Jul 22 ,2024
Synopsis:
Asian equities ended mostly lower Monday. More steep falls in Taiwan, which is down almost 10% from its record high earlier in July; South Korea's Kospi also down sharply. Japan's main boards closed at their lows of the day, Australia also down. Greater China boards mixed with mainland indexes lower but Hong Kong saw healthy gains led by growth factor stocks. India a few points down, small gains in some Southeast Asia markets. US futures indicate a higher opening, Europe seeing gains in the opening hour. US dollar unchanged, yen strengthened against basket of currencies, yuan softer, AUD under pressure from lower metal prices. Treasury yields lower, JGBs yields inched higher, CGB yields lower. Crude futures higher, precious metals mixed, copper and iron ore contracts under more pressure.
Asia markets carried on the weak momentum from Wall Street's performance Friday to see more selling in technology stocks. The Taiex under particular pressure again as concerns grow over potential US restrictions on chip sales; Tokyo Electron also fell again today. Mainland China stocks negatively impacted by rate cuts as analysts suggested the surprise cuts just reminded investors about how weak the China economy is while the 10bps cut to LPRs would have little direct impact on improving the economy.
Markets largely shrugged off political developments in the US. Biden withdrew his nomination for the presidency before Asia markets opened and although there was a slight dip in the dollar initially, there was little movement of note in bond trading or futures pricing that would indicate a pivotal shift for market assets. In macro developments, China unexpectedly cut 1Y and 5Y LPRs by 10 bp, and the PBOC also cut its 7D reverse repo rate by 10 bp, its first such reduction since August. CGB yields edged closer to 2.25%, a level widely regarded as a red line for the PBOC before it intervenes in the bond market to cap prices; the yuan also weakened to its lowest in a week.
Japan's Financial Services Agency ordered MUFG (8306.JP) to cut the pay of its CEO and five executives following the breaching of 'firewall' regulations at its banking and security arms. Nippon Steel (5401.JP) has appointed former US secretary of state Mike Pompeo to advise on its purchase of US Steel. China Fortune Land (600340.CH) sold bonds at a 90% discount to a mystery buyer who promptly cancelled them as part of a debt restructuring plan. Private Equity firm Stonepeak is to buy New Zealand's elderly care group Arvida (ARV.NZ). Vedanta Limited (500295.IN) said it had raised INR85B ($1B) through a QIP share offering to be used for capital requirements and reduction of debt. Woodside Energy (WDS.AU) is to buy Driftwood LNG developer Tellurian (TELL) for $1.2B in cash, including debt.
Digest:
China unexpectedly cuts LPRs, 7-day reverse repo rate by 10 bp:
LPRs were cut 10 bp to 3.35% in 1-year and 3.45% in 5-year. Compares with consensus forecast of no change, while minority view looked for reductions to both tenors. Combined with Monday's open market operation that saw similar 10 bp cut to the 7-day reverse repo rate to 1.70%. Statement framed the move as a strengthening in counter-cyclical regulation and increased financial support for the real economy. In additional announcements, PBOC shifted the LPR release time to 09:00 local time (21:00 ET) effective today from prior 09:15. Described this as an enhancement to strengthen market expectations management. Also relaxed MLF collateral requirements starting this month in an effort to ease bond market supply-demand pressures. Developments dovetail with apparent transition away from the 1-year MLF rate in favor of the 7d reverse repo rate as the new single policy benchmark. Also follows somewhat stronger calls for more monetary easing after last week's weaker than expected GDP data. However, this already meets consensus calls for 10 bp cut in the 1-year LPR in Q3 while dovish projections see the possibility of ~20 bp in total. RRR also expected to be cut 25 bp this quarter. After Third Plenum broadly underwhelmed, attention shifts to the upcoming Politburo meeting for more substance on economic policies.
China's surprise rate cuts bring renewed scrutiny on falling bond yields:
China's surprise rate cuts saw 10Y yield slip two bp to 2.24% Monday (Bloomberg), near 2.25% level that respondents in Bloomberg survey viewed as a PBOC 'red line.' Central bank has been making preparations for short selling bonds in bid to arrest a relentless decline in yields that has fueled concerns market is in a bubble. Latest step involved reducing collateral banks must pledge to access MLF, increasing availability of bonds to trade. Still, there is some uncertainty around timing of any action after central bank noted only that it would depend on market conditions. Some skepticism whether PBOC bond sales can put a floor under yields, given downward pressure on rates viewed more a symptom of China's economic malaise and deflation mindset (Nikkei). That is creating problems elsewhere with China's yield gap pressuring yuan, while flight to safety is accelerating capital rotation from housing and stocks. Highlights how PBOC is in a vexed situation of trying to cut rates to support growth while seeking to counter resultant downward pressure on yields and yuan.
China stock market struggles to continue amid lack of policy signals:
Bloomberg cited takeaways from the Third Plenum as lack of specifics left a dearth of catalysts to support the market. Noted CSI 300 was down as much as 1.7% Friday morning before staging a recovery and closed up 0.5% amid signs of state-backed purchases of ETFs. Article also drew attention to an upcoming Politburo meeting which in July typically focus on economic issues. Cited some thoughts Politburo will offer clearer stimulus signals. Policy theme to transition into corporate earnings season, where preliminary reports have shown little indication of recovery with few prospects for a pickup in H2. Reuters cited a 60-point follow-up document released after the plenum, reinforcing priority on "new productive forces." Listed strategic industries as new generation IT, AI, aviation and aerospace, new energy, new materials, high-end equipment, biomedicine, and quantum technology. Document also reiterated that markets will play a decisive role in resource allocation, that the government will work on legislation to improve conditions for the private sector and flagged fiscal and financial reforms. However, the statement did not specify strategies to achieve these goals.
Analysts say China Third Plenum reaffirmed status quo, still hopes for more stimulus:
Brokerage notes published after the Third Plenum indicated no meaningful surprises in short-term or long-term policy direction, as expected. Economists discussed widely flagged fiscal reforms in terms of providing local governments with more autonomy and shifting more of the burden onto central government. Some expectations of potential consumption tax reforms, though the topic not specifically mentioned in the communique. The main surprise was a vow to "resolutely achieve annual economic goals," a rare occurrence given the longer term scope of plenums. This raised some hopes for follow-through stimulus. Policymakers cited property sector as a key risk factor and composition indicated they would continue with the existing strategy to digest existing housing stock while ensuring delivery of unfinished homes. Real estate analysts highlighted initiatives to expedite urbanization and resolve urban vs rural regulatory imbalances. JPMorgan noted that preceding optimism has tended to lift property share prices in the past though were mostly unrealized. Equity strategists similarly saw the readout as a continuation of the status quo while leaning positive on tone. However, they also flagged subdued corporate outlook for H2 based on guidance.
Consensus still looks for BOJ to leave rates unchanged next week with moderate JGB purchase reductions:
Latest consensus surveys reaffirmed expectations of no rate hike at the July BOJ MPM alongside a moderate cutback to JGB purchases. According to Reuters, 28 out of 37 respondents (76%) said a rate hike would not be implemented this month, albeit up from 61% last month. October remains the modal response at 16 (43%). Soft private consumption was broadly cited as the main sticking point, along with some thoughts BOJ may be hesitant to move before the LDP presidential election scheduled for September. Results were consistent with a QUICK poll showing 18 of 27 looking for no rate change this month amid a soft macro backdrop and ongoing doubts over the likelihood of a simultaneous rate hike and revised JGB purchase plan. Timeline distribution still indicated economists leaning towards October with 10 responses, though only marginally ahead of July at 9 forecasts. In the wake of BOJ's bond market hearings, Reuters article added 16 of 27 (59%) anticipated monthly JGB purchases to taper initially to about JPY5T ($32B) from current ~JPY6T, remaining unchanged from prior consensus. Another 19% said JPY4T and 7% opted for around JPY5.5T. Narrow majority sees purchases of ~JPY3T by July 2026.
Notable Gainers:
+9.4% 6969.HK (Smoore International Holdings): obtains marketing granted orders for seven new products in US
+6.5% 9142.JP (Kyushu Railway): applies for 15.0% increase for rail fares and charges
+5.0% 3141.JP (Welcia Holdings): Amazon Japan reportedly preparing to launch online sales of prescription drugs this year in collaboration with Welcia
+4.9% 9961.HK (Trip.com Group): reportedly denies displaying lower flight prices to newer website visitors
+4.0% 3401.JP (Teijin): holder Effissimo Capital Management discloses 6.03% stake
+3.9% 9868.HK (XPeng, Inc.): to jointly develop E/E Architecture with Volkswagen for all locally produced vehicles based on Volkswagen's China Main Platform and Modular Electric Drive Matrix platform
+3.1% 532648.IN (YES BANK): reports Q1 standalone net profit after tax INR5.02B vs StreetAccount INR4.29B
Notable Decliners:
-21.0% 1883.HK (CITIC Telecom International Holdings): guides H1 net income attributable HK$455M, (37%) y/y
-10.3% 9922.HK (Jiumaojiu International Holdings): reports Q2 Tai Er same store average daily sales (18.1%) y/y
-9.3% 507685.IN (Wipro): reports Q1 EPS INR5.73 vs StreetAccount INR5.66; guides Q2 IT Services revenue $2.60-2.65B, (1.0%) to +1.0% (cc)
-5.6% 000150.KS (Doosan): Doosan Bobcat, Doosan Robotics reportedly to complete merger by early 2025
-3.1% 500325.IN (Reliance Industries): reports Q1 consolidated EPS INR22.37 vs StreetAccount INR24.68
Data:
Economic:
New Zealand June
Trade balance NZ$699M vs revised NZ$54M in May
Exports (0.1%) y/y vs +2.9% in May
Imports (13.0%) y/y vs +0.6% in May
Markets:
Nikkei: (464.79) or (1.16%) to 39599.00
Hang Seng: 218.20 or +1.25% to 17635.88
Shanghai Composite: (18.09) or (0.61%) to 2964.22
Shenzhen Composite: (1.58) or (0.10%) to 1608.49
ASX200: (39.90) or (0.50%) to 7931.70
KOSPI: (31.95) or (1.14%) to 2763.51
SENSEX: (45.80) or (0.06%) to 80558.84
Currencies:
$-¥: (0.76) or (0.48%) to 156.6960
$-KRW: (2.66) or (0.19%) to 1387.2000
A$-$: (0.00) or (0.31%) to 0.6664
$-INR: (0.07) or (0.09%) to 83.6539
$-CNY: +0.00 or +0.04% to 7.2730
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