Global Market Quick Take: Asia – May 15, 2023

What’s happening in markets?

US equities (US500.I and USNAS100.I): sentiment reflects a risk-off stance

Equities retreated on the back of mounting investor concerns over the unresolved debt ceiling issue and a surge in bond yields which was driven by higher surveyed inflation expectations. The S&P500 recorded a 0.2% tick down, while the Nasdaq 100 shed 0.4%. The market sentiment reflected a risk-off stance as investors shifted from cyclical to defensive stocks. Utilities and consumer staples gained traction, while consumer discretionary and financials experienced a pullback.

On single names, First Solar (FSLR:xnas) witnessed a staggering 26.5% surge after announcing the acquisition of Evolar, a European thin film company. Meanwhile, fresh guidelines from the US government, providing clarity on clean energy tax credit eligibility, drove up solar stock prices. Additionally, Newscorp (NWSA:xnas) experienced an 8.5% boost after reporting higher-than-expected revenue and earnings.

Treasuries (TLT:xnas, IEF:xnas, SHY:xnas): sell off on higher inflation expectations

U.S. Treasuries experience a sell-off (yields higher) as the 5-10 Year Inflation Expectations reported in the University of Michigan Consumer Survey rose to 3.2%, a level last observed in March 2011. The increase in inflation expectations was unlikely to be driven by outliners within the distribution as a greater number of participants expected 3-4% inflation, whereas those predicting 1-2% declined in number. Yields on the front end and the belly of the curve soared 9bps, with the 2-year yield closing the session at 3.99%. The 10-year yield rose by 8bps to 3.46%. Red-month (2024 contracts) SOFR futures took a hit with rates moving higher, plummeting by around 12bps, led by significant selling in the Dec 2024 contract (SR3Z4).

Chinese equities (HK50.I & 02846:xhkg): markets suffer losses as credit data disappoints, while JD.COM leads e-commerce stocks higher

The Hang Seng and CSI300 indices suffered yet another bout of losses, as both benchmarks shed 0.6% and 1.3% respectively, resulting in weekly losses of 2.1% for the Hang Seng Index and 2% for the CSI300 Index. In China, the April data for aggregate financing and RMB loans painted a dismal picture, as both new aggregate financing and new RMB loans fell substantially and below market expectations.

Chinese banks, property developers, materials, automakers, and industrial stocks were the primary drivers of the decline in Hong Kong, while media, non-ferrous metal, construction, and electric equipment makers lagged behind in A-shares. Despite the downturn, the Hang Seng TECH Index surged in value, fueled by rallies in e-commerce platforms, following JD.COM's (09618:xhkg) better-than-anticipated Q1 results and consequent 7.3% upswing.

On the mainland bourses, textile and electric utilities stood out as the lone survivors of the downturn, alongside Chinese traditional medicine and household appliance stocks.

FX: Dollar bid on safe-haven flows and pause from other central banks

While economic indicators stay away from signalling a clear collapse in growth, conditions and sentiment are taking a turn for the worse as risks from the banking sector and debt ceiling linger. The Michigan survey on Friday showed that sentiment is weakening while long-term inflation expectations are looking entrenched. This leaves little room for the market to understand the Fed’s next move, and resulted in a safe haven bid for the USD which shot up to 102.70. Meanwhile, other central banks are expected to follow the Fed pause as well, which means yield-driven pressure on the dollar could start to weaken. NZD was the underperformer on Friday after NZ inflation expectations eased to 2.8% in Q2 from 3.3% in Q1, coming within the bank's target of 1-3%. Higher US yields also brought weakness in yen with USDJPY seen rising further towards 136 in thin Asia morning trade.

Crude oil: fourth weekly decline amid demand concerns

While the growth outlook for the US isn’t yet taking a steep turn for the worse, sentiment indicators are easing to suggest that consumers could pull back on spending amid the banking sector concerns and debt ceiling risks. Michigan survey on Friday drove out some of the rate cuts from the pricing for Fed this year. But more importantly, China economic data last week poured water on the reopening trade, adding to the demand concerns. Meanwhile, low refining margins for diesel and gasoline continues to suggest weakening industrial demand. WTI prices slid to $70/barrel while Brent reached $74. The decline has remained somewhat in check due to supply issues mounting last week from wildfires in Canada to Iraq’s exports. OPEC increased its outlook for China’s 2023 oil demand, thereby supporting expectations for a rise in global demand of 2.33mb/d, a prediction that contradicts the current downward trend in oil prices. If IEA also confirms this demand outlook, then that will reflect a clear gap between the market’s and forecasters’ demand expectations.

What to consider?