Market Insights Today: Putin’s nuclear warning; China reopening trade is fading – 8 December 2022

What’s happening in markets?

Nasdaq 100 (NAS100.I) and S&P 500 (US500.I) skid again. Campbell Soup boils up

S&P 500 fell for the fifth session and briefly breached its 100-day moving average again before bouncing off the low to close slightly above it. S&P 500 was 0.2% lower and Nasdaq 100 was down 0.5% on Wednesday. Eight of the 11 sectors within the S&P 500 declined, with healthcare, consumer staples, and real estate the only sectors advancing. Market sentiment was depressed by the recessionary signals sent out from the bond markets and Putin’s warning of the rising threat of nuclear war. Tesla (TSLA:xnas) dropped 3.2% on reports of cutting prices in China and the U.S. markets. Campbell Soup (CPB:xnys) surged 6% after reporting earnings beating analyst estimates due to strong gross margins. State Street (STT:xnys) jumped 8.2% after announcing a share buyback.

US treasury yields (TLT:xnas, IEF:xnas, SHY:xnas) fell on a softer unit labor cost print, Putin’s nuclear threat and WSJ Nick Timiraos article

U.S. treasuries were well bid throughout the session, with yields falling by around 11bps across most parts of the curve. The 2-year was 11bps richer to settle at 4.26% and the 10-year yield fell 11bps to 3.42%. The Q3 unit labor cost was revised down to 2.4% from the previously reported 3.5%. The softer data provided somewhat of a relief to investors who had been concerned about wage inflation might slow the Fed from downshifting rate hikes in 2023. In addition, in his latest article, the Wall Street Journal’s Nick Timiraos, citing street economists, said the deceleration in rental increases in new apartment leases may mean “the end is in sight for one of the biggest sources of inflation” that Fed Chair Powell specifically pointed out as being important to watch in his recent Brookings Institution speech. Adding fuel to the rally in treasuries was the flight to safety bids following Putin’s threat of nuclear war.

Hong Kong’s Hang Seng (HIZ2) and China’s CSI300 (03188:xhkg) sold the new Covid-19 containment measures news

Buy the rumor and sell the news in play yesterday in the Hong Kong and mainland China equity markets. After a lackluster morning session, Hong Kong and mainland China stocks rallied in the early afternoon after investors took note of the no mention of dynamic zero-Covid and a more balanced tone towards economic growth in the readout of the politburo meeting and the release by the Chinese health authorities of additional 10-measures to further fine-tune and ease China’s Covid-19 containment strategy. The markets nonetheless reversed soon afterward and tanked 3.2% as “sell the news” profit-taking came in. Southbound monies had a net outflow from Hong Kong back to the mainland of over HKD5 billion, of which HKD1.9 billion was selling the Tracker Fund of Hong Kong (02800:xhkg). Chinese developers were among the biggest losers following the second share placement in a month from Country Garden (02007:xhkg), with China Resources Land (01109:xhkg) down 5.3%, COLI (00688:xhkg) down 6.2%, Longfor (00960:xhkg) down 12.1%, and Country Garden down 15.5%. Selling was also aggressive in mega-tech names and saw Alibaba (09988:xhkg) down 5.3%, Tencent (00700:xhkg) down 3.7%, and Meituan (03690:xhkg) down 3.6%. The three leading Chinese airlines listed in Hong Kong, however, outperformed and gained by 2% to 6%. In economic data, China’s exports in November declined 8.7% (in USD terms) in November from a year ago, weaker than expectations. CSI 300 was down 0.3%.

Australia’s share market holds six month highs, gold stocks charge, Australia's trade surplus beats expectations

The Australian benchmark index, the ASX200 (ASXSP200.1) opened 0.3% on Thursday, but holds six month high territory. As for the best performers in the ASX200, clean metal small cap miner Chalice (CHN) rose 12% after drilling confirmed it found new sulphide minerals in Western Australia. CHN would typically be classed as higher risk company as its doesn’t earn income, which is why its share are suffering while interest rates are rising. CHN shares are down 35% YTD. Gold stocks are looking interesting as recessionary calls get louder- gold generally outperforms in a recession. Evolution Mining (EVN) shares are up 5%, continuing to rally it in uptrend and have gained 61%, moving EVN shares up off their 5-year low. In the larger end of town, BHP shares broke higher but profit taking turned its break higher into loss. BHP shares are up 26% this year, with the major miner, along with RIO and Fortescue doing well of late after the iron ore (SCOA) price picked up 7% this month, with China easing restrictions. On the downside, engineering company Downer (DOW) plunged 31% to $3.31, which is its lowest level since April 2020 after Downer downgrading its outlook and flagging irregularities in utilities business.

The AUDUSD slides on AU exports falling more in October, and imports sinking; supporting RBA remaining dovish

On the economic news front, Australia’s trade surplus fell in October, but less than expected. This reflects that Australia is earning less income as demand for commodities has fallen from its peak, ahead peak energy season and China easing restrictions. The Australian surplus fell from $12.4 billion to $12.2 billion (when the market expected the surplus to fall to $12 billion flat). In October, exports surprisingly fell 1%, vs market expectations they'd rise 1%, while imports fell 1%. This supports the RBA keeping rates low, as such after the data was released, the AUDUSD immediately fell.

FX: USD weakens on lower yields

The US dollar weakness extended further on Wednesday as US 10-year yields plunged to fresh lows since mid-September breaking below the 3.50% support. There were some concerns on wage pressures as US Q3 Unit Labor Costs were revised lower to 2.4% (prev. 3.5%, exp. 3.1%), which pushed back on some of the wage-price spiral fears while still remaining elevated. GBPUSD pushed above 1.22 and EURGBP is testing the 0.86 handle. NZDUSD came back in sight of 0.64 even as AUDNZD recovered from 1.0532 lows printed after Australian Q3 GDP data came in beneath expectations. The Japanese yen gained on lower US yields, but gains were restrained by commentary from BoJ's Nakamura who reiterated Governor Kuroda, noting it is premature to tweak policy now as service prices remain low and he is not sure now is the right timing to conduct a review of the policy framework.

Crude oil (CLZ2 & LCOF3) prices pressured by demand concerns

Oil posted its fourth straight day of losses, erasing all of the gains of this year. While demand concerns are rising with the aggressive global tightening seen this year, supply side has remained volatile. US crude inventories fell by a less-than-expected 5.19 million barrels last week, as exports didn't repeat their prior performance. Distillate stocks rose by more than 6 million barrels and gasoline supplies climbed by 5.3 million barrels amid weak demand. Still, the bigger factor is that the short-term technical traders appear to be in control of the oil market currently. WTI plunged to lows of $72/barrel while Brent went to sub-$78 levels.

Gold (XAUUSD) higher on China’s central bank purchases

Gold’s safe-haven appeal has come back in focus with China joining the long list of other countries who have been strong buyers of bullion. The PBoC added 32 tons to its holdings in November, the first increase in more than three years. This brings it total gold reserves to 1980 tons. This is also potentially a step towards our outrageous prediction on a new reserve asset, as speculations mount that China, Russia and several other countries could be looking to move away from USD reserves. Gold prices gained over 1%, and helped drag the rest of the sector higher as well. Industrial metals like Copper and Nickel also pushed higher due to the weaker US dollar.

What to consider?

Putin’s nuclear threat sours risk sentiment

Following drone attacks on three Russian air bases that Moscow blamed on Kyiv, Putin has now warned that the Ukraine conflict could go on for a long time and nuclear tensions have also risen because of it. He also did not clearly stay away from pledging that Russia will not be the first to use nuclear weapons, and rather said that Russia will defend itself and its allies “with all the means we have if necessary. The irresponsible talks on nuclear weapons is a sign that Putin is getting desperate with Ukraine gaining military grounds, and his actions will be key to watch. Risk sentiment likely to be on the back foot today, and food prices as well Uranium will be in focus.

Japan Q3 GDP continues to show contraction

The final print of Japan’s Q3 GDP was released this morning and it was slightly better than the flash estimate of -1.2%, but still showed a contraction of -0.8% annualized sa q/q. Stronger than expected growth in exports and a build of inventories led to the upward revision, private consumption was slower than previously expected at just 0.1% q/q. Lower oil prices and the return of inbound tourists may further aid the Japanese economy, but slowdown in global demand will continue to underpin a weakness in exports.

Eurozone Q3 GDP grew more than initially forecasted

The final estimate of the Eurozone Q3 GDP shows an increase to 0.3% versus prior 0.2%. Growth fixed capital formation was the biggest contributor to growth (0.8 percentage point) behind household spending (0.4 percentage point). The contribution from government expenditure was negligible on the period. This shows that households and companies are rather resilient despite the negative economic environment and inflation across the board. Based on the latest PMI for November (the last estimate was published on Monday), we expect a small GDP contraction in the eurozone in Q4. This would be marginal (probably minus 0.1%).

Bank of Canada hiked 50bps and signalled the next move will be data dependent

Bank of Canada hiked policy rate by 50bps to 4.25%, in line with market expectations but higher than the market pricing of 25bps. The central bank signalled the next move will be data dependent by saying that the “Governing Council will be considering whether the policy needs to rise further to bring supply and demand back into balance and return inflation to target.” Still, there was a slight hawkish tilt as the Bank said that the BoC will consider if future rate hikes are necessary to bring supply and demand back into balance and return inflation to target, which means there is potential for more rate hikes after a temporary pause.

The Politburo says China will continue to “optimize” its pandemic control measures

The Chinese Communist Party ended a politburo meeting that focused on economic policies for 2023 and anti-corruption works in the party on Tuesday. The readout of the meeting released on Wednesday makes no mention of the “dynamic zero-Covid” policy. Instead, it says that China will strive to better coordinate pandemic prevention and control with socioeconomic development and continue to optimize the country’s pandemic control measures. The readout does not reiterate the warning on the property sector and the rhetoric of “housing is for living in, not for speculation” but instead pledges to “be vigilant of large economic and financial risks and strive to prevent systemic risks.” Overall, the readout from the Politburo meeting seems to confirm the policy shift to gradually easing pandemic control measures and supporting the property to the extent of preventing it from causing systemic risks to the financial system and the economy. The readout emphasises stability by the utmost important priority for 2023 and the leadership of the Chinese Communist Party over economic policies as well as economic activities of the country. The readout also pledges to continue the anti-corruption campaign and enhance the governance of  the Chinese Communist Party.

China issued 10 additional measures to ease Covid-19 containment practices

China’s National Health Commission issued 10 additional measures to further fine-tune and relax the country’s pandemic prevention and control practices. The crux of these new measures are to further reduce the scope and length of lockdowns and quarantines and restrict the use of PCR tests. While these are important relaxation to the current practices, especially in reducing the unit of movement restriction to as narrow as floor or even apartment as opposing to the whole block or community and making quarantine-at-home the default option instead of centralised quarantine. Nonetheless, in comparison with the high expectations in recent days, these measures may be considered a bit underwhelming and do not provide a more definite roadmap of exiting the use of lockdown. 

China’s exports shrank 8.7% Y/Y in November

In USD terms, China’s exports declined 8.7% Y/Y in November, much weaker than the -3.9% consensus estimate and -0.3% in October. The fall in exports was broad-based across destinations, U.S.  down 3.8% Y/Y, European Union down 9.3% Y/Y, and Japan down 4.6%. Exports to ASEAN slowed to a 7.7% growth in November from 19.7% in October. Imports, falling by 10.6% Y/Y, also below expectations.

Some outperforming stocks to watch

Generally, there are always outperformers in markets, even when times are tough. A hot scoop for you is that that Campbell Soup shares popped 6% higher on Wednesday, gapping up to $56.18. Its shares are now 15% off their record high that it hit in 2016. That year, the Syrian war escalated, Trump was elected, and there was a string of terror attacks around the world. And amid war talks now escalating this year Campbell Soup shares entered an uptrend, gaining 45% from last November. If recessionary talks and Russia war concerns linger, you might expect this company to continue to benefit. It has free cash flow, and consistent rising profit growth. Another stock that did well overnight was General Mills, rising 2% to an all time high, $87.50 after the wheat price jumped 3% overnight on supply concerns returning. We mentioned General Mills as a company to watch in our Five Stocks to Watch video. Despite the wheat price falling 19% from September after supply returned to the market, General Mills has been able to grow its quarterly profit and free cash flows. 

For our look ahead at markets this week – Read/listen to our Saxo Spotlight.