Global Market Quick Take: Asia – April 26, 2023

What’s happening in markets?

US equities (US500.I and USNAS100.I): tumble on regional bank concerns

Nasdaq 100 shed 1.9% and S&P500 lost 1.6% on broad-based weaknesses. All 11 sectors declined, with materials, information technology, and consumer discretionary, each tumbling over 2%. The larger deposit flight reported in the Q1 results from First Republic Bank the night before put the market on a soft footing at the open and fears of a hard landing stirred up selling across the board. First Republic Bank (FRC:xnys) plummeted 49.4% and the SPDR S&P Regional Banking ETF plunged 4.2%. United Parcel Service (UPS:xnys) tumbled 10% after missing Q1 revenue and earnings estimates and a downbeat outlook.

In extended hours, Microsoft jumped over 8% and Alphabet (GOOGL:xnas) gained nearly 2% on strong earning beats.

Treasuries (TLT:xnas, IEF:xnas, SHY:xnas): yields plunged on First Republic Bank, weak consumer confidence, and a strong 2-year auction

Treasuries opened with a strong bid (declines in yields) following First Republic Bank reporting a large decline in deposits and potential asset sales the day before. Gains were extended after a 2.7-point decline in the Conference Board Consumer Confidence. Rising concerns about the debt ceiling also contributed to the fall in yields by fuelling flight to quality bids for Treasuries. The 2-year and 5-year yields took a decisive dive and bull-steepened the yield curve after a well-received 2-year auction with a strong 2.68 times bid-to-cover ratio. The 2-year yield dropped by 13bps to 3.95% and the 10-year declined by 9bps to 3.40%. Large block buying in red months (2024 contracts) SOFR interest rate futures, seeing yields down 25-27bps, implying more rate cuts being priced in for 2024.

Chinese equities (HK50.I & 02846:xhkg): slumped on concerns about growth and geopolitics

Uncertainties of upcoming tightening of the curbs on US investment in the Chinese technology industry and weaker Chinese high-frequency economic data recently triggered investors to turn defensive in Hong Kong and mainland Chinese equities. Chinese new home sales data for the week ending April 23, according to WIND, decelerated notably. The Emerging Industries PMI fell further to 53.1 in April, from 56.1 in March after peaking at 62.5 in February. The official NBS PMIs are scheduled to release on Sunday.

Hang Seng Index declined for a third straight day, falling 1.7% to 19618. Hang Seng Tech Index plunged 3.5%. China Internet stocks were sold, seeing Hang Seng Tech Index down for six days in a row, shedding 3.5% on Tuesday. JD.COM (009618:xhkg) plunged 4.1% to the level last seen in October 2022, before China’s reopening from pandemic restrictions. Alibaba (09988:xhkg) dropped by 3.2% and back to the level on March 28 right before the e-commerce giant first unveiled its plans to restructure into six separate units. 

Pharmaceutical names tumbled. WuXi AppTec (02359:xhkg) plummeted 11.1% on weaker-than-expected revenue growth in Q1. WuXi Biologics (02269:xhkg) shed 7.1%. Ganfeng Lithium (01772:xhkg) dropped by 6.9% and Tianqi Lithium (09696:xhkg) plunged by 8.5% on the report that the Chilean government is releasing a new regulatory framework over the country’s lithium industry. For more about the new Chilean rules and the lithium industry, please refer to Peter Garnry’s article here.

On the other hand, PetrolChina (00857:xhkg) bucked the decline and gained 2.1%, followed by Tingyi (00322:xhkg) up 1.6%, China Life (02628:xhkg) up 1.1%, and China Mobile (00941:xhkg) up 0.9%.

Northbound Stock Connect registered a net outflow for the third day in a row, with outflow of RMB5 billion on Tuesday and nearly RMB16 billion in total over the past three days. CSI300 lost 0.5% on Tuesday, driven by telecommunication, electric equipment, electronics, semiconductors, and non-ferrous metal names.

FX: Dollar bid on risk aversion suggests rising growth slowdown concerns

A safe haven bid came to the dollar on Tuesday as markets waded through a multitude of risks from First Republic earnings to debt ceiling risks and earnings pressure. Fresh banking concerns took US yields lower, with the 2-year sliding back below 4%. Risk barometer AUDJPY saw a sharp drop from 90 to 88.26 as AUD weakened but JPY gained on lower yields. Australia’s Q1 CPI remains on watch today to signal whether RBA can consider hiking more, while the continued slide in iron ore prices also weighs. AUDNZD slid below 1.08. EU yields also plunged on disappointing results from UBS and EURUSD slid back below 1.10.

Crude oil: another plunge to close the gap to pre-OPEC cut

A weak sentiment as well as a stronger dollar came as a double whammy for oil prices. Demand side concerns were re-ignited with a plunge in US consumer confidence and fresh banking sector risks, while company earnings also failed to lift sentiment notably. WTI prices dropped to sub-$78 levels, coming in close sight of the levels seen before OPEC production cut, while Brent also plunged to below $81, as demand growth from China also remains underwhelming. A slump in oil refining margins is also weighing on sentiment. Meanwhile, API reported that US crude inventories declined by 6.1mn barrels last week and official data will be reported today.

Copper and iron ore: Slow Chinese recovery and rising recession risks

Copper prices saw a sharp decline, along with other industrial metals including iron ore and steel in response to a slower than expected recovery in Chinese demand. Risks of a global slowdown in growth also re-emerged strongly with a plunge in US consumer confidence and banking sector risks seemed to be brought back to life with First Republic earnings. Copper was down 2.5% yesterday, to test key support at $3.82, break of which will expose the next key support at $3.72. Iron ore prices are also down to $100 from a peak of $130+ earlier this year amid weak demand and rising inventories, as well as China’s curbs.

What to consider?

Alphabet and Microsoft results help improve tech sentiment

Alphabet (GOOGL:xnas) reported Q1 revenue of USD69.8 billion, above estimates.  EPS came in at USD1.17, beating consensus by nearly 8%. The company announced additional buyback authorization for USD70 billion.

US consumer confidence and Richmond Fed survey sends jitters on the economy

US consumer confidence hit its lowest levels since July on pessimism on economic outlook even as the present situation held up. Headline fell to 101.3 in April, well beneath the prior, and expected, 104.0. Present Situation index rose to 151.1 (prev. 148.9), but Expectations dropped to 68.1 (prev. 74.0). The level below 80 on the expectations index is considered to be associated with a recession within 12 months. Meanwhile, consumer inflation remained elevated. Another regional Fed manufacturing survey was also released and indicated pessimism. The Richmond Fed manufacturing index fell to -10 in April from -5 in March. Two of its three component indexes, shipments and new orders, declined. The employment index, however, rose slightly from -5 in March to 0 in April.

Pockets of macro concerns emerging from earnings reports

Many companies reported earnings yesterday and our Head of Equity Strategy Peter Garnry wrote an article on some of the key earnings takeaways. It is probably worth highlighting here that there were pockets of macro risks emerging from some of the earnings results and commentaries. UPS missed its top line and bottom-line expectations, as well as gave a weaker guidance and highlighted the pressure from wage costs. These results highlighted a pullback in consumer spending or a shift in buying preferences and may weigh on ecommerce earnings as well. Mc Donald’s CEO also said that consumers are starting to push back on higher burger prices, which reflects consumer pain from inflation and high interest rates is starting to widen. 3M results also added to macro concerns with the announcement of job cuts despite a beat on Q1 revenue and earnings. Meanwhile, strong earnings and upbeat outlook from PepsiCo and Nestle suggest mega caps in the global consumer staple sector are strong defensive stocks for investors.

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

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