May Day! USD/JPY Nosediving? (JPY) Japanese Yen Is Going To Be Lacking Central Bank's Support While Fed Acts Next Week! Australian Dollar (AUD) Index Might Change!

GBPUSD Testing Key Support at 1.2175: Will Oversold Conditions Trigger a Correction?

Summary:  The volatility in the equity markets is here to stay as we wade through the earnings season and brace for an aggressive Fed tightening. Japan on holiday for the Golden Week, and thin liquidity may mean more violent moves in the yen. AUD’s fate may be turning if RBA under-delivers as policy divergence theme remains in play.


What’s happening in markets?

Hang Seng TECH Index (HSTECH.I) surged over statement from the Chinese Communist Party’s Politburo meeting that the Chinese Government will issue implementation guidelines on how to support ecommerce platforms to develop “healthily”.  In the statement, the Politburo also pledges to support the economy and to prevent the pandemic from spreading.    Chinese mega tech names were well bid already in early trading on a Bloomberg story reporting negotiation between the Chinese and American regulators on arranging the latter’s inspectors to do on-site inspection in China on the Chinese companies that are listed in the U.S. Hang Seng Index (HSI.I) rose 2.6%. CSI300 (000300.I) gained 2%. In forex, after being dragged down by the weakness in the Japanese Yen yesterday to as much as to 6.675, offshore renminbi (CNH) recovered to 6.648.

Rebound in US overnight: Dow Jones up 1.9% (614 pts) but market volatility is still here and likely to continue until we see how much Fed raises rates next week at their May meeting and in June. The Dow Jones is negative for the month of April. The S&P500 is on track for its worth month since March 2020 ahead of tighter financial conditions and a very subdued earnings season (Q1 earnings growth at 3.9% vs 10% historical average).

Apple (AAPL) shares are likely to fall at open on Friday, falling 2.2% in afterhours trade on flagging a $8 billion hit ahead. Yes, we all know Apple reported better than expected results, sales rose 9% to $97.3 billion last quarter (beating $94 billion expected by analysts). But keep in mind the supply woes didn’t begin until the very end of March. Thus, Apple’s outlook is dimmer; the giant warned of chip shortages and Ukraine war causing disruptions, saying it will cost up to $8 billion of revenue.

Asian equities bid despite the pressure from US after-hours. Equity markets in Asia started the day on a positive note, despite Amazon and Apple earnings leaving a sour mood at the end of the US session. Amazon projected sluggish sales growth and Apple flagged supply constraints. Japan markets were closed for a holiday. Singapore’s STI Index (ES3) rose close to 1% amid bank earnings beat.

The Australian share market’s ASX200 rose on Friday morning up 0.8% in early trade,  extending yesterday’s rise. Stepping back, big picture, the Aussie share market is up 9% from the Jan low and stands as the 4th best global market this year, on the back of commodity demand.

Pressure on Asian currencies eases. The US dollar pared back some of the gains on Friday after reaching 20-year highs. AUD and KRW led the gains in Asia, but all remain down vs. the dollar for April. The JPY has been the biggest loser in the month, and possibly more pain is coming as the Bank of Japan remains committed to an ultra-dovish policy stance, widening the divergence to the global tightening trend. NZD and CNH remain the other bigger losers this month, highlighting that the policy divergence theme remains in play.

Iron ore price is having a volatile week. Iron ore continues to trade lower than its 2022 high, and is today is down 2.5% at $139.05. But we are expecting a slow rebound as China wants to boost growth like it did in 2007-2008 with infrastructure. So this supports iron ore demanding picking up long term and the rebound of the world’s biggest mining companies. BHP (BHP), Fortescue (FMG) and Rio (RIO).

What to consider?

Singapore banks earnings highlight macro issues, but sailing through. All three Singapore banks reported Q1 earnings and surprisingly all of them reported a -10% y/y decline in earnings. DBS Q1 earnings -10% y/y to $1.8 billion, declared an interim dividend of S$0.36. UOB Q1 earnings declined -10% y/y to $906 million. OCBC Q1 earnings declined by -10% y/y to $1.36 billion. DBS and OCBC beat estimates but UOB under-delivered. Earnings slowed down due to macro headwinds that dragged down wealth management fees as well as trading and investment income, but offset by robust loan growth, stable loan loss provisions & improvement in net interest margin. While inflation and supply chain disruptions present headwinds going forward, Singapore banks remain well positioned in the rising interest rate environment and supported by the regional reopening.

Australian borrowing continues to slow, hurting banks earnings. Private sector credit (borrowing) for March came out today, showing borrowing rose 7.8% year on year (beating 7.5% the market expected). Private sector borrowing is a gauge of consumers and business borrowing, and we’ve seen borrowing slow considerably this year, to a year low all ahead of interest rates rising. We expect borrowing to continue to slow over longer term, especially with the RBA expected to rise interest rates in May followed by a series of rate rises. This is likely to squeeze bank’s profits and hurt their shares. 

China rolled out another round of piecemeal supporting measures to the economy.  The PBoC launches a relending program to provide RMB  200 billion to 21 banks to fund the latter’s loans to innovative medium and small technology companies.  The China Securities Depository and Clearing Corp. cut clearing fees by half to 0.01% for transactions in the Shanghai and Shenzhen exchanges. China also suspended charging custom duty on coal import from May 1, 2021 to March 31 next year aiming at easing feedstock costs of electricity generation utilities. 

The U.S. Q1 GDP data released overnight do not signal a recession.  While the minus 1.4% print of the Q1 GDP generates quite a number of newswire headlines with the ‘recession’ word on them, the data are in fact stronger than what the headline GDP suggests.  Personal consumption expenditures were strong at an annualized rate of 2.7% (Q4 was 2.5%), led by services, healthcare especially.  Private non-residential investment and residential investment grew at an annualized rate of 9.2% and 2.1% respectively.  The fall in the headline GDP was primary the result of a rise of 17.7% annualized rate in imports (subtracting 2.53% from the headline) and a 5.9% drop in exports (subtracting 0.68% from the headline).  Rise in imports, led by durable goods, in fact reflects strong domestic demand. Changes in private inventory subtracted 0.84% from the GDP.  The declines in inventories were mainly in wholesale and retail autos inventories, other retailer inventories.

US Fed reserve interest rate decision next week, likely to move markets if rates rise more than expected, Rates are expected to rise from 0.5% to 1%. If they rise more than that, we will probably see tech stocks and broad selling across the market.

Tesla (TSLA) volatility will continue. Tesla had a wild price action falling to as low as $821.70 before closing at $877.51 with trading volume double the average. More volatility is expected tonight that coincides with month end as Musk sold $4b worth of Tesla shares (4.4m shares) according to regulatory filings. He was also cited saying that no more shares will be sold “told”, but perhaps opens the door for further selling next week.

Trading ideas to consider

Apple, Amazon slide will hurt tech sentiment. Given Apple and Amazon remain the favorites in the tech industry, their bleak guidance is likely to weigh on tech sentiment generally as markets brace for the first 50bps rate hike from Fed in the week ahead.

Possibility of Japan intervention is increasing. As the pressure on the yen mounts and USDJPY broke above 131, Japanese financial ministry official said recent forex moves warrant extreme concern. With the verbal intervention getting more frequent and harsh, and the pressure on the currency likely to stay in the wake of the yield differentials, the possibility of an actual intervention is only getting stronger. Either way, volatility in the Japanese yen is likely to stay high.

Short AUD against USD, Or long USDAUD. Why? AUD continued to weaken, extending its decline and is now back to where it started the year at about 71 US cents. The Aussie dollar is likely to continue to fall, as the US dollar continues to strengthen. The USD will likely set higher levels; the AUD traditionally rises when the Fed raises rates. The USD is also supported to move to higher levels amid inflation and war uncertainty. What to watch for this trade? Inflation and interest rates. Markets expect inflation to peak later this year. We think that’s wrong, inflation will continue to rise long longer, give oil will likely re-test the $150 level. Plus, the USD is also supported higher as the Fed rises rates, while the RBA has been dovish and not risen rates yet.

Copper (COPPERUSJUL22) and Aluminum are at 2-month lows. With copper and aluminum reaching their lowest levels since February, it is only prudent to expect a turnaround. While there may still be some room on the downside in the short-term as China lockdowns continue, the reversal will be sharp as China’s infrastructure push will remain the biggest since 2007-08.

Key economic releases this week:

  • Fri, Apr 29: Eurozone April inflation rate flash, US March PCE index


Key earnings to watch
:

  • Fri, Apr 29:
    • Australia: ResMed (RMD), IGO (IGO), Origin Energy (ORG)
    • US: Exxon Mobil (XOM), Chevron (CVX), Colgate-Palmolive Company (CL)

 

For a global look at markets – tune into our Podcast.

GBPUSD Testing Key Support at 1.2175: Will Oversold Conditions Trigger a Correction?

Saxo Bank

Saxo Bank is a global investment bank with a Danish banking license.
It is subject to strict regulation in 15 jurisdictions, including Denmark, the United Kingdom, and Singapore. We also hold banking licenses in Denmark and Switzerland.
When you invest with Saxo Bank, you have access to a state-of-the-art trading platform and over 40,000 financial instruments, including more than 22,000 stocks from 50 stock exchanges worldwide. It also provides access to global analyses prepared by a world-class analytical team.