Global Market Quick Take: Asia – June 14, 2023

What’s happening in markets?

US equities (US500.I and USNAS100.I): S&P 500 and Nasdaq 100 extend winning streak

The S&P 500 and Nasdaq 100 maintained their winning streak for the fourth consecutive day, with the two benchmark indices rising by 0.7% to reach 4,369 and 0.8% to reach 14,900, respectively, setting new record highs. The broader market also saw gains as the Russell 2000 surged by 1.2%. Across the 11 sectors of the S&P 500, materials led the way with a notable increase of 2.3%, followed by industrials, up 1.2%, and consumer discretionary, which rose by 1%, highlighting their strength during Tuesday's trading session.

In individual stock performance, Nvidia (NVDA:xnas) experienced a significant boost, rising by 3.9% and closing above the significant milestone of a market capitalization of USD 1 trillion for the first time. Tesla (TSLA:xnas) extended its winning streak for the 13th consecutive day, gaining 3.6% in value.

Treasuries (TLT:xnas, IEF:xnas, SHY:xnas): yields soar in a volatile session; 30-Year auction sees strong demand

Treasuries had a volatile trading session with initial price rallies and yield drops following the release of CPI data in line with expectations. However, the market sentiment reversed later in the day, resulting in a selloff that continued into the afternoon. The 2-year yield rebounded from its post-CPI low of 4.49% and surged by 21bps to reach a high of 4.70% before settling at 4.67%. This marked a 9bps increase compared to the previous day's yield. Selling pressure was also observed in the SOFR interest rate futures contracts, leading to an 18bps reduction in the market's pricing of rate cuts for 2024. The 10-year yield rose by 8bps to finish at 3.81%, while the 30-year yield closed at 3.92%, marking a 4bps increase in yield.

The auction for USD18 billion worth of 30-year bonds saw decent demand. The bonds were awarded at a yield of 3.908%, which was 1bp lower than the when-issue level at the time of the auction deadline. The bid-to-cover ratio stood at 2.52 times, the highest since January 2020, indicating strong investor interest.

Hong Kong & Chinese equities (HK50.I & 02846:xhkg): rate cuts and  stimulus hopes fuel tech and property stocks rally

The People's Bank of China has implemented a 10bps reduction in the 7-day Open Market Operation (OMO) reverse repo rate, bringing it down to 1.9%. This decision has fostered heightened expectations among investors regarding the initiation of a long-awaited series of stimulus measures, which may involve additional cuts to various policy rates as well as demand-side policies. Consequently, China's property developers experienced notable gains, with Country Garden (02007:xhkg) surging by 4.8% and Longfor (00960:xhkg) climbing by 3.5% on the back of these hopes for stimulus. The Hang Seng Index, meanwhile, continued its upward trajectory for the fifth consecutive day, registering a 0.6% increase. Although market sentiment has continued to improve, the overall turnover of HKD100 billion fell short of the recent average.

Driving the market's upward movement were the technology sectors, with the Hang Seng Tech Index recording a notable rise of 2.4%. Within the IT hardware domain, Lenovo (00992:xhkg) spearheaded the gains with a substantial surge of 5.6%, while Sunny Optical (02382:xhkg) followed suit with a 4.4% increase. Stocks in the fields of artificial intelligence, cloud computing, and semiconductors also made noteworthy advances. Baidu (09888:xhkg) rose 4.9%, while Sensetime (00020:xhkg) surged 7.4%. Ming Yuan Cloud (00909:xhkg) emerged as a top performer, jumping by 16.5%. Meanwhile, tech giants Alibaba (09988:xhkg) and Tencent (00700:xhkg) each secured gains of around 2%. SMIC (00981:xhkg) and Hua Hong Semiconductor (01347:xhkg) saw their stocks rise by 4.7% and 2.5% respectively. In the electric vehicle sector, leading companies observed a steady ascent, with their stock prices climbing between 1% and 6%.

Similarly, mainland bourses demonstrated an outperformance by semiconductor, artificial intelligence, computing, and AI stocks, which collectively fueled a 0.6% gain in the CSI300 Index.

FX: Dollar weakened on slowing CPI and GBP strength

The USD weakened into the CPI release overnight and wobbled thereafter with a softer CPI print making room for a Fed pause. The only currency to weaken against the dollar on the G10 board was JPY, as USDJPY rose back above 140 on rising yields with the dovish CPI release spelling risk on. GBPUSD saw a push higher on the hot UK jobs data, crossing above 1.2600 with EURGBP sliding to 0.8560 from highs of 0.8613 earlier. EURUSD wobbled around 1.08 while USDCAD took a look below 1.33 as oil prices recovered.

Crude oil: recovers on China stimulus hopes and risk on

Crude oil pushed higher as the traders welcomed the prospect of further support measures for the Chinese economy. Sentiment was also boosted by a broader risk-on tone across markets following a fall in US inflation. Technical factors also helped after Brent reached in close sight of $70 but has now recovered to $74 with WTI back above $69 from lows of $67 earlier. OPEC report suggested Saudi Arabia’s output cuts will succeed in tightening supply in H2, while it kept the demand forecast unchanged.

Metals: China rate cut drives gains

Copper rose after China cut its short-term policy interest rate. The PBoC cuts its seven-day reverse repo rate by 10bp to 1.9%. This came after data showed credit demand weakened in May, with aggregate financing at CNY1.6tn. Beijing is also said to be considering a broad package of stimulus measures focused on supporting the real estate market. Meanwhile, supply side issues continue and copper traded above the 38.2% retracement level at $3.79.

What to consider?

US CPI slows, giving room for a Fed pause

US CPI in May rose 0.1% MoM (exp. 0.2%; prev. 0.4%) and 4% YoY (exp. 4.1%; prev. 4.9%). The core, however, was slightly higher than expectations at 5.3% YoY (exp. 5.2%; prev. 5.5%) but stayed in-line on a MoM basis coming in at 0.4% (exp. 0.4%; prev. +0.4%). The main downside pressures came from gasoline prices falling 5.6% MoM. The main upside pressures came from two of the biggest components – shelter (43% weighting within core CPI basket) continues to run hot at 0.6% MoM while used cars jumped 4.4% MoM. Shelter prices could see downward pressure in the coming months as most US cities see rents peaking out. Meanwhile, car prices usually track Mannheim used car auctions with a lag, and this has fallen over the last two months. So further downside in CPI remains likely, which together with weakening near-term inflation expectations, could provide room for Fed to pause its rate hike cycle for now.

FOMC decision: have we seen the peak Fed rates?

While inflation trajectory remains comforting and allows room for a pause, the Fed is still likely to keep the door open for further tightening given the labor market pressures. Meanwhile, the equity market rally continues to question the effectiveness of policy transmission and this may prompt some hawkish commentary from Powell. It’s too early to say whether or not there will be a hike in July, but a data-dependent approach will likely continue to be the safest choice for the Fed for now. If inflation continues to soften and jobs data also shows some signs of a loosening in the labor market, the peak Fed rate may well have been past us.

Vote split at today’s decision will be a key aspect to monitor. Members like Lorie Logan, Neel Kashkari, Christopher Waller and Michelle Bowman have been voicing hawkish sentiments. Meanwhile, the assessment of the dot plot will play a key role in market response as well. The committee could raise its 2023 growth forecast while lowering its inflation forecast. That will be a dovish message and will have to be countered with enough hawkish commentary to keep a July rate hike in play.

The reduction in the OMO reverse repo and SLF rates signal impending MLF rate and LPR cuts

As we suggested in this week’s Saxo Spotlight, the stalled recovery and mounting deflationary pressure raise calls for China’s central bank to cut rates imminently. On Tuesday, the People's Bank of China (PBoC) reduced the 7-day OMO reverse repo rate by 10bps to 1.9%. After the market closed, the PBoC further announced a cut in the Standing Lending Facility (SLF) rates. The overnight, 7-day, and 1-month rates of the SLF were lowered by 10bps to 2.75%, 2.9%, and 3.25% respectively. This adjustment in the SLF rates aligns with the recent change in the OMO reverse repo rate, as the 7-day SLF typically sits 100 basis points above the 7-day OMO reverse repo rate.

These strategic moves by the PBoC serve as strong indicators that the most crucial policy rate, the 1-year Medium-term Lending Facility Rate (MLF rate), is highly likely to be cut by 10bps to 2.65% on Thursday. If executed, this MLF rate reduction will pave the way for Chinese banks to lower the 1-year and 5-year Loan Prime Rate (LPR) on June 20.

China's May Credit Data Disappoints: new loans and aggregate financing fall short of expectations

China's credit data for May, released after the market closed, revealed figures that fell below market expectations. New RMB loans reached RMB1,360 billion, missing the Bloomberg survey forecast of RMB1,550 billion. Although higher than April's RMB719 billion, it was significantly lower than the RMB1,890 billion recorded during the same period last year. The growth rate of outstanding RMB loans slowed to 11.4% Y/Y in May, down from 11.8% in April. Notably, weakness was mainly observed in corporate loans, which plummeted by 44% from May last year to RMB856 billion. On the other hand, new loans to households rebounded to RMB367 billion in May, surpassing the RMB241 billion repayment in April, and indicating a 27% increase from May last year.

Additionally, new aggregate financing for May rose to RMB1,560 billion compared to April's RMB1,220 billion. However, it fell short of the expected RMB1,900 billion and represented a significant 45% decline from May last year. The growth rate of outstanding aggregate financing decelerated to 9.5% Y/Y in May, down from 10.0% Y/Y in April. Furthermore, the growth rate of M2, a measure of the country's money supply, slowed to 11.6% Y/Y from 12.4%.

The disappointing credit data highlights the challenges faced by China's economy, signaling weak demand for loans and potential headwinds for growth in the coming months.

Hot UK labor market data pumps UK yields to new cycle highs

Some very positive revisions to ugly April UK labor market data have changed the plot here again for the Bank of England. The Payrolled Employees figure was inline at +23k for May, but the strong revisions to April data, from original –136k up to +7k wiped away concerns, even if the moving average is still trending in the wrong direction. More good news was in the May Jobless Claims numbers, which fell –13.6k, while April figures there were revised down to +23k from what was originally a two-year high of +47k. The April Employment Change figure (3-months/YoY) was +250k, a new high since May of last year, while the April Unemployment rate dropped to 3.8% from 3.9% and versus 4.0% expected. Average Hourly Earnings for April were far higher than expected, at +7.2% ex Bonus YoY vs. 6.9% expected and 6.8% in March. This mix of data jolted the UK 2-year yields another 18 basis points higher to new highs above the chaotic period last fall during the Kwarteng-Truss mini-budget debacle.

Chinese authorities contemplate broad stimulus package to safeguard economy from double-dip risks

On Tuesday, headlines gained momentum as reports indicated that Chinese authorities are actively considering a range of options for implementing a comprehensive stimulus package. The objective behind these measures is to bolster aggregate demand and revive the struggling economy, thereby mitigating the risks of a potential double-dip recession.

European Union is set to launch new antitrust charges against Google

European Union regulators are reportedly launching new antitrust complaints against Alphabet’s (GOOGL:xnas) advertising-technology business model and might pursue some sort of a breakup of it in another escalation.

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

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