Summary: While the US markets remained mixed overnight with the post-wage growth and ISM gains cooling off, focus in Asia shifts back to China’s reopening and policy measures. A fresh round of fiscal boost and a likely higher budget deficit target could mean more infrastructure spending, and hence further gains for industrial metals. Copper broke the key $4/lb mark. Furthermore, higher import quotas for crude oil were also announced. Tesla charged ahead, but remains in a technical long-term downtrend.
U.S. equity benchmark indices pared their over 1% gains in the morning and finished the Monday session mixed. Nasdaq 100 gained 0.6% while S&P 500 was nearly flat. Among S&P 500 sectors, information technology was the top winner and advanced 1.1%, led by the strong performance of Nvidia (NVDA:xnas) and Advanced Micro Devices (AMD:xnas). Tesla (TSLA:xnas), rallying 5.9%, was the best-performing stock within S&P 500. The stock however is still in a long-term downtrend. Healthcare was the worst-performing sector. Lululemon Athletica plunged 9.3% after saying the company expected lower profit margins in Q4. Uber gained 3.8% on an analyst upgrade.
Apple (AAPL:xnas) plans to drop Broadcom (AVGO:xnas) chips from its devices and use in-house chips. Apply also aims to replace the modems from Qualcomm (QCOM:xnas) with in-house designs. Shares of Broadcom fell nearly 2% and those of Qualcomm shed 0.6%.
After a strong session last Friday, Treasuries extended their gains to finish 2 to 4 bps richer across the curve. Yields on the 10-year edged down 3bps to 3.53% and those on the 2-year slid by 4bps to 4.21%. The market is pricing a 77% chance of a 25bp hike at the February FOMC. Comments from Fed’s Bostic and Daly, both non-voter this year, did not offer new insights. Bostic said he was in favor of “raising rates to the 5%-5.25% range”. Fed Chairman Powell will speak in a panel discussion on central bank independence at a Riksbank event today. The New York Fed survey showed U.S. consumers expecting 1-year, 3-year and 5-year inflation expectations at 5%, 3% and 2.4% respectively.
The Australian share market (ASXSP200.I) opened slightly lower on Tuesday down 0.2%, while Japan’s market is suggested to outperform in APAC today, with the futures suggesting the Nikkei could rise 0.9%. Keep an eye on coal stocks particularly as China’s National Development and Reform Commission has issued three notices urging parties to secure and speed up the process of locking in medium and long-term supply deals, to ensure China does not run out of power. China banned the imports of Australian coal for over two years, however yesterday, reports suggested BHP struck a deal, and sold two shipments of met coal to China. This highlights that trade relations are improving but also means the price of coal is likely to remain supported as demand is increasing. Keep an eye on Coronado (CRN) Whitehaven Coal (WHC), and New Hope (NHC). In Australia and Asia today, Copper stocks are in focus after the copper price rose 2.4% to over $4, which is a six month high. Copper stocks to potentially watch include BHP, Oz Minerals. It’s also worth watching the Bloomberg Commodity Index which jumped 1.1%. There also affiliated ETFs that are worth watching given China is easing restrictions and likely to ramp up commodity buying after the lunar new year. Iron ore (SCOA) trades flat today, but holds a five month high, as buying of iron ore is expected rise after the new year holidays as it typically does. This notion is also supporting iron ore stocks in the industry like Vale, Champion Iron, Fortescue Metals, BHP and Rio.
Alibaba (09988:xhkg), surging 8.7%, was the best-performing stock within the Hang Seng Index on Monday, following Ant Group announcing a new arrangement in which Alibaba’s founder Jack Ma cedes his indirect control of Ant Group. The new arrangement, which apparently has the blessing of the Chinese authorities, signals that Alibaba and its affiliates may be close to the end of the government-imposed reorganization and return to relatively normal business. Separately, Guo Shuqing, who is Party Secretary of the People's Bank of China (PBOC) and Chairman of the China Banking and Insurance Regulatory Commission, said that the rectification of 14 internet platform companies' financial businesses had basically been completed and China will support platform companies to play a bigger role in job creation and global competition. Hang Seng Index climbed 1.9% and Hang Sang TECH Index surged 3.2%. In A-shares, CSI300 gained 0.8% with non-ferrous metal, non-bank financials, food and beverage, beauty care, education services, and poultry farming being top gainers.
The USD was further lower on Monday continuing the post-NFP and ISM Services decline as risk assets enjoyed a bid on the back of China reopening optimism, seen throughout Asia, Europe, before paring in the US afternoon. The latest NY Fed consumer inflation expectations were mixed, but the cooling in 1yr ahead expectations gained the most attention. Fed speakers failed to add anything new, but clearly opened the door for a 25bps in February resulting in some dovish Fed repricing, and focus is now on Chair Powell and US CPI. EURUSD continues to look stretched as it rose to 7-month highs of 1.0761. AUDUSD capped at 0.6950 for now but China optimism continues to underpin with USDCNH now below 6.8000.
Crude oil prices opened the week with gains on continued China optimism as fiscal stimulus measures bode well for the demand outlook in China. China also issued a fresh batch of import quotas, of about 112 million tons in its second allocations for 2023, in a signal that the world’s largest importer is ramping up to meet higher demand. The upcoming Lunar New Year is also keeping the travel demand robust. Meanwhile, Russian oil exports are likely suffering on the back of sanctions (read below). WTI futures traded close to $75/barrel in the Asian morning while Brent was close to $80.
With the China government considering CNY3.81trn of local government bond issuance in 2023, there is expectations of a further push to infrastructure spending which will continue to bump up industrial metals prices. Beijing may also bump the budget deficit to 3% of GDP, up from 2.8% last year. Meanwhile, copper inventories for immediate withdrawal from LME warehouses fell 2.8%, the most since 8 December. That leaves stockpiles at just above a 17-year low. Having touched the $4.05 level overnight, HG copper prices are now back the $4 mark, and support is seen at $3.8475.
China exempts value-added tax (VAT) among small businesses with monthly revenues less than RMB100,000 a month till the end of 2023, according to Bloomberg. China is also considering a record special debt quota and a wider budget deficit with a new special bond quota of up to CNY 3.8tln and a deficit ratio of around 3% for the year. China is on track to spend more on infrastructure and support the real estate sector, both will bump up demand for industrial metals.
Tokyo CPI for December was released this morning, with the headline coming in at 4.0% YoY as expected from a revised 3.7% YoY in November, suggesting price pressures in Japan haven’t started to cool off yet. Tokyo core CPI (ex-food) was higher than expected at 4.0% YoY from 3.6% YoY previously while the core-core measure (ex-food and energy) was also higher at 2.7% YoY from a revised 2.4% YoY in Nov. With Tokyo CPI numbers leading the broader print, there are clear signs that further upside pressures are likely to stay and continue to keep a policy tweak option alive for the BOJ.
The leading MSCI indices tracking these two segments of the global equity market have entered a bull market up 20% since their lows in October fuelled by gains in China and a weaker USD. The market is betting on a shallow recession in some parts of the world, while inflation keeps coming down, and on top of a successful kickstart of the Chinese economy. All three wishes may not be able to be fulfilled simultaneously and our view is that the market is getting too excited about growth too early as a lot of uncertainty persists. The rally has been fast and furious, so it is only natural to expect some profit-taking. There are also some risks to keep a tap on, such as BOJ's hawkish shift and company earnings. But that being said, there is still room for Asian markets to outperform its global peers in 2023.
There is not much on the eurozone calendar this week. According to the latest Eurostat figures, the labour market remains well-oriented both in the eurozone and in the European Union (EU). The eurozone unemployment was at 6.5 % in November and at 6.0% in the EU. The figures are stable compared to October. Within the EU, Spain scores the highest official unemployment rate (12.4%) and Germany and Poland the lowest one (3.0%). In a working paper published yesterday, ECB economists pointed out the risk of high wage growth in the coming quarters – way above historical patterns. This reflects robust labour markets that so far have not been substantially affected by the slowing of the economy, increases in national minimum wages and some catch-up between wages and high rates of inflation. We tend to disagree with this assessment. Wage growth is of course fuelling inflation in the CEE area. But this is clearly not the case in Western Europe. The likelihood that wages will increase significantly, thus becoming an issue in regard to the fight against inflation, is rather low in our view. The United Kingdom is certainly the only European country (but not belonging to the EU) which may potentially face a wage-price spiral this year.
Russia’s Urals grade, a far bigger export stream than any other crude that Russia sells, was $37.80 a barrel at the Baltic Sea port of Primorsk on Friday, according to data provided by Argus Media. Global benchmark Brent settled at $78.57 on the same day. Combined flows to China, India and Turkey hit the lowest last week since October, suggesting sanctions and EU embargo may be impacting Russia’s key exports.
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Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Head of Fixed Income Strategy
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Head of Commodity Strategy
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Head of Fixed Income Strategy
Quarterly Outlook
Head of Commodity Strategy