Summary: The major US indices, the Nasdaq 100 and S&P 500 fell on weaker-than-expected company news, Putin clearing martial law, and more hawkish Fed comments. 10-year US bond yields hit 4.14%, its highest since July 2008 which boosted the US dollar against every G-10 peer. Netflix, the standout performer up 13% following their mostly better-than-expected results. Tesla shares slid after hours on weaker-than-expected 3Q results. AU jobs data disappoints, putting the focus back on the AUD and banking shares. Across the Asia Pacific, all eyes are on energy and oil stocks after the Crude oil price lifted 3% on EIA warnings.
US stocks fell on the backfoot after a two-day rally, with the 10-year US bond yield hitting 4.136% in the session, which is its highest level since July 2008, while 2-years rose to the highest since 2007. That in turn boosted the dollar, which rallied against every G-10 peer. Gold dropped. It comes as Fed speakers warned US inflation continues to surprise to the upside, saying there’s no reason to think key price measures have peaked. Over in UK and Canada CPI came in stronger than expected in September, up 10.1% year on year (YOY) and 6.9% YOY respectively, ensuring the Bank of England and Bank of Canada keep on hiking rates. Earnings enthusiasm faded with backup generator manufacturing Generac (GNR) shares sliding 25% on slashing its full year sales outlook. While community bank M&T (MTB) shares crumbled 14% on the company reporting weaker than expected results. On the upside, oil stocks charged with Baker Hughes (BKR), Valero Energy (VLO) and Halliburton (HAL) up over 5% each. While Netflix (NFLX) was the stand out performer up 13% following their mostly better than expected result released the day prior as we mentioned here. S&P 500 dropped 0.7% and Nasdaq 100 slid 0.4%. 10 of the 11 sectors of S&P 500 declined with the notable exception of Energy, which rose 2.9%.
Higher-than-expected U.K. inflation prints, hawkish comments from Fed’s Bullard and Kashkari, poor results from the 20-year treasury bond auction, and corporate bond supply contributed to an around 13bp rise in yields across the curve. The 2-year yield rose to 4.56% and the 10-year surged to 4.13%, both reaching new highs. The 20-year auction was awarded at 2.5bps cheaper than the market level at the time of the auction, indicating poor demand. Corporate bond issuance amounted to around USD15 billion and added to the upward pressure on yields.
Hang Seng Index fell 2.4% by mid-day, as China Internet stocks reversed the bounce in the past two days, falling by 4% to 7%, and local property developer names paring early gains as the relief for extra stamp duties for non-resident home buyers in the maiden Policy Address of the Hong Kong Chief Executive is less extensive than expected. Sun Hung Kai Properties (00016:xhkg) dropped 3.6% and New World Development (00017:xhkg) tumbled 7.8%. Hong Kong Stock Exchange (00388:xhkg), falling 2%, reported a 30% Y/Y decline in EPS in Q3, slightly better-than-feared. EV stocks tumbled, with Xpeng (09868:xhkg) falling 9.5% and other leading names losing by 4% to 7%. Tanker and dry bulk operator COSCO Shipping Energy Transportation (01138:xhkg) soared more than 10%. In mainland bourses, the CSI300 fell 1.6%, with Consumer Staple and Consumer Discretionary sectors being the worst performers, falling over 3%. While all major sectors in the CSI300 declined, lithium battery makers, shipping, and coal mining companies gained.
It’s worth keeping an eye on banking stocks particularly regional banks that could see more volatility, like Suncorp (SUN), Bendigo and Adelaide (BEN) and Bank of Queensland (BOQ). Also, today focus will be on oil stocks like Santos (STO), Woodside Energy Group (WDS) and Beach Energy (BPT) after the oil price darted ahead.
There is a lot of sense of “urgency” in the Japanese officials as USDJPY continues to flirt with the 150 handle. The surge higher in US yields overnight is likely to further pressure the yen, and FinMin Suzuki’s comments this morning on taking appropriate steps to curb speculative moves still suggest they stand ready to intervene if USDJPY rises above 150. Meanwhile, the rebound in the US dollar weighed on G10 currencies, with GBP suffering despite a pick up n BOE rate hike bets after the higher than expected UK CPI print, as political turmoil continued to weigh. Three officials left the office yesterday, including the Home Secretary and Chief Whip, although there were reports later that some of them will remain in post. Meanwhile, the fight for Truss to stay in office continues. GBPUSD testing the downside at 1.1200.
The Chinese offshore yuan weakened to as much as 7.2790 this morning and is trading at around 7.2680 as of writing. Higher U.S. bond yields, sell-offs in Chinese stocks, concerns over a harsher line on income redistribution in China, and reports about talks on the joint production of weapons between the U.S. and Taiwan weighed on the yuan.
Gold prices heading lower to test the support at $1620/oz amid risk aversion and higher Fed bets propelling US yields higher and a rebound in the US dollar. Hawkish Fed speak yesterday, together with fresh highs in UK CPI, suggested higher-for-longer inflation and interest rates, while demand for the yellow metal also remains depressed due to ongoing lockdowns in China.
Oil extended gains rising 3.3% to $85.55 after EIA earlier reported US crude stockpiles dropped by 1.73 million barrels last week. Four-week seasonal demand for distillate fuels soared to the highest since 2007 while inventories remained at the lowest point on record for this time of year.
James Bullard and Neel Kashkari kept up their hawkish Fed rhetoric, in light of the burgeoning global price pressures. Bullard warned that inflation continues to surprise to the upside and the Fed needs to continue to act, also emphasising higher-for-longer rates even if inflation starts to decline in 2023. Kashkari (2023 voter) added that there is no reason to think that key price measures have peaked, and he sees little evidence of a labor market softening. He also reiterated the Saxo view that “risk of under shooting on rate hikes bigger than overdoing it”. He also said his best guess is the Fed can pause hikes sometime next year but he favours rate hikes until core inflation starts to cool, noting the Fed's rate changes take a year or so to work through the economy. Chicago Fed President Evans was also on the wires this morning, and given that he’s retiring next year, he was accepting of the fact that “beginning rate hikes six months earlier would have made sense.”
UK inflation came in at double-digits again, matching the 40-year high in July, at 10.1% y/y. This puts further pressure on the Bank of England to go big with its rate hike at the November meeting. Price pressures were broad-based, but most notable was the increase in food price. Scaling back of aid for electricity and natural gas prices, as suggested by the latest fiscal measures announced by Chancellor Hunt, could fuel further inflationary pressures next year. Eurozone headline inflation, on the other hand, was revised lower to 9.9% for September from flash reading of 10.0% but core measure rose to 5.8% y/y from 5.2% y/y in August, coming in at a record high. The ECB is expected to raise rates by 75bps at the October 27 meeting.
Tesla (TSLA) shares fell 2.7% after hours when the EV giant reported third-quarter sales falling short of analyst estimates, noting the US dollar’s growing strength, along with production and delivery bottlenecks impacted results. Tesla’s Revenue rose to $21.5 billion, versus $22.1 billion expected by Wall Street. Profit rose to $1.05 a share, exceeding the $1.01 average Bloomberg estimate. And the closely watched Q3 automotive gross margin, came in at 27.9%, missed the 28.4% expected. Tesla cited higher costs related to a slower-than-expected ramp up in output at new factories, as well as difficulties shipping vehicles. Tesla’s shares are down almost 45% from their high against the backdrop of a slowing economy, higher inflation and rising interest rates, plus Musk’s $44 billion bid to buy Twitter. For more on Tesla click here to read Peter Garnry’s note.
According to Nikkei Asia, the Biden administration and Taiwan are in talks for American defense companies to provide Taiwan technology to manufacture weapons in Taiwan or to ship Taiwan-made parts to make weapons in the U.S. This, reading together with U.S. Secretary of State Blinken’s warning this Monday that “a fundamental decision that the status quo was no longer acceptable and that Beijing was determined to pursue reunification on a much faster timeline” and President Biden’s remarks of deploying U.S. forces to defend Taiwan in a CBS 60 Minutes interview last month, stirred up some unease among investors. Separately on Wednesday, Taiwan conducted live-fire military drills on Penghu Island, an archipelago in the Taiwan Strait.
Market chatters show some investors are feeling unease about the phrase “we will improve the personal income tax system and keep income distribution and the means of accumulating wealth well-regulated” in the Work Report delivered by General Secretary Xi at the Chinese Communist Party’s National Congress last Sunday. The concept of regulating the means of accumulating wealth (规范财富积累机制) shows up in an official document for the first time.
In his maiden Policy Address, Chief Executive John Lee unveils a Steering Group on Integration into National Development to devise strategic plans to integrate Hong Kong’s economy into the mainland’s Greater Bay Area development scheme and the Belt and Road Initiative. Li also rolls out investment-led measures aiming to boost the Hong Kong economy, including setting up a Hong Kong Investment Corporation which will establish and fund an HKD30 billion public-private co-investment fund to invest in projects that potentially drive industry development in Hong Kong. Hong Kong will also establish the Office for Attracting Strategic Enterprises whose mandate is to attract business enterprises from the mainland and overseas through favorable tax, financing, land provision, and other incentives.
Japan’s inflation data for September is due for release on Friday, and as signalled by the Tokyo CPI released earlier this month, price pressures are likely to pick up further. Bloomberg consensus expects the core measure (ex-fresh food) to come in at 3.0% y/y from August’s 2.8% y/y while the core-core measure (ex-fresh food and energy) is expected at 1.8% y/y in September from 1.6% y/y previously. The headline is expected to be a notch softer at 2.9% y/y from 3.0% y/y, but still remain way above the 2% target level. Weakness in the yen prompted an intervention from the Bank of Japan in September but the effect faded fast and the currency was significantly weaker in the month, which possible led to import price pressures. Still, the central bank is unlikely to shift its easing stance and will likely continue to wait for the global pressures to ease and USD to top out.
Traders digested much weaker than expected jobs data for September. Data released today showed just 923 jobs were added to the economy, much weaker than the 25,000 jobs Bloomberg estimated to be added. It also shows employment is falling ahead of RBA’s expectations, with less jobs added to the Australian economy, following last month’s 33,500 jobs being added. Also in important news; the unemployment rate rose by less than 0.1 percentage points, but remained at 3.5% in rounded terms. The reason for this is because rate rises and rising inflation is having a greater impact on the corporate world with the RBA also noting business insolvencies are rising in Australia.
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Chief Investment Strategist
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Chief Investment Strategist
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Chief Investment Strategist
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Head of Fixed Income Strategy
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Head of Commodity Strategy