APAC Daily Digest: What is happening in markets and what to consider next – August 4, 2022

What is happening in markets?

Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) are in bull markets, but the warning signs of a pullback are there

The Nasdaq 100 and S&P500 extended their run-up.  The two benchmark indices are now up 20% and 14% respectively from their June intraday lows after putting on 2.7% and 1.6% overnight. Yesterday’s moves higher were supported by stronger-than-expected economic data (July ISM Services and Factory Orders) and better-than-feared earnings. Paypal (PYPL:xnas) surged 9% after raising earnings guidance on cost cutting initiatives and committing to an additional $1.75 billion repurchases in the second half of 2022 plus a new share repurchase authorisation of $15 billion.  In addition, the company managed to gain market share and having revenue trending up during the quarter.  Moderna (MRNA:xnas) jumped 16% following reporting above consensus revenues and announcing an additional $3 billion share repurchase authorisation. Earnings to watch today include Eli Lilly (LLY:xnys), Amgen (AMGN:xnas), Conocophilip (COP:xnys) and Cheniere Energy (LNG:xnys).

U.S. treasuries had a choppy session

After the much stronger than expected print on ISM Services, U.S. treasury yields jumped sharpy.  The move was further fuelled by hawkish comments from Fed officials.  St. Louis Fed President James Bullard said he supports “front-loading” rate hikes. San Francisco Fed President Mary Daly said the market is ahead of itself on pricing in Fed rate cuts.  Minneapolis Fed President Neel Kashkari commented that rate cuts in 2023 seem unlikely.  Bids returned to treasuries later in the day as dealers taking note of the cut in auction sizes across the curve in the Treasury Department’s refunding announcement.  The 2-year yield, after rising to as high as 3.2%, retraced to close at 3.09%, up only 3bps for the day.  The curve flattened.  The 10-year yield, once going as high as 2.85% after the ISM Services data, fell 4bps to close at 2.71%. 

Hong Kong’s Hang Seng (HSI.I) and China’s CSI300 (000300.I)

Hong Kong and mainland China stock markets opened higher but pared gains throughout the day.  Hang Seng Index ended the day 0.4% higher while CSI300 was nearly 1% lower.  U.S. House Speaker Nancy Pelosi completed her controversial visit to Taiwan. Markets have taken a relief as China’s reactions have so far been measured.  China is conducting military drills in six areas of the seas and airspaces surrounding Taiwan from today to Sunday.  How transportation and supply chain from and to Taiwan will be affected remains to be seen.

Macau casino shares gained, after the adjacent Zhuhai agreed to reopen travel with Macau without quarantine requirement.  Semiconductor makers rose on news that China has successfully completed the development of a microchip that enables smartphones to send and receive communication signals directly with China’s Beidou Navigation Satellite System.   SMIC (00981:xhkg) gained 4.1% and Hua Hong (01347:xhkg) rose 2.7%.

What’s moving the ASX200 (ASXSP200.1)

The ASX200 rallied 0.5% in early trade on Thursday, taking the rally from the June low to 9.3%. Today traders digested stronger than expected trade data, showing Australia's surplus surged to $17.7 billion (vs $14b surplus expected for June). In May trade also hit a record of $15.95 billion. What's driving this, is that exports keep surging to brand new records with Australia exporting more and more coal and coal derivatives. Coal exports hit a new record in June of $14.5 billion. There was also a significant jump in gold exports, 64% month on month, and a 27% month on month jump in metal exports. For traders and investors, this means, commodity stocks might not report financial results as bad as feared for the Financial year ending June 2022.

In corporate news today Combank (CBA) became the first major bank to lift variable mortgage rates, by the full 0.5%. The RBA made on a 0.5% hike on Tuesday to the cash rate. CBA shares are higher by almost 1% and are up 17% from the June low. however, the best performer today is the global giant Block (SQ2) who’s shares jumped 11% in the US, and on the ASX they’re trading 10% higher.  Block is rallying after Elliot Investment Management bought a $2 billion stake in its rival, PayPal. This is generally what happens; when there is M&A talk/ or major buying in one stock, sentiment is lifted in the entire sector that stock was in. So, what’s next for Block? It’s due to report earnings results after the US market close and ahead of the ASX market open tomorrow (Friday). Block’s results will be watched closely for clues as to how consumer spending has changed and if cash app transactions have been impacted by higher interest rates and inflation. The market consensus is that Block's revenue will hit $4.34 billion in Q2. Earnings (EBITDA) of $146.1 million is expected for Q2 and the market thinks earnings will head higher in Q3 to $179.1 million, with revenue of $4.6 billion

Crude oil prices (OILUKOCT22 & OILUSSEP22)

WTI crude fell USD3.76 or 4% to $90.66 on crude inventory build.  Crude inventories rose 4.5 million barrels last week to 426.55 million barrels, according to data from the U.S. Energy Information Administration, while survey had forecasted a drop.

US natural gas price (NGU2) jumped 7.3% to USD8.27 after Freeport LNG entering into an agreement with the regulator to resume the company’s LNG facilities’ operations in early October at almost full capacity. This will result in the export of US LNG going back to normal and remove the supply glut of natural gas in the U.S.

The U.S. dollar gained on stronger economic data and hawkish fedspeak

The US dollar continued to rally the second day, supported by the strong ISM Services data and Fed officials pushing back on the market expectations of rate cuts in 2023.  DXY climbed to 106.5, up 0.26 overnight.  In Asia this morning, USDJPY is trading at slightly above 134 and EURUSD is at 1.0160. 

What to consider?

US ISM services blows past expectations

US ISM services showed an unexpected surge in July to 56.7 from 55.3 previously amid strong order growth and some relief on price pressures and supply constraints. The composition was strong with business activity rising to 59.9 from 56.1 and new orders rising to 59.9 from 55.6. This was also a positive surprise especially after a dismal print of 47.3 on the services PMI reported by S&P, and it eases concerns about the pace of economic slowdown in the US. New orders were up to 59.9 in July. We see this as adding more weight to our thinking that markets are underpricing Fed’s tightening path.

OPEC+ production targets underwhelmed

OPEC+ decided to add only 100k barrels per day of output for September, significantly lower than the output increases in July and August. This further raises concerns around energy supply and inflation, despite pressure from the White House to bump up production to cool prices. Next OPEC+ meeting is scheduled for September 5.

Bank of England set for another rate hike

Bank of England’s rate decision is due today and we may see a split vote for a 25/50 bps rate hike, but with inflation touching 9.4% y/y in June and seen rising to 12% in the winter months suggests room for a stronger action. Job market still remains tight, even though there are some nascent signs of easing. The growth outlook is softening into the winter, which suggests that the window to tighten continues to diminish with each passing meeting. The pace of tightening is likely to slow after the August meeting.

Caixin China Services PMI surged but the employment component was weak

Caixin China Services PMI rose to 55.5 in July (consensus: 53.9; June 54.5), the highest level since April 2021 and firmly in the expansionary territory.  However, the Employment sub-index dropped to 48.8 in July from 49.5 in June.  The New Export Orders sub-index also declined to 47.9 in July from 49.5 in June, suggesting weak external demand. 

Rusal issued first RMB bond in Russia

The Russian aluminum giant, Rusal (00486:xhkg) issued the first RMB bond in Russia.  Rusal issued two 5-year RMB denominated bonds with a total size of RMB4 billion.  The bonds were more than two-time oversubscribed.  The issuance suggests that there is quite a pool of renminbi cumulated in Russia and looking for renminbi-based assets for investment.  Under the U.S. sanction, Russian exporters are willing to receive currencies other than the US dollar for payment. 

Alibaba is scheduled to report results

After today New York close, Alibaba (09988:xhkg) is scheduled to report Q1 FY2023 (ending June 30) results.  We published an article yesterday highlighting some headwinds faced by Chinese platform companies. 

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