Global Market Quick Take: Asia – May 18, 2023

Some progress on debt ceiling talks before Biden left for G7

There was some optimism on the debt ceiling after President Biden said he was confident the US will not default and the meeting on Tuesday was productive, he noted talks will be continuing throughout the week whilst he is at the G7 and he will stay in close contact with negotiators during his time away. Republican House Speaker McCarthy also reaffirmed that a debt ceiling by Sunday is doable and that he is optimistic about their ability to work together. Biden has also continued to highlight that leaders have agreed that there will be no default, and the negotiations are on the budget outlines. This suggest bonds can rally as an agreement is announced.

USD/CNH breached the 7-handle amidst the gloomy Chinese economic indicators, RRR, and interest rate cuts expectations gaining momentum

The USD/CNH currency pair, for the first time this year, surpassed the critical threshold of 7, reflecting mounting concerns fuelled by a series of lacklustre economic data from China. Market sentiment has been increasingly inclined towards the likelihood of a reserve requirement ratio (RRR) reduction as well as cuts in key policy interest rates. Moreover, foreign investors withdrew approximately USD6 billion from Chinese domestic bonds in April, channelling their funds out of the country.

Adding to the prevailing unease, the approaching months of June and July mark the dividend payment season for mainland Chinese companies listed in Hong Kong, with estimated payouts nearing USD8 billion. These combined factors have set the stage for a downward trajectory in the renminbi's value, potentially pointing towards a weakening trend with a target of around 7.20.

Tencent surpasses total revenue expectations but falls short in advertising revenue and EPS

Tencent (00700:xhkg) unveiled its Q1 financial results, showcasing a noteworthy 11% year-on-year increase in revenues, reaching RMB149.99 billion. The reported figures surpassed market expectations, which had anticipated a more modest 8% growth rate. This strong performance was primarily attributed to the better-than-expected revenue generated from online games. However, the company's advertising revenues slightly missed consensus estimates, amounting to RMB20.9 billion instead of the anticipated RMB21.3 billion.

During the first quarter, Tencent witnessed an expansion in gross margin, rising to 45.5% from the previous quarter's 42.6%. Additionally, the non-GAAP operating margin demonstrated growth, reaching 29% compared to 24.5% in the previous quarter. Despite these positive developments, the earnings per share (EPS) came in at RMB3.35, falling 2% short of the consensus forecast. This outcome can be attributed to lower-than-expected non-operating income.

Tencent’s ADR gained 1.8% overnight.

Target beats in Q1 EPS as margins expand but guides Q2 EPS lower

Target (TGT:xnys) released its 1Q23 financial results, reporting revenue of USD24.95 billion, slightly below the consensus estimate of USD25.01 billion. However, the company exceeded expectations on Q1 EPS, posting $2.05 compared to the consensus of $1.77. This outperformance can be attributed to improved gross margin of 26.3% and EBIT margin of 5.2%, surpassing the consensus figures of 26.2% and 4.6% respectively. Notably, Target experienced a significant decline of 16% in inventory year-over-year.

The management highlighted strong performance in the food and beverage, beauty, and household essentials sectors, while observing weakness in discretionary categories. Target reaffirmed its previous guidance for the second quarter, projecting low single-digit growth in same-store sales. However, they anticipate softer EPS of USD1.30-1.70, which falls short of the consensus range of USD1.91-1.93.

Alibaba Q4 FY23 is expected to report revenue growth of 2.5% Y/Y

Alibaba (09988:xhkg) is anticipated to unveil its Q4 FY23 financial results, with revenues of RMB210.2 billion, a 2.5% year-on-year growth, as per Bloomberg consensus. Despite hurdles encountered by Alibaba's e-commerce segment, AliCloud revenues are projected to exceed expectations. Adjusted net income is predicted to rise by 14.5% to RMB24.56 billion, showcasing a year-on-year expansion in operating and net profit margins, although a sequential contraction is anticipated.

Google and Microsoft engage in fierce AI battle as Bard Chatbot update shifts dynamics

The landscape of AI technology leadership is witnessing a fierce showdown between industry giants Google (GOOGL:xnas) and Microsoft (MSFT:xnas), with recent developments from Google's upgraded chatbot, Bard, reshaping perceptions. While initial notions positioned Google as trailing behind Microsoft, the latest update has sparked speculation that Google may indeed be spearheading the race in AI technology. This clash between the two tech behemoths promises to be a monumental contest, captivating industry observers and enthusiasts alike. In an insightful article penned by Peter Garnry, various streams of opinion surrounding AI technology and its regulatory landscape are thoroughly examined.

US jobless claims ahead

Thursday’s jobless claims will be key to watch after last week’s higher-than-expected print which showed jobless claims reached highest levels since October 2021 at 264k. This sparked concerns of a cooling in the labor market, and another high print of 252k is expected as per Bloomberg consensus. While this indicates that the labor market is cooling, it still remains tight. If the trend extends further, we could see a material shift in next month’s non-farm payroll expectations due on June 2.

Japan CPI out on Friday

Japan’s Q1 GDP outperformed expectations and provided another boost to Japanese equities. Nikkei 225 is now above its key 30,000 level. April CPI will be on tap on Friday which will likely confirm that price pressures remain concerning. Tokyo CPI for April had come in above expectations despite the falling commodity prices and the base effect. Bloomberg consensus expects national CPI to come in at 3.5% for the headline from 3.2% previously while the core-core measure (ex-fresh food and energy) is expected to rise to 4.2% from 3.8% in March. High inflation will continue to spook expectations about a tweak in BOJ policy, although policymakers remain focused on seeing wage growth.

G7 Summit: Potential for clear geopolitical implications

The heads of the G7 will convene for a summit held from May 19-21 in Hiroshima, Japan. The leaders are expected to deliberate on a range of topics, including the health of the global economy, risks of a recession and persistent inflation. Global food security and geopolitics will also be a key focus as the war in Ukraine rages on, along with the escalating tensions between US and China. There is considerable anticipation that the meeting could produce major geopolitical signals related to the nature of the nations’ relationship with China. Bloomberg reported that G7 finance heads will propose a new partnership on supply chains that will only allow participation if certain minimum standards are met on human rights and environmental policies. The statement will be scrutinized by China in case it feels targeted, after China last month called a G7 statement "full of arrogance, prejudice against China," and lodged complaints with this year's G7 host, Japan.

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