More pain ahead for tech as bond yields spike, banks on weak footing, US dollar index climbs to 19.2 year high

Turbulent Times Ahead: USD Smile and JPY's Future - Q3 2023 Analysis

Summary:  The mood shifts from defensive to cautionary with the odds of a 0.75% rate hike from the Fed getting louder, with some calling for a 1% (100bps) hike. This has resulted in defensive plays gaining momentum; with the US Dollar Index rising to 19.2 year high. Elsewhere, oil stays firm around $120 and wheat holds its ground. Meanwhile, in equities the S&P is poised for further downside, to test the lower 3,510 level. Other riskier assets continue to be sold off with bitcoin falling below $23,000, hurting stocks like Block (SQ, SQ2). Elsewhere, commodity investors heavily take profits thinking iron, copper, nickel demand will fall as Beijing endures more covid outbreaks.

What’s happening in markets?



Caution, and fear in the air ahead of more central banks hikes


As we’ve been saying and as we reiterated last week, we think more pain is ahead with inflation  to get worse and rates to rise more than expected which will cause further market shocks. We’ve already seen a lot of pain already, company earnings are slowing, and costs are likely to swell, all ahead of more powerful rate hikes, which will pressure the consumer. We know the S&P 500 shed 9.1% over the past four sessions, closing at 2021 March lows but we think a larger pull back is still ahead. The S&P 500's top 9 companies (by market cap) shed over $1 trillion in value the past four days. Apple Inc. (AAPL) has lost $242.94 billion; Microsoft (MSFT) has shed $205.00 billion; Alphabet Inc. (GOOGL) has lost $124.72 billion; Tesla Inc. (TSLA) has dropped $64.66 billion in market cap; Berkshire Hathaway Inc. has lost $62.97 billion;  The fundamentals look shaky and the technical indicators suggest more long-term pull backs are ahead in growth and tech names in particular.

Asia Pacific equities slide with the onset of official bear markets on Wall Street

As we have warned over the weeks, S&P closed in bear territory last night and is now poised to test 3510. The odds of a 75bps rate hike from the Fed has increased with some even calling for a 100bps hike. The consensus still stands at 50bps, but that may run the risk of being perceived as dovish now. APAC equities are weighed by a confluence of Wall Street pain, inflation worried and faster Fed tightening risks. Australia’s ASX200 fell 4.8% for their first trading day of the week, with the Australian Tech sector down 7.2% as most Aussie tech stocks are pegged to the US economy while more attractive Australian bond yields also seen ASX Tech stock carnage. Meanwhile, Australia’s mining sector is seeing a brunt of profit taking down 6%; with mining magnate Fortescue Metals (FMG) down 9.3% leading smaller iron ore stocks lower after the iron ore price fell 4% yesterday with commodity investors thinking Beijing’s covid outbreak could see commodity demand fall back again the short term. Japan’s Nikkei 225 (JP225.I) is down 2% and Singapore’s STI (ES3) down close to 1%. Indonesia’s Jakarta Composite Index however stayed in green, reaffirming our positive view on the back of favorable demographics, abundant natural resources and a strong reform progress.

Hong Kong and Chinese equities are down moderately


The region remain relatively calm following a massive selloff in risk assets overnight with overseas equity markets down 2% to 4% and a massacre in U.S. treasuries jumping 34bps to 3.4% and 10-year rising 27bps to 3.36%.  The U.S. money market has raised their Fed hike expectations to 195bps for the next three FOMCs, pricing in a 75bps for this week, another 75bps in July and almost surely a 50bps in September.  The fear of a more aggressive path of monetary tightening and a slower global economy continue to put pressure on equity markets, including Hong Kong and China A shares.  The risk of resurgence of COVID-19 breakouts and strengthening pandemic control measures in China is another one that keep investors awake at night.  As of writing, Hang Seng Index (HSI.I) and CSI300 (000300.I) were down 0.5% and 1% respectively. 


Oil holding up as supply concerns outweigh slowdown risks

Crude oil (OILUKAUG22 & OILUSJUL22) remained firm in the Asian session with Brent at $122 and WTI around $120 despite concerns around China’s fresh lockdowns, India’s increasing imports from Russia and global economic slowdown. Market still remains tight with Libya's decline in production after a political crisis has hit output and ports, while other producers in OPEC+ struggle to meet their production quotas and remain short of covering for the lost output from Russia amid the bans

What to consider?


The task for Bank of Japan keeps getting tougher

USDJPY is back below the key resistance at 135.15 but the yields on long-dated bonds still keep the threat of a Bank of Japan (BOJ) policy tweak alive. The central bank boosted scheduled purchases of five-to-10-year debt to 800 billion yen ($6 billion) Tuesday from an expected 500 billion yen after the benchmark yield climbed to 0.255%, above the upper end of its 0.25% tolerance band. The selling threat for longer than 10-year bonds still continues and may prompt BOJ to conduct an unscheduled operation.

RBA to get more aggressive with employment will soar, giving more market shocks and tech on notice again

Australian employment is soaring and poised to hit another high with monthly unemployment for May set to hit another historical low (3.8% consensus expectation, with 25k jobs expected to be added). But wait, there’s more….the RBA sees unemployment falling to 3.5% by 2023. So the employment picture is bright and wages are growing. But on Thursday If the jobs numbers are better than expected, Australia bond yields will move higher, and continue their strong uptrend from August 2021 with the 10-year bond yield chasing the 4% level. This also means, Australian tech stocks will continue to be pressured lower, showing no signs of bottoming yet with Tech stock working inversive to yields.

Weak UK April GDP weighed on GBP

UK’s April GDP contracted 0.3%, coming in worse than expected (+0.2 % and prior -0.1 %). The drop is partially explained by the fact the UK government rolled back overall state support more quickly than other G7 countries (think France or Germany for instance). This is a worrying figure for the Bank of England. But we don’t think it will weigh on Thursday’s monetary policy decision (the consensus expects a 25bps interest rate hike). Extra government support will likely be needed to avoid a consumer-led recession. GBPUSD is at cycle lows below 1.2200, with sights on 1.2000. EURGBP pushed higher towards 0.8600 with European yields sharply higher.


Potential trading and investing ideas to consider?


Risk of further pain in bank stocks ahead

We alluded to banks being susceptible for further selling in Australia and American too, with lending continuing to fall, savings rates falling and foreclosure rates being questioned given the average mortgage could increase by $800 per month if central bank rates rise to over 3%. Looking at the S&P Bank ETF (KBE) as an example, it fell to its lowest level since Feb 2021 after losing 27% from Jan 18 to now. Meanwhile, insurance companies in that time, have remained somewhat steady. UnitedHealth (NHH) for example rose 3% over the same period. By and large, we remain bearish on banks while inflation is punitively high.

Risk of a galloping food crisis

Food prices continue to face upside risks due to the rising cost of fertilizer and energy, as well as protectionist measures from some countries like India (wheat, sugar) and Indonesia (palm oil). Our colleague Peter has warned in a piece yesterday that Russia is using the war in Ukraine to stage a food crisis, and market participants are increasingly preparing for an energy and food crisis that will extend well into 2023 and put upward pressure on inflation and cause an economic recession in many emerging market countries. While that appears gloomy, it also suggests that the commodities sector still have scope for further gains. For exposure to agriculture commodities, you could consider ETFs like Invesco DB Agriculture Fund (DBA) or iShares MSCI Global Agricultural Producers ETF (VEGI).

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Source: APAC Daily Digest June 14 2022 More Pain ahead | Saxo Group (

Turbulent Times Ahead: USD Smile and JPY's Future - Q3 2023 Analysis

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