Global Market Quick Take: Asia – March 29, 2023

What’s happening in markets?

Nasdaq underperforms as traders unwind sector rotation trade

On Tuesday Tech stocks lagged, with the Nasdaq 100 losing 0.5% as investors unwound their post-SVB sector rotation trades on the rise in bond yields and spooked by EV names showing signs of stress. Lucid (LCID:xnas) fell 7.3% on reports of layoffs. Tesla (TSLA:xnas) slipped 1.4%.

S&P 500 edged down 0.2% in a quiet session. The energy sector stood out, rising 1.5%. Occidental Petroleum (OXY:xnys) gained 4.3%, surging for the second day in a row after Berkshire Hataway added to its stake,

In after-hours trading, Lululemon (LULU:xnas) shares rose over 12% after delivering stronger-than-expected sales amid high demand and guiding an upbeat outlook. The company is looking to double its sales to $12.5 billion before 2026, as it expands its menswear business and grows its international operations.

European equities close flat with investors considering a drop in gas prices, while bank issues linger

On one hand, European investors are somewhat relieved that European gas prices are down 88% since August, amid higher storage levels after winter ended, which implies that the ECB could potentially go lighter on interest rates, while investors are digesting news that UBS sees its take-over of Credit Suisse as an opportunity to accelerate growth. Still, investors are cautious about the banking sector crisis, which was reflected in Deutsche Bank shares having a volatile session, before closing 1.6% lower. While more broadly, junk bond spreads are showing the US economy is on the brink of a recession. The EuroStoxx600 closed under its 100-day moving average for the 3^rd session.

Treasuries bear flattened as the 2-year yield rose to 4.08%

As fears of the risk of an escalation of the banking turmoil dissipated, traders adjusted their positions in Treasuries and added to the selloff in the front end. The 2-year yield rose 8bps to 4.08%, closing firmly above the 4% handle. The selling started during London hours as German bund yields climbed. For U.S. data, the Conference Board Consumer Confidence and the Richmond Fed Manufacturing Index came in stronger than estimates. The 5-year Treasury notes auction found solid demand and helped to stabilize the selloff somewhat in the New York afternoon. Yields on the 10-year climbed 4bps to 3.57%. The 2-10-year yield curve bear flattened 5bps to -52bps.

Hang Seng Index gained, led by Tencent and financials

Hong Kong’s Hang Seng Index advanced 1.1%, led by Tencent (00700:xhkg) and energy stocks. ENN Energy (02688:xhkg) and Sinopec rose more than 3% as China National Petroleum Corp’s (CNPC) Economics and Technology Research Institute forecasted a 7.8% growth in refinery throughput in 2023.

Tencent, up 4.2%, was the best-performing stock within Hang Seng Index as the company restarted its share buyback program. As the US regional bank turmoil and the concerns about Deutsche Bank receded, HSBC (00005:xhkg) and Standard Chartered (02888:xhkg) climbed more than 1%. Tingyi (0322:xhg) reported a 31% Y/Y decline in net income, seeing its share price plummeting 10.4%.

Alibaba (09988:xhkg) dropped 1.2% during Hong Kong trading hours but the interest giant’s ADR surged 14.3% (8.2% higher than Hong Kong close) overnight in New York. After the Hong Kong market closed, the management announced that Alibaba will split into six units.

CSI300 remained range-bounded and was down 0.3%. Petrochemicals were the top gainers while semiconductors and e-commerce stocks lagged. Rongsheng Petrochemical (002493:xsec) was 10% limit up after Saudi’s Aramco made a USD 3.6 billion investment for a 10% stake in the independent refinery.

Australia’s share market reacts to a bigger drop in inflation than expected, ahead of next week’s RBA decision

The S&P/ASX 200 index opened slighting lower and moved up after CPI came out lower than expected. The ASX200 moved further above 200-day moving average with mining stocks continuing to move higher, which is offsetting the drop in the financial sector. In the financials space, investors were a little taken back by the resignation of National Australia Bank’s (NAB) markets boss, who oversaw the bank’s rates, credit trading, foreign exchange, commodities, equities, and institutional sales. NAB shares fell 1.8%, with the other big three banks and regional banks following. On the upside, lithium stocks saw increased buying following yesterday’s surge after Albermarle lobbed an almost $4 billion takeover offer on Liontown Resource. Gold stocks are also higher, with the Australian dollar gold price being underpinned by the Australian 10-year government bond yield trading in the neighborhood of three-month lows.

FX: Month-end flows underpin a softer dollar

Lack of market news saw the US dollar being slightly offered on Tuesday, even as banking concerns remained at bay and traders continued to increasingly price in a 25bps rate hike from the Fed for May. EURUSD now at 1.0840 and keeping an eye again on 1.09 after failing above that last week. AUDUSD drifted above 0.67 again ahead of the CPI release with retail sales remaining upbeat yesterday. Japanese yen not suffering massively despite yields surging, USDJPY took a look below 130.50 but heading back to 131+ in early Asian trading hours.

Crude oil focusing back on fundamentals

With fears of a banking crisis easing, focus returned to fundamentals in the crude oil market supporting recent gains. Supply issues remain with a disruption to Iraq exports, and OPEC+ showing no signs of adjusting oil production as it meets next week amid financial market jitters. A draw in private inventories also underpinned, with crude inventories down 6.1mn barrels last week compared to expectations of 0.2mn build. WTI prices touched $74/barrel after dipping to $64 last week, while Brent rose to $79 from sub-$73 levels.

Gold tied in a range awaiting next trigger

Markets are awaiting a further direction in Gold which recovered overnight to reach back to $1970+ levels but appears to be waiting for its next catalyst. Banking sector fears have eased this week with no further reports of a bank collapse, but markets are for now not pricing in the incoming risks of a credit crunch or a slowdown in growth as US data stays robust. Last night’s consumer confidence report remained strong despite covering a part of the period after the SVB collapse. Meanwhile, the disconnect between market and Fed expectations of the rate cycle continue to stay wide, and US PCE data this week may be worth watching. On the upside, $2000 remains to be the key level to watch, while support is seen at $1933.

What to consider?

Alibaba is splitting into six independent business groups

In a statement from its CEO, Alibaba announced that the e-commerce giant is going to break up into six separate and independently operated business groups which could seek separate capital financing including IPOs in the future. The six business groups will be: cloud intelligence, e-commerce, smart logistics, local services, global digital business, and digital media and entertainment. The restructuring could effectively dismantle the business empire founded by Jack Ma. The conglomerate has grown to be too large and dominant in the e-commerce and technology industries in the eyes of the authorities and a fundamental restructuring of Alibaba has long seemed to be inevitable. As a result of the announcement, Alibaba’s shares saw a monster rally in New York, with its shares surging 14%.

US consumer confidence rose again in March, inflation expectations up as well

Despite the one-year ahead consumer inflation expectations ticking higher to 6.3% (prev. 6.2%), US consumer confidence for March rose to 104.2 (prev. 103.4) above the expected 101. Looking at the split in the index, the Present Situation index fell to 151.1 (prev. 153.0), while Expectations slightly lifted to 73.0 (prev. 70.4) still staying soft. The strength of the index may be a slight surprise as the cutoff date for survey was March 20, after the US bank failures hit, and risks of a credit crunch ahead keeps risks tilted to the downside.

Australian inflation cools more than expected, and Australian retail sales cool - which leans into the RBA’s potential pausing rate hikes next week

Australian retail sales pointed to household spending beginning to slow, following higher interest rates. This suggests the RBA could likely pause rate hikes next week. Retail sales rose 0.2% from a month earlier, which was in line with forecast. However today’s February CPI was more telling, showing inflation fell to a 6.8% read YoY, with prices rises slowing from the 7.4% prior print, and slowing more than the 7.2% expected. This is the last important read before the RBA potentially considers a rate pause next week. Given CPI cooled more than Bloomberg consensus expected; it triggered a quick drop in the Australian dollar. Australian bond yields trade around 3-month low neighborhood, and this ultimately underpins Australian dollar gold prices.

Sector rotation between tech and financials, large cap and small cap

Large cap stocks, especially in tech, have seen big gains in the last few weeks primarily due to the slide in Treasury yields and flight to safety amid the banking sector woes where companies that are less dependent on financing needs become attractive. We wrote this piece, asking how long can that outperformance continue, given tech is not immune to a recession. Even if banking concerns were to ease now, risks of a credit crunch remain and have brought forward the next recession. What that could mean is small cap stocks could continue to be under pressure as bank lending tightens.

Apple continues to diversity its revenue, rolling out its buy-now-pay-later service

With Apple looking to double its revenue over the next four years to $50 billion, by moving into financial services, communications and EVs, Apple took another step, and launched its buy-now-pay-later (BNPL) services after a lengthy delay. Not only will this diversity its revenue, but it will allow Apple to take market share from providers such as Affirm, Klarna and Square’s Afterpay. Apple launched its BNPL service, which allows customers to pay for their products over four payments across six weeks, with no interest or fees.  This year Apple is expected to unveil plans to launch its EV business, with the “Apple Car’ reportedly due to release in 2024 or later.

Lululemon’s sales outlook lifts, but so too do inventory levels, showing that consumers are watching their spending amid higher interest rates

Lululemon Athletica shares jumped 12% after hours, on delivering stronger than expected results, as activewear sales surpassed expectations, while it attempted to combat inventory issues that ate into margins. Gross margins fell 300bps to 55.1% in the quarter, falling 230bps to 55% over the year, with inventory levels biting into its bottom line, up 50% from the year prior. For the year ahead, it sees full-year 2023 sales growing ~15%, to between $9.3b to $9.4b, as it ramps up store openings. Over the next five-yeas to 2026 it’s planning to double sales $12.5 billion, by expanding internationally and its menswear business.

EV competition intensifies with BYD gaining a strong foothold of the EV market

BYD, the leading Chinese EV company’s Q4 results came out somewhat in line with expectations amid intensifying competition, while its margins grew after commodity prices fell. The company reported record EV sales of 683,000 units, with net income coming in slightly under BYD’s own forecasts. Net income surged over 400% to 16.6 billion yuan ($2.4 billion) vs the company's estimate of 17 billion yuan ($2.5 billion). The Warren Buffett-backed EV maker saw profit more than quintuple and its gross margin rise more than market estimates, hitting 17%. EPS also beat market estimates at 5.71 yuan. The company is also expanding overseas and launching into Norway, Denmark, the UK, Thailand and Australia. The EV sector has generated a lot of noise of late; from intensifying price wars among EV makers who are cutting prices, to EV purchase subsidies expiring in China last year, to new EV entrants in the market, to lithium prices dropping. As mentioned in our Week Ahead, this week’s earnings from China’s BYD’s, China’s Great Wall and America’s Canoo, as well as China’s lithium giant Genfeng, will set the scene for what investors can expect from the EV sector in 2023. And if BYD’s results are anything to go by, we can see that market leaders have not been affected by increased competition, instead its price drops have perhaps spurred on orders. We can also see that BYD’s margins rose more than expected, and this could be a testament to the significant drop in commodity prices (with lithium prices down 11%-47%). 

For a detailed look at what to watch in markets this week – read or watch our Saxo Spotlight.

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