencent (00700:xhkg) sliding 6.7% were among the biggest losers within the Hang Seng Index. Hang Seng TECH Index plunged 4.8%. The Bloomberg story that reported the Netherlands and Japan had agreed to join the U.S. to restrict exports of advanced chip-making machinery to China added to the woes, in particular shares of Semiconductor Manufacturing International Corp (SMIC, 00981:xhkg), down 5%, and Hua Hong Semiconductor (01347:xhkg) falling 5.1%. Home sales in the 40 major cities during the Lunar New Year holiday shrank 14% from last year. Leading Chinese developer Country Garden (02007:xhkg) plunging 8.3% was the top loser within the Hang Seng Index, followed by Alibaba (09988:xhkg) which tumbled 7.1. Macao casino stocks slid on disappointing traffic that reached just 38% of the pre-pandemic level. CSI300 gapped higher by over 2% at the open when the Chinese market returned from a week-long holiday but pared most of it to finish the first post-holiday trading day only 0.5%. Auto, defense, electric equipment, and electronics were among the outperformers in A shares.

Australian shares hold steady, defying negative leads from Wall Street. Australian retail sales fall off a cliff, borrowing falls

Australia’s share market, as measured by the ASX200(ASXSP200.I) opened 0.3% higher today at 7,501 defying the futures and US markets negative lead. Not only are Australia shares outperforming US shares this year, but also UK’s FTSE . However, given materials prices could be at risk of a shorter term pull-back as mentioned above, it’s worth pointing out the technical indicators suggest the ASX200’s uptrend is weakening. Our Technical Analyst suggests a possible short term correction down to 7,167 should be ruled out. However, over the longer term, we think upside in the ASX200 is intact with mining companies to report some of the strongest earnings on record, and guide for their strongest outlooks in several years amid China reopening. For stocks, ETFs and baskets to watch, click here.  In company news today, Gold Road Resources (GOR) reported a drop in production in the prior quarter and higher costs due to inflationary pressure, but guided for higher grades in 2023. This follows Oz Minerals (OZL) also guiding for higher costs, which paints a picture of what we can expect for full year earnings season next month. In economic news, retail sales fell 3.9% in December, shocking the market, which expected sales to only decline 0.3%. On top of that, borrowing data also missed expectations. Borrowing rose 0.3% in December, vs Bloomberg’s consensus expecting lending to rise 0.5%. Today’s data is telling as it shows interest rates have taken effect on the consumer, and supports the market thinking that the RBA could potentially pause and then cut rates later this year. 

FX: Dollar recovers as risk sentiment deteriorates ahead of Fed

The USD was broadly higher against the entire G10 pack on Monday as risk sentiment was hurt by higher-than-expected Spanish inflation fuelling concerns on global inflation remaining higher-for-longer. Lower commodity prices also fuelled some profit taking in AUDUSD which is now testing the support at 0.7050. NZDUSD was also marginally lower but AUDNZD remained above 1.09. EURUSD made another attempt at breaking above 1.09 as ECB rate hike bets picked up, but retreated back to 1.0840 at the US close. GBPUSD also slid to 1.2350. Higher yields saw USDJPY back above 130.50.

In FX the US dollar picks up, pushing most currencies off course.

The US dollar index has bounced up off it lower and risen 0.5% and pressured most currencies lower, with the Aussie dollar (AUDUSD) falling 0.8% from its high, with the Aussie buying 0.7061 US. The Aussie against the US has fallen under its 200-day moving average after commodity prices rolled over, while there is caution the Fed’s Wednesday’s decision could cause the US dollar to rise. Should we see the Fed only hike by 0.25% as excepted and guide for only one more hike, or if the Fed mentions it’s hikes have been effective, or that its sees interest rates having a lag effect, then the AUDUSD could potentially rally back up. Supporting longer term upside in the AUD is the rise of China’s economy and commodity buying picking up. From a technical perspective, the bull may like to hear the 50 day moving crossed above the 200, indicating the longer term rally could remain intact, despite the RSI indicating, there are currently more sellers right now, than buyers. 

Commodity short term pull back risk – with prices already down from fresh peaks; oil down 5.6%, iron ore, copper and aluminium lose 2% ahead of the Fed

On Monday oil dropped 2.4%, while most commodities lost almost 1%, with the markets awaiting further evidence China is picking up demand - just as BHP, Rio and FMG alluded to. It seems traders are torn between real demand physical materially rising, but awaiting the Fed’s decision this week, which could result in the US dollar spiking, that would ultimately pressure commodity prices down further. So these factors raise the risk of a short-term correction across the board. That said, resources prices have been really strong up 17-70% from their lows. In 2023 alone iron ore and copper are up 9%, Aluminium up 11%, spot gold up 5%. However, with the commodity prices falling - it also raises the alarm that Aussie dollar and the Aussie share market could be at risk of a short term correction or consolidation as well. The key is to watch the US dollar index. Also keep in mind, over the longer term, commodity prices appear underpinned by rising demand amid lower physical supply. For more on commodities, see Saxo’s Commitments of Traders report, that highlights broad buying slowed in recent weeks.

Crude oil (CLG3 & LCOH3) prices slumped as dollar gathered steam

Oil prices dropped to three-week lows as the new week kicked off, with another interest rate hike on the table by the Fed this week boosting the US dollar. Higher-than-expected Spanish inflation also served as a reminder that rate hikes can continue.. Meanwhile, China returned from a week-long Lunar New Year holiday and all the gains that were built up in anticipation are now being put to test. The market is also cautious ahead of this week’s OPEC+ meeting. President Putin and Prince Mohammed bin Salman discussed cooperation within the group to maintain the stability of the global market. Russia also formalised its ban on sales to nations adhering to the G7 price cap on its fuel. WTI futures fell below $78/barrel while Brent was down to $85.

What to consider?

Spanish inflation fuels concerns on EU inflation surge

Spain’s HICP rose 5.8% YoY for January from 5.5% YoY in December, and came in a whole 100bps above expectations of a softer print at 4.8% YoY. This casted concerns on the pace of slowdown in the Eurozone inflation, and marginally increased ECB rate hike bets as well through the middle of the year. There was a resulting sell-off in bonds and European equity futures in the morning hours, and the risk appetite remained weak in the rest of the session as big earnings data and events in the week were eyed. Meanwhile, German GDP contracted for the first time on a QoQ basis since December 2021, down 2% vs expectations of remaining unchanged.

The Adani saga poses some key questions on India for foreign investors

India’s corporate governance has come back in focus with the Adani rout, alarming foreign investors who had been looking at India as a potential long-term opportunity especially with a shift away from China. While the extent of collateral damage can be contained and Modi’s popularity will be protected by a lack of coherent opposition, the key concern is how deeply the investor confidence gets dented and whether markets start to question India’s premium valuation. Read our Market Strategist Charu Chanana’s full report here.

Expecting pickups in China’s PMIs

China returns from a week-long Lunar New Year holiday, during which, sales in consumption-related industries grew by 12.2% from the same lunar calendar period last year. Estimates of passenger traffic from various sources all pointed to a strong recovery of activities. The official NBS Manufacturing PMI and Non-manufacturing PMI, scheduled to release this morning, are expected to bounce back strongly to the expansionary territory. The median forecasts from Bloomberg’s survey of economists call for the Manufacturing PMI to rise to 50.1 in January from 47.0 in December and the Non-manufacturing PMI to bounce sharply to 52.0 in January from 41.6 in December.

Japan Productivity Center panel hints at policy tweak

Several comments from a panel at Japan Productivity Center hinted at making the inflation target of 2% a long-term goal, suggesting that flexibility around inflation targeting may be considered by the new Chief. USDJPY slid below 130 on the report, before recovering later in the session. The panel also suggested that BOJ and the Japanese government should make a new joint statement so as to make responsibilities of the government clearer. FinMin Suzuki responded to the panel this morning saying that it is too early for a joint statement to consider revising the inflation goal. But speculation of a policy tweak will likely continue as the bOJ leadership changes get closer.