Summary: The US treasury yields will be key this week to make or break the equity gains that we have been seeing in the past few weeks. The Jackson Hole symposium remains key to watch, as it usually spurs a few surprises, and the markets are currently confused about the Fed’s forward thinking so a further push against 2023 easing expectations may be warranted. The dollar bull run, if extended, will push most of the G10 pairs towards fresh lows for the year. USDCNH may be heading towards 7, and expectations are for a cut in loan prime rates today. Zoom and Palo Alto earnings on tap after-market.
The 9-week long rally (+17% in S&P 500, +23% in Nasdaq 100) since June 17, 2022 in U.S. equities waned notably last Friday, S&P 500 -1.29%, Nasdaq 100 -1.95%. Last week Fed officials’ pushback on the market’s notion of Fed pivoting to pause and then reverse course to ease in 2023 had the effect of cooling down some of the hype of the return of goldilocks among market participants, who had taken comfort from tentative signs of peak inflation and at the same time data showing the economy not being on the brink of a recession.
Speculative sentiments took a hit. Bed Bath & Beyond plunged 40.5% on Friday after losing 19.6% the day before, following an SEC filing released on Wednesday showing that Ryan Cohen had sold his stake in the company. Other meme stocks also dropped, AMC Entertainment (AMC:xnys) -6.6%, GameStop (GME:xnys) -3.8%. Bitcoin fell 9%.
On the other hand, Berkshire Hathaway announced that the company has the approval from the Federal Energy Regulatory Commission to increase its 20% stake in Occidental Petroleum (OXY:xnys) to as much as 50%. The news that the Oracle of Omaha is going to get control of the company sent the share price of Occidental Petroleum 9.9% higher on Friday.
Treasuries sold off across the curve with the 10-year jumped most in yield, +9bps. Without major news or data triggering the move, the market seems to position for the supply from the 2-year, the 5-year, and the 7-year auctions next week and the Jackson Hole symposium hosted by the Kansas City Fed from August 25 to 27. The much-anticipated highlight will be Powell’s speech on August 26.
Hang Seng finished trading last Friday flat. As a heatwave is hitting China and causing a power crunch, coal mining stocks gained, Yancoal Australia (03668:xhkg) +7.3%, Yankuang Energy (01171:xhkg) +3.8%, China Coal Energy (01898:xhkg) +4.9%, China Shenhua Energy (01088:xhkg) +2.8%, Likewise, China electricity utilities surged, Huaneng Power (00902:xhkg) +8.6%, China Resources Power (00836:xhkg) +6.1%, Longyuan (00916:xhkg) +2.8%.
Orient Overseas (00316:xhkg), a container liner, climbed 6.5%, after reporting strong H1 earnings and a special dividend of USD2.57 and an interim dividend of USD3.43, bringing dividends to a total of USD6, a growth of 36% from H1 last year. Chinese property names gained across the board amid anticipation of more support from the Chinese authorities and local governments.
NetEase fell 6.3% despite reporting better-than-expected revenues and earnings. Investors are concerned about the company’s less-than-assuring tone about getting new banhao (game approvals).
USDCNH surpassed its May 2022 high of 6.8380, reaching as high as 6.8445 on Friday after the PBoC, China’s central bank, fixed the onshore USDCNY reference rate north higher at 6.8065, a level last seen in September 2020. Last week’s sharp rally of the U.S. dollar versus major currencies, plus weak credit and economic data, the resurgence of Covid outbreaks, and surprising rate cuts in China were among factors that might have contributed to the renminbi’s weakness. All eyes are on if the PBoC will allow the currency pair to move towards 7.0000, and the expected easing move in LPRs today.
The run higher in the US dollar last week has seen has meant pressure across the G10 board. Commodity currencies were the laggards, NZD lost 4% while SEK and SUD were also down over 3%. More pain likely ahead if US 10-year yields pushed towards/above the key 3% mark in the week. That could mean EURUSD heading to parity, and GBPUSD seeing a firmer breaker below 1.1800. USDJPY, currently toying with 137, could move for a re-test of 140 if US yields surged. The next key event risk for the US dollar arrives with next Friday’s Jackson Hole symposium speech from Fed Chair Powell.
Crude oil turned lower in the Asian morning hours at the start of the new week after modest gains last week as the focus turned away from demand destruction fears to persistent supply shortages. WTI futures were seen back below $90/barrel this morning while Brent futures dipped below $96. Still, the gas-to-fuel switch with the increasingly weaker supply of gas to Europe now adds to the fundamental price-supportive factors. Focus may turn back to Iranian supply early in the week though, with reports that the deal is ‘imminent’.
China’s National Interbank Fund Center, under the supervision of the PBoC, is scheduled to release the fixing of the 1-year and the 5-year loan prime rates (“LPR”) quoted by major Chinese banks on Monday. After the 10bps cut to the 1-year Medium-term lending facility rate to 2.75%, market participants are expecting the LPR to be lowered also by 10bps to 1-year at 3.60% and 5-year at 4.35%. The focus will be on the 5-year LPR as a larger than 10bp cut, for example, 15bps, to this benchmark of mortgage loan rates will signal stronger support from the PBoC to the housing market.
The Housing Ministry, the Ministry of Finance, and the PBoC, according to Xinhua News, have jointly rolled out new policies, including making special loans through policy banks to support the delivery of presold residential housing projects which are facing difficulties in completion due to lack of funding. While the news report does not elaborate, given that the PBoC is one of the entities that initiate this plan, the central may be printing money to provide funding to the policies banks for the latter to lend to developers to complete presold projects. The significance of this initiative depends on the lending programme’s size which is not yet known.
Daily locally transmitted new cases of Covid-19 in China persistently stated above 2,000 since August 12, 2022, with Hainan, Tibet, and Xinjiang being the regions most impacted.
China is currently being hit by a heatwave with a large part of the country experiencing -degree Celsius temperatures since the beginning of August. The surge in air conditioning caused electricity consumption to soar. To make things worse, drought has reduced hydropower output. Some provinces and municipalities, especially Sichuan, are curbing electricity supply to industrial users in order to ensure electricity supply for residential use. This has caused disruptions to manufacturing production and added to the headwinds faced by the Chinese economy.
Germany’s July PPI smashed expectations to come in at 5.3% MoM, the biggest single gain since the Federal Republic started compiling its data in 1949 and above the consensus estimate of 0.7%. The data suggests potentially a lot more room on the upside to Eurozone inflation, and a lot more pain for German industries. European PMIs due this week will gather attention, as will Germany’s IFO numbers.
There is a considerable tension between the market’s forecast for the economy and the resulting expected path of Fed policy for the rest of this year and particularly next year, as the market believes that a cooling economy and inflation will allow the Fed to reverse course and cut rates in a “soft landing” environment (the latter presumably because financial conditions have eased aggressively since June, suggesting that markets are not fearing a hard landing/recession). Some Fed members have tried to push back against the market’s expectations for Fed rate cuts next year it was likely never the Fed’s intention to allow financial conditions to ease so swiftly and deeply as they have in recent weeks. The risks, therefore, point to a Fed that may mount a more determined pushback at the Jackson Hole forum, the Fed’s yearly gathering at Jackson Hole, Wyoming that is often used to air longer term policy guidance. This will have further implications for the US dollar, which is threatening the cycle highs versus sterling, the euro and on the comeback trail against the Japanese yen as well. The US dollar is a barometer of global liquidity, and a continued rise would eventually snuff out the improvement in financial conditions we have seen since the June lows in equity markets, particularly if longer US treasury yields are also unmoored from their recent range and rise back to 3.00% or higher.
Hang Seng Indexes Company announced last Friday to add China Shenhua Energy (01088:xhkg), Chow Tai Fook Jewellery (01929:xhkg), Hansoh Pharmaceutical (03693:xhkg), and Baidu (09888:xhkg) to the Hang Seng Index, bringing the latter’s number of constituent companies to 73 from 69. The changes will take effect on September 5, 2022. In addition, SenseTime (00020:xhkg) will replace China Pacific Insurance (02601:xhkg) as a constituent company of the Hang Seng China Enterprises Index.
Two key companies report earnings in the day ahead. Zoom Video Communications (ZM:xnas) reports after-market, and the switch from online to offline following the pandemic has spelled trouble. Tightening corporate budgets due to soaring inflation and labor costs will likely dampen the outlook, and competition from Microsoft Teams also remains a concern. Focus will be on business strategy shift towards enterprise solutions and cloud. Palo Alto (PANW:xnas) – a component of our cybersecurity basket – will have to wade through the slowing IT spending as macro conditions deteriorate. Still, we remain overweight on the cybersecurity basket, given the increased security spending despite slowing overall IT budgets. Meanwhile, PANW also has a robust cash and balance sheet position.
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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