May 21 ,2024
Synopsis:
Asian stocks retreated. Hang Seng underperformed and snapped three-day winning streak, mainland indexes also pulled back. Kospi, Nikkei, Taiex and ASX all ended lower. India trading higher. US futures flat. Treasuries and JGBs little changed while Australian yields edged up. Yen slightly stronger against dollar while Aussie dipped. Crude, gold swinging lower. Copper near all-time highs.
Investors are awaiting FOMC minutes to gauge timing and extent of possible rate cuts this year and Nvidia earnings. Overnight comments from several Fed officials, signaling continued caution on interest rate policy, have damped sentiments towards Asian equities and currencies. May RBA minutes showed board weighed case for rate hike but decided to hold, opting to look through short-term CPI variation given risk of policy mistake. RBA assessed risks as broadly balanced but acknowledged potential for inflation risks tilting higher amid a tight labor market. Westpac Consumer Confidence Index dipped in May as households expressed concern about persistent inflation triggering another rate hike.
In other macro developments, South Korean exports rose 18% y/y in first 20 days of May with semiconductor shipments strengthening another 45.5%. However, South Korean consumer confidence turned negative for first time this year amid consumer concern over elevated interest rates. Philippine peso dropped past 58 level against dollar, near record low reached in 2022 and prompted BSP to say it will intervene in the market to curb volatility. Thailand finance minister says country needs more stimulus to help economy meet its potential after Q1 growth came below expectations.
China equity rally inviting fresh scrutiny as multiple expansion drives discussion about valuation attractiveness. Bulls continue to point to China's still-large valuation discount to historical averages and global benchmarks, citing earnings growth potential from policy efforts and nascent economic stabilization. However, bullish views balanced by thoughts liquidity, momentum and policy headline effects mostly drive the rally, leaving markets exposed amid still-weak economic and property market fundamentals, and geopolitical risks.
China Vanke (2202.HK) has obtained fresh loan of CNY1.2B from Bank of China's Shenzhen branch, pushing its recent bank borrowings over CNY7.85B this month. Alibaba's (9988.HK) Alibaba Cloud has slashed price of GPT-4 foundation model by 97%. Li Auto (2015.HK) has postponed plans to launch pure electric SUV models to next year, citing hurdles including lack of enough fast chargers. Q1 vehicle sales also missed estimates as deliveries of first all-electric car MEGA fell short of its targets. Hard Rock International has denied any involvement in any takeover proposal regarding Star Entertainment (SGR.AU)
Digest:
RBA minutes show board cognizant of upside risks to inflation outlook:
May RBA minutes noted board weighed case for a rate hike, but opted to keep cash rate steady given belief inflation forecasts remained credible with risks judged to be balanced. While stronger-than-expected data suggested somewhat less economic slack than previously assessed, board said reasonable to look through short-term CPI variations to avoid excessive fine-tuning. Said rate hike could be appropriate if disinflation assumptions turned out to be overly optimistic, even with ongoing weakness in demand. Noted labor market tighter than consistent with full employment, leaving risk that spending picks up more rapidly and delays return of inflation target if accompanied by further growth in public demand and business investment. Said while risks to domestic outlook remain broadly balanced, costs are asymmetric given inflation already projected to be above target. Stressed recent data signaled inflation risks had risen somewhat, and repeated it is difficult to rule in or out further changes to cash rate.
South Korean export growth resilient as consumer confidence turns negative:
South Korean exports rose 18% y/y in first 20 days of May, a faster pace than the 13.8% increase over same period a month earlier (Bloomberg). Semiconductor shipments again the main driver, up 45.5% and offsetting 4.2% fall in car shipments. Exports to US rose 6.3% versus 1.3% increase in China-bound shipments. While exports continue to buttress South Korea's economy, prospect of persistently elevated interest rates saw consumer sentiment turn negative in May for first time this year (Bloomberg). More respondents now anticipate rates likely to rise than fall as inflation expectations nudged higher. Comes ahead of Thursday's BOK meeting, where central bank is expected to leave policy unchanged. Reuters poll showed BOK expected to keep rates unchanged through Q3 amid elevated inflation and a weak won. Compared to prior survey that showed consensus for 25 bp cuts in Q3 and Q4. Latest views were split on whether BOK will cut by 25 bp or 50 bp in Q4.
India may cut bond issuance with cash balances high:
Bloomberg sources suggested India may consider cutting bond issuance this year aided by a higher cash balance. Government looking at multiple options to utilize surplus cash and may cut borrowing if the response to bond buybacks fails to improve. Final decision to be made in the full budget after national elections conclude next month. Noted February interim budget indicated plans to borrow INR14.13T ($170B) in the year through March 2025 and any reduction may encourage lower yields amid India's inclusion into a JPMorgan global bond index. Article recalled markets were surprised earlier this month with a plan to repurchase bonds maturing in the current FY, which fell short of expectations and the auction was only partially filled. Sources said the government will not fully capitulate to investors, suggesting RBI will be unwilling to offer lower yields in its third buyback of INR600B due on Tuesday. Story noted some thoughts that a reduction in short-term bill issuance would be more preferable to buybacks.
Japan insurer earnings boosted by cross shareholding divestment:
Nikkei aggregates for the three major insurance companies -- Tokio Marine (8766.JP), MS&AD (8725.JP), SOMPO (8630.JP) -- showed net profits surged 2.3-fold in FY23 to JPY1.48T. Main tailwind came from sales of cross shareholdings amid market strength, driving earnings at all three firms to record highs. However, core business operations in auto and fire insurance continues to struggle amid high costs. Total profits from cross shareholding divestment rose 1.6-fold to JPY310.6B reflecting regulatory pressure. In contrast, insurance underwriting earnings were limited to JPY146.9B -- while up 1.8 times the previous year, levels were still well-off recent peak of JPY349.7B posted in FY16. Insurance combined ratios for the four largest firms ranged between 95.9% to 100.7%, where a level above 100 indicates deficit. Japan insurers compare higher than foreign leaders such as Chubb (CB) at 85.8% and Allianz (ALV.GR) at 93.8%. Despite underlying profitability challenges, the article suggested bottom-line results looks set to remain strong for the time being as cross shareholdings continue to unwind. Additional support from new buybacks ranging between Sompo's JPY77B and MS&AD's JPY190B.
StreetAccount Event Preview: RBNZ 22-May policy meeting
RBNZ expected to leave OCR unchanged at 5.50% at its 22-May policy meeting. Most of the attention will be on updated forecasts for OCR and whether RBNZ adjusts its stance that rates need to remain restrictive for a sustained period. Previews mixed with UBS eyeing a modestly dovish tilt to OCR track that brings forward projected timing of first rate cut to late 2024 from early 2025. Economists argued RBNZ likely to remain confident inflation will return to target in 2024. HSBC sees inflation returning to target in Q3-2024 that paves way for Q4 rate cut, citing softening labor market and ongoing economic weakness that gives RBNZ more confidence on inflation trajectory. Others argue RBNZ will refrain from adopting more dovish bias given New Zealand's economy is weakening in-line with central bank's own forecasts. Hawkish previews also pointed out non-tradeabales inflation remains elevated and that rates need to remain restrictive to return CPI to target later this year.
Notable Gainers:
+13.8% 8725.JP (MS&AD Insurance): reports FY ordinary income ¥6.573T, +25% vs year-ago ¥5.251T; launches ¥190B buyback
+6.5% 500049.IN (Bharat Electronics): reports Q4 standalone EPS INR2.44 vs FactSet INR2.12, revenue INR85.29B vs FactSet INR83.72B
+2.3% 8766.JP (Tokio Marine Holdings): reports FY results; issues mid-term plan 2026; targets FY26 adjusted ROE 14% or higher; to reduce cross-held shares to zero by end FY29
+0.2% 7974.JP (Nintendo): acquires Shiver Entertainment from Embracer Group; terms undisclosed
+0.2% 8058.JP (Mitsubishi): signs agreement to transfer entire 35% stake in Japan KFC to Carlyle Fund; terms undisclosed
Notable Decliners:
-19.1% 2015.HK (Li Auto): reports Q1 non-GAAP EPADS CNY1.21 vs StreetAccount CNY1.75; guides Q2 revenue CNY29.9-31.4B vs FactSet CNY37.36B
-6.1% 8630.JP (Sompo): reports FY results; guides FY ending Mar-25 net income attributable ¥230.00B, ordinary profit ¥320.00B
-0.6% 005930.KS (Samsung Electronics): appoints Young Hyun Jun as new Head of Device Solutions to lead company's semiconductor business
-0.2% 6902.JP (DENSO Corp): to sell 4.4% stake in Renesas Electronics, expects gain of ¥175.5B
Data:
Economic:
Australia
May Westpac-MI consumer sentiment 82.2 versus 82.4 in prior month
Markets:
Nikkei: (122.75) or (0.31%) to 38946.93
Hang Seng: (415.60) or (2.12%) to 19220.62
Shanghai Composite: (13.18) or (0.42%) to 3157.97
Shenzhen Composite: (13.48) or (0.75%) to 1780.50
ASX200: (12.00) or (0.15%) to 7851.70
KOSPI: (17.96) or (0.65%) to 2724.18
SENSEX: 186.52 or +0.25% to 74103.55
Currencies:
$-¥: (0.08) or (0.05%) to 156.1900
$-KRW: +0.37 or +0.03% to 1361.8300
A$-$: (0.00) or (0.12%) to 0.6661
$-INR: (0.04) or (0.05%) to 83.2701
$-CNY: (0.07) or (0.96%) to 7.1642
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