Jul 02 ,2024
Synopsis:
Asian equities ended mixed Tuesday. Among the markets staying positive were Japan, Hong Kong and Singapore but others stayed negative for most of the day. India opened at a new record high but has since traded back to the flatline as brokerages weigh. Seoul and Taipei failed to stay in line with the Nasdaq and fell steeply. US futures lower, Europe opened with losses. US dollar flat, yen hovering at record lows, AUD weaker. Treasury yields lower across tenors, JGB yields higher with 10Y yield back above 1.0%. Crude, precious metals largely unchanged, industrial metals ticking higher.
Japan markets tracked Wall Street higher over the day as the yen reached another 38-year low briefly before strengthening. But Emerging Asia markets largely fell, with Hong Kong only just staying positive and many mainland boards staying in the red all day. Australia also under pressure as RBA minutes showed board members weighed a rate hike in June amid upside inflation risks before seeing a stronger case to hold with household finances under pressure.
Elsewhere, South Korean inflation slowed by more than expected towards BOK's target, while the core measure was unchanged. New Zealand's quarterly business survey showed further deterioration in sentiment, leaving the economy on track for potentially another GDP contraction. The China 10Y bond yield inched away from a record low Monday following PBOC statement it will borrow bonds from primary dealers signaling a possible intent to sell securities in bid to slow descent in yields.
Capcom (9697.JP) has acquired a 66% stake in Minimum Studios for an undisclosed price. BYD (1211.HK) said it had sold a record number of cars in Q2 on price discounts and technology upgrades. Unionized workers at Samsung Electronics (005930.KS) to stage three-day strike but production disruption is expected to be negligible. The South Korea government has frozen gas rates in July, affecting Korea Gas (036460.KS).
Digest:
Subdued expectations for major policy announcements ahead of China third plenum:
Bloomberg preview of the Third Plenum indicated various policy issues on the agenda but no expectations of a major policy pivot comparable to Big Bang reforms that would revive market sentiment. Recalled a slew of official statements and media articles pointed to a reinforcement of President Xi's long-term goals. Politburo last week signaled a "resolution on comprehensively deepening reform and advancing Chinese modernization" will be submitted for endorsement. JPMorgan noted policy innovation at sessions over the past decades always coincided with a change in top leadership, which is not the case now. Still, the article suggested that with expectations so low, any clues on policy response to the property slump, local government debt and soft domestic demand may trigger positive headline effects. Highlights of expectations include a continuation of prioritizing bottlenecks in supply chain self-sufficiency and tech innovation, urbanization and accelerated rural land reform, as well as fiscal reforms to provide more financial independence to local government.
RBA weighed rate hike in June amid upside inflation risks:
June RBA minutes showed board debated whether to hike last month but saw a stronger case to remain on hold given data since May had not changed assessment of inflation returning to target by 2026. Also not enough evidence aggregate demand strengthened with households under financial stress. However, acknowledged upside risks to May CPI forecast profile and narrow path to achieving CPI target and not moving significantly away from full employment is getting narrower. Monthly inflation data increased risk disinflation progress may be slower than forecast. Noted productivity very weak while market-based measures suggest increased risk of rise in inflation expectations. Added case to hike may be strengthened if aggregate supply judged to be more constrained than assumed. Labor market still assessed as tighter relative to full employment, though leading indicators weaker. Board will assess spare capacity in labor market and economy in August. RBA noted mechanical reduction to CPI from budget rebates will be reversed in 2025, but will incorporate assessment of budget impact on inflation outlook at August meeting.
South Korea inflation dips closer to BOK target, lifts chance of rate pivot:
South Korea's June headline inflation fell to 2.4% y/y, slowest rate of price rises in 12 months, below May's 2.7% and forecasted 2.6%. On m/m basis, prices fell 0.2%, also beating expectations. Core CPI again stable at 2.2% y/y. Rate compares against BOK target of 2.0%, comes week before BOK decision on base rates; although no-change widely expected, lower inflationary pace may pave way for bank to cut rates by Q4, perhaps as soon as August, according to some analysts. Bank described drop in June's CPI as "positive" but warned still necessary to see if price pressure will converge before target. Added uncertainties linger over oil prices, weather's impact on food prices (which surged 13.3% y/y in June), public utility charges. In considering rate cut, BOK also likely to be cognizant of depreciating won, impact of higher rates on construction sector, lack of positive flow-through to consumer from export surge (Yonhap).
Economists see challenging H2 for China economic growth:
Soft China June PMIs added to signs economic momentum slowed markedly over Q2. Morgan Stanley's tracker showing GDP growth pacing at 0.5% q/q following 5.1% growth in Q1. Run of data indicative of a dual-speed economy with export growth offsetting weaker domestic demand. Deutsche Bank lowered its 2024 GDP growth forecast to 5% from 5.2% previously, citing drag on consumption from a property market weighed down by persistent inventory glut. Deflation pressures expected to persist with consumers hesitant to spend in a challenging economy. Geopolitics also loom in the background amid potential for tariff escalation following US election. Attention is on mid-year leadership gatherings and whether China's policymakers signal more dovish stance at July Politburo meeting. Some thought government could flag stronger fiscal stimulus, as declining fiscal revenues underpin calls for another mid-year upgrade to deficit target. Economists also maintaining calls for additional rate cuts in Q3.
More New Zealand businesses pessimistic about economic outlook:
Latest NZIER Quarterly Survey of Business Opinion (QSBO) showed net 35% of New Zealand firms expect deterioration in economic outlook over coming months, up from net 24% in previous survey. Net 28% of firms also experienced decline in their own activity compared to net 24% in prior quarter, indicative of further slowing in economic activity over coming year. Confidence weaker across all sectors with construction and manufacturing sectors most downbeat. Uncertainty prompted firms to reduce capex plans while quarter of firms reduced staffing levels. Multiple sectors reported loss of pricing power amid a weak economy with over 60% citing low sales as primary business constraint. However, decline in cost and pricing measures also indicated further easing of inflation pressures with NZIER maintaining its forecast for CPI to return to 1-3% target band in H2 2024. Survey feeds into bearish narrative surrounding New Zealand's economy with lackluster growth in Q1 expected to be followed by another contraction in Q2.
Notable Gainers:
+5.0% 2015.HK (Li Auto): reports June deliveries of 47,774 vehicles, +46.7% y/y
+2.2% 9697.JP (Capcom): acquires 66% stake in Minimum Studios, terms undisclosed
+1.8% 3099.JP (Isetan Mitsukoshi Holdings): reports preliminary June domestic department store sales +19.0% y/y
+1.0% 9866.HK (NIO Inc): delivers 21,209 vehicles in June, +98.1% y/y
+1.3% 4689.JP (LY Corp.): submits report to Japan's MIC in response to administrative guidance
+0.4% JFC.PM (Jollibee Foods): subsidiary to acquire 70% of Compose Coffee for $340M (100% basis)
Notable Decliners:
-13.3% 327.HK (PAX Global Technology): guides H1 net income to decline 30-40% y/y
-11.9% 036460.KS (Korea Gas): Korean government reportedly freezes gas rates in July
-8.9% 3186.JP (Nextage): reports Q2 net income attributable ¥3.94B, (11%) vs year-ago ¥4.44B
-1.0% 373220.KS (LG Energy Solution): receives contract from Renault for 39GWh EV batteries
Data:
Economic:
South Korea June CPI +2.4% y/y vs FactSet consensus +2.6% and +2.7% in prior month
CPI ex-food & energy +2.2% y/y vs +2.2% in prior month
New Zealand
May Building Permits m/m (1.7%) versus (2.05%) in prior month
Markets:
Nikkei: 443.63 or +1.12% to 40074.69
Hang Seng: 50.53 or +0.29% to 17769.14
Shanghai Composite: 2.28 or +0.08% to 2997.01
Shenzhen Composite: (9.75) or (0.60%) to 1620.74
ASX200: (32.50) or (0.42%) to 7718.20
KOSPI: (23.45) or (0.84%) to 2780.86
SENSEX: (96.80) or (0.12%) to 79379.39
Currencies:
$-¥: +0.11 or +0.07% to 161.6340
$-KRW: +4.26 or +0.31% to 1387.7100
A$-$: (0.00) or (0.21%) to 0.6647
$-INR: +0.00 or +0.01% to 83.5173
$-CNY: +0.00 or +0.03% to 7.2704
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