The AUD/USD Lost After RBA Governor Remarks, The End Of An Era For The UK

The AUD/USD Lost After RBA Governor Remarks, The End Of An Era For The UK

Summary:  U.S. Treasury yields rose 6-7bps after the ECB hiked 75bps and Fed Chari Powell’s speech. U.S. equity markets were quiet and managed to finish the session moderately higher. Reserve Bank of Australia Governor Lowe said interest rates were not on a “pre-set path” as the economic outlook was uncertain. Crude oil bounced by 1%. In Japan, a meeting between the MOF, BoJ, and FSA sent signals that FX intervention remains on the cards. The European Union is holding an emergency meeting to discuss measures to tackle the energy crisis in Europe and China is scheduled to release CPI and PPI today.


What is happening in markets?

 

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

U.S. stock markets closed higher in a choppy session, S&P 500 +0.7%, Nasdaq 100 +0.5%.  Trading was quiet after the well-anticipated ECB 75bp hike and Powell’s now consistent hawkish script.  The 6-7bp rise in bond yield did not move stocks.  VIX edged down further to 23.6. On the corporate front, T-Mobile (TMUS:xnas) announced a buyback program authorization for 7.5% of the company’s market cap and expected to complete the buyback by Sep 2023.

U.S. treasuries (TLT:xnas, IEF:xnas, SHY:xnas)

Following a 75bp hike by the ECB and Fed Chair Powell sticking to his hawkish stance in a speech yesterday, U.S. treasury yield jumped 6 to 7 bps across the curve.  Money market rates are pricing in a 85% chance of a 75bp hike on September 22.  Chicago Fed President Evans said the Fed “could very well do 75 in September” but his mind “is not made up” yet. The Treasury Department announced the size of next week’s 3/10/30-year auction at a total size of USD91 billon. 

Hong Kong’s Hang Seng (HSIU2) and China’s CSI300 (03188:xhkg)

Hang Seng Index underperformed its major Asian peers which advanced more than 1% across the board to continue its multi-session decline since the beginning of September and finished the day 1% lower.  The weakness in Tencent (00700.xhkg), -3.1%, Chinese developers, and energy stocks dragged down the benchmark index in Hong Kong.  According to filings to the stock exchange, about USD7.6 billion worth, or 2% of the market cap, of Tencent shares have been transferred to CCASS, the Stock Exchange of Hong Kong’s clearing and settlement system.  Prosus, Tencent’s largest shareholder holding 27.99% of shares outstanding, confirmed that it has transferred 192 million shares of Tencent to CCASS and is selling Tencent shares.  In June, Prosus (PRX:xams) announced that the company was going to offload its stake in Tencent to raise cash to buy back its own shares and Naspers’ (NPN:xjse) shares (Prosus’ parent) at a discount to NAV.

The Chinese developer space was once again under selling pressure.  CIFI (00884:xhkg) tumbled 13.6% following credit agency S&P downgraded the long-term rating of the company’s senior unsecured debts by 1 notch to BB- from BB. Country Garden (02007:xhkg) plunged by 6.8%.  Energy stocks declined on sharp fall in crude oil price, CNOOC (00883:xhkg) -3.6%, PetroChina (00857:xhkg) -1.9%.  The Chinese automaker space was sold, Great Wall Motor (02333:xhkg) -4.7%, Geely (00175:xhkg) -3.1%, BYD (01211:xhkg) -3.0%, Li Auto (02015:xhkg) -3.0%, XPeng (09868:xhkg) -2.6%.

After the Hong Kong market close, Bilibili (09626:xhkg/BILI:xnas) reported a larger than expected loss in 2Q2022 on the deterioration of gross and operating margins.  The company’s ADR plunged 15%.    

USDJPY paid little heed to Japan’s three-party meeting

USDJPY stuck close to 144-levels on Thursday despite stronger signs of concern from the Japanese authorities. The meeting between Japan’s MOF, central bank and FSA ended with some strong verbal signals that direct intervention remains on the cards, but even if that was to happen, it will only increase the volatility in the yen and cannot possibly reverse the move as long as the monetary policies of the US and Japan continue to diverge. EURUSD gained some bids in early Asian morning to rise to 1.002, but the move remains fragile especially with the emergency meeting scheduled for today. GBPUSD reversed the overnight weakness to rise to 1.1540 with dollar losing some momentum in early Asian trading hours. 

Crude oil prices (CLU2 & LCOV2) 

A slight recovery was seen in crude oil prices overnight despite the hawkish Fed rhetoric and a further surge in the dollar. Supply side dynamics remained in focus, with the EIA saying that crude inventories rose by 8.85 million barrels last week, while supplies dropped in the largest storage hub of Cushing. Gasoline inventories also gained, but there was no change to oil production. Putin warned that Russia will not supply energy to any nation that backs a US-led price cap on its crude oil sales. However, with WTI futures now priced at ~$83/barrel and Brent futures below $90, eyes are again on OPEC+ which hinted earlier this week the intention was to keep crude oil prices around the $100-mark. Demand concerns have picked up since the OPEC meeting due to widening China lockdowns and more aggressive central bank rate hikes.  

Copper (HGc1)

Copper is showing signs of stabilizing despite demand concerns from China as Covid restrictions continue to be tightened. Copper rose above $3.50 per pound overnight, as supply concerns remain top-of-mind with mining companies continued to struggle to meet their production targets with top producer Chile has seen its exports slump to a 19-month low due to water restrictions and lower ore quality - while demand from China, surprisingly is showing signs of strengthening as infrastructure push ramps up. Having found support last week at $3.36/lb, after retracing 61.8% retracement of the July to August rally, copper is currently staring at resistance in the $3.54 area where recent lows and the 55-day moving average merges. For a real upside and trend reversal to occur the price needs to break above $3.78/lb while a break below $3.36/lb could see the metal take aim at $3/lb. 

What to consider?

The Queen of England has passed away and Charles has taken the throne 

It’s the end of an era for the UK with the passing of Queen Elizabeth, age 96. Some of the Queen’s key moments since reigning from the 1980s to today include: in 1986 Elizabeth became the first monarch to visit China. It was an important piece of Britain’s diplomatic effort as it prepared to return Hong Kong to Chinese control. In 2011, The Queen became the first British monarch to set food in Ireland in 100 years, with the trip being widely praised as a historic moment of reconciliation. In 2012 the Queen celebrated 60 years on the throne and in 2022 Elizabeth became the first and only British monarch to reach 70 years on the throne. Politicians from the Commonwealth and across the world paid tribute to the Queen. UK Parliament will pay tribute to Queen Elizabeth on Friday and Saturday. Australian Parliament will not sit next week.  

ECB’s 75bps rate hike

As was generally expected, the European Central Bank went ahead with a 75bps rate hike on Thursday, taking the deposit rate to 0.75%. President Lagarde said risks to inflation are on the upside and growth are on the downside, but did not rule out further tightening. The ECB raised projections for inflation (5.5% in 2023 now vs 3.5% earlier), lowered growth for 2023 (0.9% vs 2.1%), and 2024 (1.9% vs 2.1%) while raising growth for 2022 by a notch. Lagarde said that 75 bps was not the norm, but “moves will not necessarily get smaller” as policy was dependent on data and on a meeting by meeting basis, echoing Lane’s comments from last week. ECB’s Lane was however noted to be more hawkish yesterday than what his previous comments suggested. This keeps the door for another 75bps rate hike still open. 

Fed Chair Powell stays in the chorus

Fed Chair Jerome Powell stuck to the tune that the Federal Reserve members have been singing, suggesting a 75bps rate hike at the September meeting as inflation reins. He noted that the labor market is “very, very strong” and wages are elevated, while also signaling that growth will likely fall below trend. On inflation expectations, a key concern for Fed officials, the Fed chair said that today they are well anchored over the long-term, but the clock is ticking and the Fed has more concerns that the public will incorporate higher inflation expectations in the short-term. Fed’s Evans also hinted at a 75bps rate hike for September. With the chorus on inflation getting louder and market pricing for September being very close to a 75bps rate hike, a softer headline inflation print next week likely has the potential to usher in a relief rally. If, however, inflation remains high, we could see another leg down in equities.  

Australia’s trade surplus halves as coal and iron ore exports fall from record highs. What next?

Australia’s trade surplus almost halved in July, plunging from A$17.1b to an A$8.7b surplus, when the market expected the surplus balance to fall to just A$14.5b. It comes as exports of coal and iron ore fell from their record highs, dragging down total exports by 10%. Coal export earnings fell 17% with the northern hemisphere in peak summer, while iron ore export earnings fell 15% tarnished by China’s slowdown. Australian imports (covering outbound tourists) rose 5% with Aussies escaping the record cold winter to enjoy the European sun. The market responded to the drop in exports, with the Coal futures price falling to a 3-day low, losing 1.7%, taking the two-day loss to 7%, which pulls the price away from its record. For investors it’s a timely reminder, energy commodity prices are seasonally impacted, and could remain volatile before picking up later this year when we think peak buying is expected.

Australian bonds and equities price in the RBA will be less aggressive, so it’s risk-on again


RBA Governor Phillip Lowe sees a slower pace of rate hikes while conceding a sharp slowdown in global growth will make it hard to avoid a soft landing. The AUDUSD lost 0.4% after his remarks. While short-term rates as measured by the 3-year Australian bond yield fell 0.17% - supporting the risk assets rally. As such, the Australian Technology Sector surged to its highest level in a week. But sophisticated Australian investors seem skeptical that the RBA will slow the pace of hikes. Australian interest rate futures suggest rates could peak at 3.6% by mid-next year. We think the market would also be especially rate rises will slow as Australia’s Resources Minster was tapped for the second time to restrict Australian energy exports, as the nation is tipped to run out of energy in 2023.

EU proposes five measures to curb gas demand and prices

Ahead of Friday’s emergency energy meeting, European Commission President Ursula von der Leyen proposed five radical steps to curb costs and demand: 1) Smart savings of electricity by mandatory targets to reduce peak hour demand for electricity; 2) Cap on revenues of companies producing electricity with from low-cost sources such as wind and solar with profits being re-channeled to vulnerable people and companies; 3) Solidarity contribution from fossil fuel companies; 4) Liquidity support for energy utility companies in order for them to cope with elevated market volatility; 5) Cap on Russian gas revenues on the remaining 9% Russia supplies to Europe, down from a pre-war level around 40%.

China’s PPI is expected to have risen as CPI remained stable in August

PPI is expected to fall sharply to 3.2% (Bloomberg consensus) in August from 4.2% in July.  Base effect and a decline in coal prices in August could be factors contributing to the deceleration in producer price inflation.  CPI, however, is expected to edge up to 2.8% in August from 2.7% in July.  Analysts suggest that favourable base effect was offset by vegetable price increases amidst the heatwave.

Bilibili reported below expectation earnings on margin compression

 

Bilibili (09626:xhkg/BILI:xnas) reported a worse than expected adjusted loss per share of RMB4.98 (Bloomberg consensus: loss per share RMB4.37, 2Q2021: loss per share RMB2.23). Revenue came in at RMB4.91 billion, largely in line with analyst estimates. The larger-than-expected loss came from disappointing margins.  Gross margin contracted to 15.3% from 16.4% in 1Q2022 and 22.4% in 2Q2021 due to the weak performance of the mobile game business (segment revenue -15% YoY).  Operating margin deteriorated to -39.4% in 2Q2022 from -33.9% in 1Q2022 and -20.9% in 2Q2021 which are attributable to higher general and administrative expenses +44% YoY) as well as research and development expenses +68% YoY).   The company’s revenue guidance of RMB5.6bn-5.8bn for 3Q was below market expectations. 

A lender appointed receivers to siege Evergrande’s Hong Kong headquarters premises

The Financial Times said that a lender had appointed receivers to siege the headquarters building of China Evergrande (03333:xhkg, suspended) and looked to force a sale of the premises.  The distressed developer’s Hong Kong headquarter has been pledged to secure a loan from a syndicate of lenders led by China Citic Bank International.  Evergrande has previously been served a winding-up petition and is scheduled to have a hearing on the petition at the High Court on 28 Nov 2022. Separately, the Wall Street Journal reports that a consortium of Chinese state-owned banks and private enterprises agreed to pay USD1.05 billion in a court-arranged auction for Evergrande’s 14.6% in Shengjing Bank, a regional bank based in Shenyang, Liaoning province.

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Source: APAC Daily Digest: What is happening in markets and what to consider next – September 9, 2022 | Saxo Group (home.saxo)

The AUD/USD Lost After RBA Governor Remarks, The End Of An Era For The UK

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