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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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Global Market Quick Take: Asia – May 29, 2023
APAC Research
Summary: US equities rose while bonds were mixed on Friday on hot PCE data bringing focus back on inflation concerns while a debt ceiling deal improved sentiment. NASDAQ led the gains on Nvidia and artificial intelligence-driven surge, even as the Fed curve witnessed a hawkish repricing with the June rate hike now priced in with about 70% probability. USDJPY approaching 141 and entering possible intervention territory, while crude oil prices rose and gold slumped on improved risk sentiment.
What’s happening in markets?
US equities (US500.I and USNAS100.I): Artificial intelligence-driven surge powers semiconductor stocks and boosts market sentiments
The U.S. stock market experienced a significant rise as the dominance of artificial intelligence in semiconductor stocks and information technology companies continued. This surge in AI-led sectors fueled investor optimism, especially with the promising prospects of an imminent agreement on debt-ceiling negotiations over the weekend. The S&P 500 demonstrated impressive strength by soaring 1.3%, while the Nasdaq 100 experienced a remarkable surge of 2.6%.
The iShares Semiconductor ETF (SOXX:xnas) continued its upward trajectory, leaping an additional 6.5% on Friday. Noteworthy, Nvidia (NVDA:xnas) sustained its exceptional momentum, adding a further 2.5% to its value after an astounding gain of 24.4% the previous day. Furthermore, Marvell Technology (MRVL:xnas) witnessed a remarkable ascent of 32.7% as the microchip manufacturer anticipates explosive revenue growth in the next two years, driven primarily by the soaring demand for generative AI. Broadcom (AVGO:xnas) surged 11.5%.
U.S. equity markets are closed for Memorial Day on Monday.
Treasuries (TLT:xnas, IEF:xnas, SHY:xnas): reaction mixed as inflation concerns and debt-ceiling deal expectations impact yields
On Friday, the performance of U.S. Treasuries was mixed, influenced by various factors shaping market sentiment. The front end of the yield curve reacted to higher-than-expected PCE inflation figures, which included robust core services ex-housing reading, personal spending, and durable goods orders. These data releases heightened the expectations of a rate hike at the upcoming June FOMC meeting, with futures markets currently pricing in a probability of over 60%. Consequently, the 2-year yield climbed by 3 basis points, reaching 4.56%.
In response to the PCE data, Cleveland Fed's Mester (a non-voter) made remarks affirming the existence of a persistently high inflationary environment, further reinforcing market expectations.
Furthermore, the market was influenced by the anticipation of a weekend agreement on debt-ceiling negotiations between President Biden and House Speaker McCarthy. The increasing likelihood of a deal weakened demand for safe-haven Treasuries, particularly at the shorter end of the yield curve. However, the 10-year yield experienced a slight decline of 2 basis points, settling at 3.80%.
It is worth noting that the U.S. Treasury market closed early on Friday and will remain closed on Monday in observance of the Memorial Day holiday.
Chinese equities (HK50.I & 02846:xhkg): CSI300 ends flat, breaking three-day decline; PDD soars 19% on impressive growth
In a volatile and relatively thin-volume trading session, the CSI300 index closed nearly unchanged on Friday, putting an end to a three-day decline. Notably, stocks in the memory chip makers, AI-related industries, media, education, and traditional Chinese medicine sectors performed well. Meanwhile, the Hong Kong stock market was closed due to a public holiday.
Pinduoduo (PDD:xnas) surged 19% in ADR trading on the New York Stock Exchange. This impressive rise followed the company's announcement of a stronger-than-expected 58% year-over-year revenue growth and an outstanding 134% year-over-year rise in non-GAAP EPS. Additionally, the Nasdaq Golden Dragon China Index showed a notable rally of 2.9%.
FX: USDJPY heading into the intervention zone
The hawkish repricing of the Fed following the hot PCE data on Friday has brought fresh pain for the Japanese yen. USDJPY rose above 140.50 into the US close on Friday, and is gaining further to ~140.90 levels in early Asian trading hours. These are levels that should start to make the Japanese authorities uncomfortable, given the last rounds of intervention in September/October 2022 came when USDJPY was in the 140-150 range. Focus this week on US NFP which if hotter-then-expected, can push rate cuts further out the Fed curve. NZDUSD testing a break below 0.6050 while AUDUSD is still above 0.65. EURUSD eying a break below 1.07 amid Germany recession risks, while GBPUSD trades around 1.2350 after hot inflation print last week.
Crude oil: boosted by risk on amid debt ceiling deal progress
Crude oil prices rose on Friday as hopes of a resolution on the debt ceiling developed, and gains extended further in the Monday Asian morning as an in-principle deal was reached. Supply side issues were also supportive. Russia walked back comments that OPEC wouldn’t intervene at next week’s meeting. Russian Deputy Prime Minister Alexander Novak said they will engage in discussions with partners to determine what is best for the market. This suggests crude oil can be expected to stay in a range ahead of the June OPEC meeting. WTI prices heading to $73.50 while Brent was close to $77.50.
Gold: dual pressure from Fed pricing and risk on
Gold prices heading to test the 100DMA support at $1936 amid dual pressures from a hawkish repricing of the Fed path and the debt ceiling deal lifting sentiment which reduced the demand for safe haven asset. The hot PCE data on Friday increased the probability of a June rate hike to ~70% from less than 20% at the start of last week and rate cuts were pushed out into next year with only 1 rate cut now priced in for 2023. US jobs data due at the end of the week will be key but Fedspeak over the week also remains in focus. Meanwhile, initial euphoria around the debt ceiling deal may be temporary as focus shifts to liquidity concerns. Break above $2000 will be needed to improve sentiment.
What to consider?
US debt ceiling: an in-principle deal is done
The US has averted a major economic crisis by raising its debt ceiling as part of a new two-year budget agreement. The agreement keeps non-defense spending roughly flat for the current fiscal year and 2024 and removes budget caps after 2025. Risk assets could potentially rally as markets will be relieved off the risks of a US default, as well as with the avoidance of steep spending cuts. But still the negotiated deal needs to pass through both the House and the Senate, and there could likely emerge some opponents that could still delay the signing until the X-date of June 5.
Hot US PCE brings a hawkish shift in Fed expectations: June rate hike now priced in
Core PCE rose 0.4% M/M, above the expected 0.3% and accelerating from the prior 0.3%, while the Y/Y accelerated to 4.7% from 4.6%, despite expectations of an unchanged print. The headline rose 0.4% from 0.1% M/M and the Y/Y rose to 4.4% from 4.2%. The hot prints in Fed’s preferred inflation gauge brought a hawkish shift in Fed expectations, with a June rate hike now priced in at about 60% probability from about 10-20% last week, while rate cuts are being pushed out the Fed forward curve from this year. This week’s NFP print, due on Friday, will now be key to further weigh in the chance of another rate hike from the Fed in June.
Ford and Tesla collaborate to expand supercharger access, boosting EV adoption
Tesla (TSLA:xnas) and Ford (F:xnys) made a joint announcement stating that beginning in early 2024, all Ford car owners in the U.S. and Canada will be able to utilize Tesla's extensive network of 12,000 Superchargers. Initially, Ford electric vehicles (EVs) will be able to recharge using Tesla Superchargers through the use of Tesla-made adapters and software integration. By 2025, Ford plans to incorporate a built-in connector in its new EVs for seamless access to Tesla Superchargers. Currently, Ford has three EV models available in the market. On Friday, Ford witnessed a gain of 6.3%, while Tesla advanced by 4.7%.
Turkey’s Erdogan declares victory
Turkey’s president Recep Tayyip Erdoğan has extended his rule into a third decade, comfortably beating his rival Kemal Kılıçdaroğlu on Sunday in an acrimonious run-off election. Erdoğan had secured about 52.1 per cent of the vote with almost all the counting complete, according to Turkey’s election board, putting him significantly ahead of Kılıçdaroğlu on 47.9 per cent. Turkish Lira hit a record low on Friday, and further losses may be inevitable as economic and social risks accelerate. A slide in Turkey’s foreign exchange reserves is also likely as intervention picks up to stem the decline in lira.
China industrial profits fall again in April
China reported data on industrial profits over the weekend, and April print was down 18.2% YoY following a decline of 19.2% YoY in March. For Jan-Apr, industrial profits fell 20.6% YoY. Sequential comparison also showed dire results, with April profits down 18% from March. Margin pressures, soft demand & a faltering economic recovery were cited as the key reasons, and the data adds to the soft April numbers we have seen out of China over the course of the last few weeks that have raised doubts over any likely cyclical rebound due to the reopening.
Pinduoduo reports strong Q1 results, shifting focus to quality growth amidst rising competition
Pinduoduo's (PDD:xnas) total revenue for the first quarter of the year reached RMB 37.6 billion, marking a significant 58% Y/Y increase. This figure surpassed the Bloomberg consensus estimate by 16% and can be attributed to the strong growth in advertising revenue. Notably, PDD's online marketing revenue for the same period grew by an impressive 50% Y/Y, exceeding expectations. The company's non-GAAP operating margin also saw a noteworthy expansion of 7 percentage points compared to the previous year, reaching 22%. Furthermore, its non-GAAP EPS grew 134% Y/Y, partially driven by higher non-operating income. Pinduoduo's management announced a strategic shift in focus from prioritizing growth speed to prioritizing the quality of growth. This adjustment is a response to the increasing competition in the e-commerce sector, indicating the company's commitment to adapt to the changing landscape.
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