Mar 12 ,2024
Synopsis:
Asian equities mixed Tuesday. Hang Seng rallied with its tech index gaining 20% from a January low. Mainland China indexes diverged on rotational moves from value to growth. Shares in South Korea and Taiwan also recorded gains. ASX mildly higher. Japan's Nikkei closed marginally lower though at intraday highs. India trading higher. S&P 500 and Nasdaq futures advancing. Treasuries little changed ahead of US February inflation data. Yen pulled back against other majors after BOJ Governor Ueda slightly toned down optimism on economy. Crude edging higher ahead of OPEC monthly report and US stockpiles. Gold slightly lower. Iron ore futures in China down sharply again. Bitcoin hovering above $72k level.
BOJ policy move speculation remains key focus of press coverage with reports that there is growing internal support for central bank to raise interest rates in March with outcome currently "too close to call". Attention will be on first results from shunto on Friday with expectations this year's wage talks will deliver bigger pay hikes than last year, which will likely lead BOJ to proceed with a March move. Meanwhile Governor Ueda toned down optimism on economy, saying consumption was weakening for food and daily necessities amid higher prices. Nikkei poll also showed expectations Japan's economy will return to contraction in Q1. Separately, Japan's business sentiment index turned negative in Q1 with manufacturing weakness driven by autos. Corporate inflation in February strengthened by more than expected.
China inflation takeaways viewed February rebound in consumer prices as temporary given outsized influence of LNY effects and economists noted deflationary pressure will likely persist amid prolonged property downturn and lack of household income growth. Still, recent rally in Chinese equities is spurring views that markets have bottomed with inflows into mainland market continuing in March after net buying in February, which snapped a record six-month streak of outflows through January. US-China tensions simmering as Commerce Secretary Raimondo said Biden administration mulling further tightening restrictions on China's access to sophisticated chip technology. Trump threatening to get tough with China on trade if reelected. Elsewhere Australian business conditions back above long-run average, but survey also showed inflation pressures persisting. Bank of Korea minutes for its February meeting showed board members noted it was too early for a policy pivot.
Xiaomi (1810.HK) said it will start deliveries of first EV model SU7 on 28-March. Reuters reported China's billionaire entrepreneur and former Olympics gold medalist Li Ning is mulling taking his eponymous sportswear company (2331.HK) private while several global PE firms have been tapped to join as investors. Moody's has downgraded China Vanke (2202.HK) issuer rating from "Baa3" to "Ba1", or non-investment grade, and places all ratings on review for downgrade. CATL (300750.CH) has attracted an increase of foreign ownership as Morgan Stanley named stock as its top pick, citing improvement in cost efficiency.
Digest:
BOJ seen ending NIRP in March if pay raises are well above last year:
Jiji reported there is growing internal BOJ support for a March rate hike amid cementing expectations this year's shunto talks will deliver bigger pay raises than last year. Focus is on Rengo's first tallies due on 15-Mar. BOJ expected to proceed with a March move if aggregates show markedly stronger growth than last year's 3.80%. Latest positive Q4 GDP revision was also cited as a tailwind. Article recalled Rengo's demands this year for average raises of 5.85%, above last year's calls for a 4.49% increase. With several unions in major sectors already reporting full achievement, cited estimates the large firm aggregate may come in above 4%. Added recent BOJ rhetoric has indicated greater confidence in the outcome. While views supporting an April move remain amid sluggish private consumption and ongoing caution on small firm wage growth, a BOJ official source argued against waiting another month just because the risk in delaying is low. Separately, Bloomberg quoted BOJ Governor Ueda's remarks in parliament, reaffirming his view the economy is still recovering gradually, offered as another reason to support expectations of a rate hike in the near term. However, Reuters noted Ueda's optimism was somewhat toned down compared to the January Outlook Report, acknowledging weakness in some areas.
Consensus still looks for BOJ rate hike in April:
Amid the latest ramp-up in BOJ rate hike speculation, Nikkei's latest QUICK poll conducted March 4~6 found 20 out of 28 respondents expect BOJ to remain on hold this month with the remaining eight looking for a rate hike. Cited BNP Paribas' view that BOJ will move at the March 18-19 meeting after confirming shunto wage hike aggregates come in higher than last year. Noted that final tallies typically show minimal deviation from the first round (due 15-Mar), suggesting that waiting for consolidated data would be virtually meaningless. Added that adverse inflation impacts on households compounded by yen depreciation contradict the rationale there is low risk in waiting longer. Nomura Research Institute said that with a rate hike already priced in the markets, the only compelling reason to delay to April would be to avoid collision with the fiscal year-end. Meanwhile, dovish camp still sees no need to rush. UBS noted shunto first round tally only reflects large firm developments and it would be prudent to wait until the BOJ branch managers meeting to confirm small firm wage hikes. Nomura Securities said the next BOJ Tankan will provide a basis for an objective evaluation of passthrough from wages to inflation. Broader spread of responses showed 8 of 28 picked March, 17 in April, 1 in July and 2 do not see NIRP lifted this year.
China equity rebound spurring views markets have bottomed:
China equities' positive run spurring more debate whether markets have bottomed (Bloomberg). Rebound from February's low chalked up in part to reversal of extreme bearish positioning and oversold conditions, while market stabilization efforts/National Team intervention, regulatory scrutiny on quant funds and 5Y LPR cut have also aided sentiment. Mainland inflows turned positive in February with trend continuing in March following six-month run of outflows. China's record valuation discount viewed favorably by some analysts anticipating stronger earnings growth, particularly in new economy sectors such as EVs and chipmaking being championed by Xi (Bloomberg). Low bar dynamic also highlighted with UBS noting bottom line beats and guidance upgrades in latest reporting season met with share price outperformance. To be sure, downside risks remain prevalent, including absence of economic and property market stabilization, failure of earnings recovery to materialize, cessation of National Team support and geopolitical tensions.
China bond yields plumbing new depths, prompting thoughts rally is overdone:
Alongside China's equity rally has been an ongoing bull run in sovereign bonds that took 10Y yield to lowest since 2002. Both 10Y and 30Y rates have fallen ~30 and 40 bp respectively this year, causing 10/30Y spread to invert temporarily last month. Main drivers include accommodative financial conditions and expectations of additional rate cuts, China's weak growth outlook, and demand from yield hunters and households seeking risk-free havens amid declining asset prices. Rally also inviting thoughts China's bonds in overbought territory amid potential for bear steepening if expected rate cuts do not materialize, economic data comes in better, and expanded issuance is not adequately offset by PBOC liquidity operations (Bloomberg). Recall authorities announced outsized CNY1T bond issuance at NPC, which Goldman Sachs referenced in highlighting risk of supply shock given average annual issuance of ~CNY450B over 2019-2023. Regulatory scrutiny another risk after Bloomberg noted last week PBOC increasing oversight of banks' bond investments amid concerns over speculative activity.
Japan market watchers see limited prospects for further yen strength, equity weakness:
Nikkei took stock of recent market developments in yen and the stock market, affirming the main driver as the contrast between expected BOJ and Fed policy trajectories while citing doubts that yen strength and equity weakness have much further room to run. Noted the initial underlying catalyst was Friday's US payrolls, which came in weaker than expected and reinforced perceptions Fed will start cutting rates from June. This followed a lull in the rate differential dynamic after a January payrolls beat dampened Fed rate cut expectations, while BOJ rate hike speculation also waned after the Noto Peninsula earthquake. Yet momentum was revived after Fed chair Powell acknowledged rate cuts were on the table this year while BOJ board member Takata said achievement of stable 2% inflation was coming into sight. Attention heightening this month ahead of back-to-back policy meetings at BOJ (Mar 18-19) and FOMC (19-20), when a reinforcement of BOJ tightening vs Fed easing stands to increase upward pressure on yen. However, few expect further yen appreciation and equity declines with a BOJ rate hike cycle seen gradual while Japan corporate sector profitability is seen amply robust to absorb yen strengthening up to about 140 per dollar.
Notable Gainers:
+11.3% 1810.HK (Xiaomi): first EV SU7 to debut on 28-Mar
+8.1% 2331.HK (Li Ning): founder reportedly considering privatizing Li Ning
+3.2% 540691.IN (Aditya Birla Capital): approves scheme of amalgamation with Aditya Birla Finance
+3% 9602.JP (Toho Co): reports February production and distribution revenue ¥9.14B, +79.9% y/y
+2.9% 4689.JP (LY Corp.): ValueCommerce to launch tender offer at ¥1,029/share; subsidiary of LY concluded agreement to tender partial number of its ValueCommerce shares in offer; after conclusion it is expected that ValueCommerce will cease to be a subsidiary of LY and newly become an equity method affiliate
+2.4% 066570.KS (LG Electronics): acquires stake in Bear Robotics specializing in AI-driven autonomous service robots for $60M (KRW78.67B)
Notable Decliners:
-4% 6723.JP (Renesas Electronics): reportedly pushing back its regular salary hikes that takes place in April every year to October, considering reducing personnel due to slow recovery of semiconductor market
-1.9% 8002.JP (Marubeni): guides FY24 adjusted net profit ¥440.0B vs prior guidance ¥460.0B
-0.9% 6594.JP (Nidec): Nidec, KPS reportedly invited to make second-round offers for Siemens's Innomotics
-0.8% 6902.JP (DENSO Corp): Koji Arima to step down as CEO but remain chairman, current president/COO Shinnosuke Hayashi appointed replacement, effective 1-Apr
Data:
Economic
Japan
Q1 MOF BSI large manufacturing index (6.7) vs 5.7 in prior quarter
Large non-manufacturing index 3.2 vs 4.4 in prior quarter
Large all-industry index (0.0) vs 4.8 in prior quarter
February CGPI +0.6% y/y vs consensus +0.5% and +0.2% in prior month
Australia
February NAB business confidence 0 vs +1 in January
Business conditions +10 vs revised +7 in January
Markets:
Nikkei: (22.98) or (0.06%) to 38797.51
Hang Seng: 505.93 or +3.05% to 17093.50
Shanghai Composite: (12.52) or (0.41%) to 3055.94
Shenzhen Composite: 14.38 or +0.82% to 1770.57
ASX200: 8.30 or +0.11% to 7712.50
KOSPI: 21.97 or +0.83% to 2681.81
SENSEX: 349.35 or +0.48% to 73851.99
Currencies:
$-¥: +0.49 or +0.33% to 147.4320
$-KRW: (3.09) or (0.24%) to 1308.5500
A$-$: +0.00 or +0.04% to 0.6616
$-INR: (0.01) or (0.01%) to 82.7466
$-CNY: (0.01) or (0.14%) to 7.1744
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