Financial Markets Today: Quick Take – August 30, 2022

What is our trading focus?

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

US equities stabilised yesterday following that knee-jerk reaction on Friday to the Jackson Hole presentations with S&P 500 futures touching and bouncing off the 50-day moving average closing above the critical 4,000 level. S&P 500 futures are trading around the 4,044 level this morning sandwiched between the 100-day moving average above this level and the 50-day moving average below suggesting a bigger move is shaping up in either direction. The next big shift in sentiment will be when we get the US August CPI print on 13 September as that is the key data point to shape expectations from current levels.

Hong Kong’s Hang Seng (HSIQ2) and China’s CSI300 (03188:xhkg)

Hong Kong and mainland China equities pulled back moderately, Hang Seng Index -0.9%. Tech names were weak. Hang Seng Tech Index plunged as much as 3% before bouncing off the lows to finish the morning session down 1.7%.  According to the Ministry of Industry and Information Technology, smartphone sales in China fell 2.9% YoY in the period between Jan and July. Despite reporting solid 1H results, China automaker, BYD (01211:xhg) slid 0.6%. In A-shares, mining stocks, gas, electric equipment, and auto parts underperformed, CSI 300 -0.5%. Pinduoduo (PDD:xnas), a leading Chinese eCommerce platform listed on Nasdaq reported strong 2Q results, showing stronger than peer gross merchandise value growth and better-than-expected margin improvement.

US dollar and especially USDCNH

The US dollar tried higher, but failed to follow through as risk sentiment stabilized and US Treasury yields eased back lower. The USDCNH rate, however, continues to push toward the high of the cycle, trading near 6.92 this morning. EURUSD trades near parity this morning after natural gas prices fell sharply in Europe yesterday and despite ECB Chief Economist Lane arguing for steady rate increases (pushing back against the pricing of a possible 75 basis point move at next week’s ECB meeting). Incoming data this week will be critical for USD direction.

JPY weakness to bring back pressure on Bank of Japan

USDJPY is back to testing its record July highs despite little change in money market pricing of the Fed rate path following Powell’s hawkish speech at Jackson Hole. The peak Fed funds rate is still priced in at 3.8%, while some of the Fed speakers have started to suggest 4%+ levels that may be needed to combat inflation. This brings the September dot plot in focus, but we get the jobs and CPI data before that as well. Any further upward re-pricing of the Fed path, if resulting in gains in US 10-year yields, could very well take USDJPY to new highs with Japanese yields still remaining capped due to the Bank of Japan’s yield curve control policy. If, however, US data underwhelms, the room on the downside for USDJPY is tremendous.

Crude oil prices (CLU2 & LCOV2)

Crude oil prices saw their best day in six weeks amid threats of a decline in supply from OPEC and production outages in Libya. Brent futures rose above $105/barrel although some softening was seen in Asia overnight, while WTI rose to $97/barrel. This follows news from last week that Kazakhstan’s exports of crude may be impacted for months because of damage to its port facility. Meanwhile, negotiations between Iran and the US over the revival of the 2015 nuclear deal could drag on for weeks, easing fears of an imminent surge in supply.

Pro Farmer tour see lowest US corn production since 2019

The just completed Pro Farmer tour across the US grain belt helped drive corn futures in Chicago to a two-month high on Monday after the tour saw the US corn crop at 13.76 bn bushels, below USDA forecasts for 14.36 billion bushels. Pro Farmer predicted a soybean crop of 4.54 billion, in line with the USDA’s latest forecast. Wheat, supported by corn’s rally, touched its highest since July 12 despite news that Ukraine agricultural exports could rise to 6.5 million ton in October, double the volume in August.  The soybean vs corn ratio needs to stay low (favouring corn) ahead of the South American planting season in order to persuade farmers there to plant more of the fertilizer intensive crop.

US Treasuries (TLT, IEF)

US treasury yields eased lower yesterday. An interesting paper presented at the Jackson Hole conference at the weekend suggests that the Fed will have a hard time delivering on quantitative tightening without causing harm to financial market functioning, which could mean less supply of treasuries from the Fed if its shies away from reducing its balance sheet at the previously touted pace of $95 billion/month. Otherwise, incoming US data is the focus through the August CPI release on September 13.

What is going on?

Shell CEO warns of prolonged European gas crisis

Shell CEO Ben van Beurden gave comments from Norway’s ONS conference, suggesting that Europe could face gas shortages for a number of winters. This disproves reports suggesting that Europe has already built reserves for the winter demand and reaffirms our belief that a move to broad-based energy supply will continue to be top of mind in the long run. In the near term, demand destruction appears to be the only possible solution, and Van Beurden stressed the need for efficiency savings as well as rationing.

ECB Lane dials back on jumbo rate hike expectations

ECB chief economist Lane was on the wires on Monday and hinted at a steady pace of rate hikes in a “step-by-step” manner rather than jumbo rate hikes. This appears to be a pushback against calls for a 75bps rate hike at the September meeting, as he made the case to allow the financial system to absorb the rate changes. Moreover, on inflation, Lane said long-term inflation expectations remain close to the two per cent target, while near-term inflation expectations are quite elevated.

BYD reported 1H earnings at the high end of the preannounced range

Chinese automaker BYD (01211) reported 1H revenue up 66% y/y to RMB 151bn. In terms of segments, auto revenue surged 130% y/y while mobile handset revenues contracted 4.8% y/y. Net profits jumped 206% to RMB 3.6bn, at the top end of the preannounced range of RMB 2.8-3.6bn. Volume growth (353K new energy passenger vehicles in 2Q, +265% y/y) beating market expectations despite two rounds of price increases in 2022 and supply chain disruptions. The company’s EV market share rose to 29% (vs 17% in 2021).

Pinduoduo delivered Q2 results showing stronger than peer sales growth

Pinduoduo (PDD:xnas), a leading eCommerce platform with strong penetration into agricultural products and online shoppers from rural areas, reported 1H total revenue up 36% y/y, far exceeding the 3% y/y consensus estimate. The company attributed the revenue growth to a recovery in consumption since mid-May, successful promotion campaigns, and 48-hour daily necessity supply packs for people facing lockdown. The company’s strong market position in rural areas and agriculture-related products also help it stand out from its rivals. In Q2, the company achieved a 20 %-point improvement in margin, reaching 33.5%, but the management cautioned investors that the margin compression was attributed to temporary cost savings early in the quarter and spending had increased since mid-May. Non-GAAP EPS came in at RMB 7.54, +161% y/y.

Shares in Uranium companies and other nuclear-related companies are back in the spotlight

Japan has signaled its openness to more nuclear power, at the same time, Tesla founder Elon Musk has applauded uranium as an energy alternative, during an energy conference in Norway. Uranium stocks moved higher as a result on Monday in the US, which boosted the Global X Uranium ETF up 7%, to its highest level since June 8. Shares in the Asia-Pacific region followed. Australian stocks saw the most significant moves given the country has the largest uranium reserves globally. Australia’s Paladin rose 11%, Deep Yellow 15% and Boss Energy 10%, while Rio Tinto (which owns a deposit) rose over 1%. Japan’s Mitsubishi Heavy Industries and Tokyo Electric Power gained 3%. Companies to watch in Europe, include Yellow Cake and Kazatomprom.

What are we watching next?

August U.S. job report is out on Friday

There should not be a major surprise. The economist consensus expects a 300,000 payrolls increase in August and a stable unemployment rate at 3.5 % - this is a five-decade low. If this is confirmed, it all points to a healthy labor market (despite the moderate pace of job increases). Today, the U.S. government will also release July data on vacancies and quits. Expect job openings to remain elevated, thus pointing to resilient demand for labor. These figures are unlikely to play a major role at the September FOMC meeting since it is well-known that labor market data are lagged indicators. Inflation remains the main point of concern, as mentioned by Fed Chair Jerome Powell last week at Jackson Hole Symposium.

August EZ CPI will be painfully high

The consensus expects a new increase of 9 % year-over-year when the data will be released on Wednesday. This should convince European Central Bank (ECB) policy makers to raise borrowing costs by a sizable increase on September 8. At Jackson Hole, ECB’s executive board member Isabel Schnabel indicated the central bank has no other choice but to act with ‘determination’. This is a matter of credibility. According to Bloomberg, traders now price a 50 % chance of a 75-basis points rate hike in September.

Earnings to watch

Today’s earnings focus is China are lithium miners Tianqi Lithium and Ganfeng Lithium as the growth in electric vehicles sales is putting enourmous pressure on availability of lithium and prices of lithium carbonate. Baidu is another Chinese earnings release to watch today as the company’s footprint in online advertising will give insights into economic activity. Later in the US, earnings to watch are Crowdstrike in the cyber security industry and HP in computing hardware.

• Today: Woodside Energy, ICBC, China Yangtze Power, Muyuan Foods, SF Holdings, Shaanxi Coal, Midea Group, Tianqi Lithium, Ganfeng Lithium, Bank of Montreal, China Construction Bank, Bank of China, Great Wall Motor, COSCO Shipping, Partners Group, Baidu, Crowdstrike, HP
• Wednesday: MongoDB, Brown-Forman, Veeva Systems
• Thursday: Pernod Ricard, Broadcom, Lululemon Athletica, Hormel Foods
• Friday: BNP Paribas Fortis

Economic calendar highlights for today (times GMT)

• 0700 – Spain Flash Aug. CPI
• 0830 – UK Jul. Net Consumer Credit
• 0830 – UK Jul. Mortgage Approvals
• 0900 – Euro Zone Aug. Confidence Surveys
• 1115 – ECB's Vasle to speak
• 1200 – Hungary Rate Decision
• 1200 – US Fed’s Barkin (Non-voter) to speak
• 1200 – Germany Aug. Flash CPI
• 1300 – US Jun. S&P CoreLogic Home Price Index
• 1400 – US Aug. Consumer Confidence
• 1400 – US Jul. JOLTS Job Openings
• 1500 – US Fed’s Williams (voter) to speak
• 1600 – ECB Speakers Holzmann and others
• 2030 – API's Weekly Crude and Fuel Stock Report
• 0130 – China Aug. Manufacturing/Non-manufacturing PMI

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