APAC Daily Digest: What's happening in markets and what to consider next (July 28, 2022)

What is happening in markets? 

Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I)

Equity markets soared after the FOMC, which raised rates by 75 basis points, lifting overnight Fed Fund target range to 2.25%-2.50%, as widely. S&P 500 surged 2.6% and Nasdaq jumped 4.3% with Alphabet (GOOGL) +7.6%, Microsoft (MSFT) +6.6%, Tesla (TSLA) +6.1% and Spotify (SPOT) +12.2%.  Meta (META) gained 6.5% in regular hours but fell 3.6% in after-hour trading following reporting a decline in revenues and worse-than-expected forward guidance. 

U.S. yield curve bull steepened after the FOMC

In its post-meeting statement, the Fed acknowledged that “recent indicators of spending and production have softened” while noting that job gains “have been robust” and that inflation “remains elevated.” In the press conference, Powell refrained from giving concrete forward guidance and indicated that future moves would depend on incoming data and on a meeting-by-meeting basis.  While noting that the Fed will slow down at some point, Powell also somewhat pushed back market expectations of rate cuts in 2023 by referring to the Fed’s median projections from the June FOMC that had the Fed fund at 3.375%, 3.75% and 3.375% at the end of 2022, 2023 and 2024 respectively. Earlier in the day, durable goods order came at an increase of 1.9% in June versus an expected decline. The U.S. yield curve bull steepened with 2-year yield falling 5 basis points to 3.0%, 10-year yield falling 3 basis point to 2.78% and 30-year yield rising 3 basis point to 3.06%.

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

After two days of outperformance, Chinese developers retreated and dragged the equity market lower.  Leading Chinese property names were down 2% to 4%. Country Garden (02007:xhkg) collapsed 15% after announcing to place new shares at deep discount.  Hang Seng Index fell 1.1% on Wednesday.  Reports lack of compromise between the U.S. and China over ADR listings sent Hang Seng TECH Index (HSTECH.I) 1.3% lower. Alibaba (09988), Tencent (00700) and Baidu (09888:xhkg) were down about 3%.  Sportwear names, Li Ning (02331:xhkg) and Anta (02020:xhkg) fell around 3% as Adidas noted a slow recovery in China. 

European energy crunch to continue

Nord Stream volumes fell to just 20% of capacity on Wednesday, according to German grid operators. Gazprom warned that there were more cuts to come, saying another turbine needed to be taken down for maintenance. With the prospect of gas flows remaining curbed for the foreseeable future, the European Union pressed ahead with a plan to cut gas use by 15% through next winter. Dutch front month futures (TTFMU2) ended the session up 2.6% to EUR 205.23/MWh after touching record highs of EUR 228 in the day. Electricity prices also signaled stress with French year-ahead power climbing to a record EUR 495/MWH yesterday and German year-ahead power prices at a record EUR 380.

Crude oil prices gain on risk-on and supply concerns

Crude oil prices also gained overnight amid sustained demand but weaker supply concerns. WTI futures are now back to $97/barrel and brent up to $107. US crude oil stockpiles dropped by the most since the end of May, falling 4.52mbbl last week according to the Energy Information Administration. Crude oil exports from the US rose to a record 4.55mb/d, driven by a widening spread between WTI and Brent. The Fed’s tone also suggested little demand concerns, while a power outage in Kazakhstan further added to supply concerns.

EURUSD holds 1.0100

EURUSD has held up despite risks of further cuts in gas supplies and widening of the spread between Italian and German 10-year yields again towards the danger zone. EURUSD tested the support line at 1.0100 but gains returned later in the session and pair rose back to 1.0200 as the USD weakened following the Fed’s announcement. USDJPY saw gains to 137.40 but since retraced back to 136 in the Asian morning session.

What to consider?

Fed’s 75 basis points rate hike comes with lack of forward guidance

While we did see a unanimous decision from the FOMC members to raise rates by 75bps, Fed Chair Powell dodged every attempt in the Q&A to make a point that can be considered solid forward guidance – he even specifically stated that the Fed won’t issue any “clear guidance” on future rate moves and that the June FOMC rate forecasts are the only thing on offer for a likely path of rates. Any questions on easing financial conditions or markets pricing in cuts for 2023 were also completely ditched. This sparked risk-on in the markets, but our sense is that volatility of the Fed meetings from here on will be much higher suggesting more, not less risk.

US Q2 GDP may remain positive

The first estimate of US Q2 GDP will be released today and after a negative print in Q1, the risk is that a second consecutive negative print may mean technical recession is here. The durable goods and trade data on Wednesday, however, suggests that a positive quarterly growth figure is likely. Durable goods orders were up 1.9% m/m in June from an advance estimate of 0.8% earlier. Even if a technical recession was to happen, it would largely be driven by inventories and net trade, but still strong consumer demand suggests a broad-based recession is unlikely.

China’s industrial profits grew in June

Industrial profits grew in China to +0.8% YoY in June from -6.5% in May. Growth in industrial revenues accelerated to +9.1% from 6.8%. Improvement in supply chains and logistics, plus resumption of manufacturing production contributed to the recovery.  With retracement of commodity and material prices, profit of upstream industries declined -6.3% YoY while downstream industries’ profits rose 6.1% YoY in June.  The auto industry led the downstream in profit growth following the resumption of production in Shanghai and Jilin.

Australia inflation for June, hotter than expected, hitting a record high

Australian headline inflation grew 6.1% year on year in the June-ending quarter, (the highest inflation growth in 21 years), But, the key measure the RBA looks at, Trimmed CPI, showed prices are growing across the board, and are somewhat entrenched with trimmed CPI hitting its highest in history (since the ABS started tracking the data series). Trimmed Inflation grew 4.9% YOY (vs 4.7% expected) with the data excluding large price rises and falls. That being said, we are seeing the largest price rises in unleaded fuel prices, which hit a brand new record high in June. Rising construction costs pushed new property prices up, with new dwelling prices seeing their biggest jump in history (since the ABS started tracking the data in 1999). Higher construction costs are pushing up dwelling prices due to materials and labour shortage. All in all, as we think this CPI data confirms inflation will continue to rise more than expected and well into next year due to the supply/demand dynamics.

Australian Retail spending data on watch, expected to grow 0.6% in June, following May’s 0.9% jump

Retail spending is at record high and monthly unemployment is its lowest level in history. Today, we’re expecting Department store and café, restaurant and takeaway food spending to continue to grow, while spending pressure remains on clothing/foot ware/accessories with consumers forking out more for groceries. If today’s data show retail spending grew to another record, it gives the RBA more ammunition to rise rate 0.75% next Tuesday, particularly given unemployment is at a record low.

Rio Tinto (RIO)  HY Results for 30 June, the numbers and what’s next

Underlying profit fell 28% to $8.6b (vs $9.18b expected) A big miss. Free cash flow fell 30% to $7.1B vs $10.2b same time last year. Dividend payouts were  slashed to $4.3b (US$2.67 per share); that’s a 52% drop compared to the same time last year. This weaker than expected result will likely pressure Rio shares and cause a ricochet in the mining sector. Until we see the market focusing on the supply shortage, and not recessionary fears, prices and thus mining company’s performance will likely remain capped. Rio’s weaker results not only reflect the commodity giant is being hurt by industrial metal prices pulling back (Iron ore, Bauxite, Alumina, Copper), but also by higher rates of inflation in their operating costs (real inflation and interest rates). What’s next? BHP reports August 16. BHP’s results might not be as weak as Rio Tinto’s given BHP is somewhat supported by higher coal and oil prices with BHP generating 8.7% and 6.7% of revenue from those assets. However, more broadly, cost pressures and lower commodity prices will also be a focus for BHP.

ArcelorMittal, L’Oréal, Stellantis and Orange will release their semi-annual results today

Expect a very solid performance for ArcelorMittal. The stock is down 17.7% YTD. But it is likely to rebound strongly today if it is confirmed. The market will focus mostly on sales in China for L’Oréal (but the impact of the zero Covid policy should be rather limited since the company manages to significantly boost its ecommerce business in China). The telecom company is expected to announce solid results too (but its business in Spain should continue to disappoint. Several analysts believe a restructuring is unavoidable). Finally, the auto carmaker Stellantis (owner of PSA Peugeot-Citroen, Fiat and Chrysler) should confirm its ability to reach an operating margin of above 10% this year.

The central bank of Turkey will announce its year-end inflation update today

This will certainly not have much impact. Other the past three years, the July estimates stayed below actual inflation. In June, Turkey’s inflation stood at a 24-year high of 78.62% YoY.

Apple earnings ahead

The weaker consumer demand, supply chain issues and deteriorating economic environment may mean pressure on Apple’s (AAPL) earnings due today. Taiwan Semiconductor Manufacturing (TSM), Apple's leading supplier of processors, recently warned that demand for PCs, smartphones, and consumer electronics is weakening amid inflationary pressures and after the pandemic-driven boom. Still, Apple’s innovation and pricing power are key positives that provide resilience, and strong balance sheet and robust capital-return program suggest long term potential despite a tough macro environment.

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