Sep 09 ,2024
Synopsis:
Asia equities ended weaker Monday but were well off their lows by the close. Losses greatest in Hong Kong and mainland China as the CSI 300 touched its five-year low set in February; Taiwan and South Korea also notably lower. Japan gapped lower but halved its losses by the close. Modest gains for India, Singapore and several other Southeast Asia boards. US futures point higher, Europe bouncing back at the open. Dollar stronger, Asia currencies generally soft with yen and yuan notably weaker. Treasury yields marginally higher across tenors. Crude well bid, precious metals weak, iron ore and copper higher. Cryptocurrencies higher first thing but have since fallen back.
Asia equities substantially lower first thing but recovered over the day as US futures ticked higher. Hong Kong and mainland China less inclined to join the rally as lower-than-expected CPI and plunging PPI set off fresh worries over the strength of the China consumer. The yuan weakened to reverse much of its recent gain as traders speculated Beijing would have to act on rates to support the weakening consumer base. Japan final Q2 GDP unexpectedly revised lower amid weaker contribution from private consumption and capex. Revision added to concerns over narrowing yield differentials to pressure Japanese equities, which hit a one-month low early on.
Alimentation Couche-Tard said it was "disappointed" with Seven & I's (3382.JP) initial rejection of its takeover offer. China Renaissance (1911.HK) fell 66% on its first day's trading in 17 months following the detention of its former chairman Bao Fan. Toyota Motor (7203.JP) is mulling a cut to its EV production guidance of around 30%. Midea Group (000333.CH) launched its HK$27B ($3.46B) share offering in Hong Kong at a price quoted at HK$52-54.8 per share. 99 Speed Mart (5326.MK) gained around 14% in its market debut in Kuala Lumpur.
Digest:
China consumer inflation edges up while factory-gate prices stuck in deflation:
CPI rose 0.6% y/y in August, missing consensus 0.7%, following 0.5% in the previous month. It was higher 0.4% m/m, compared with 0.5% rise expected and the same growth in July. Food prices were higher 2.8% y/y, contributing 0.51 ppt in headline CPI. Fresh vegetables were 21.8% y/y higher, 18.5 ppt higher from July, due to hot summer and heavy rainfall in certain areas. Pork prices rose 16.1% y/y, compared with 20.4% jump in July, due to high base. Non-food items rose 0.2% y/y, compared with 0.7% growth in July. Notably airfares and hotel accommodation prices fell by 11.9% and 3.6% respectively. YTD aggregate steadied at 0.2%, still notably weaker than government target of 3%. Core inflation was 0.3% in August, lowest in nearly 3.5 years, down from 0.4% in July. PPI fell 1.8% y/y in August, compared with 1.4% contraction expected and worsened from 0.8% decline in July. August also marked 23rd straight month of producer deflation and was steepest decline since April. It fell 0.7% m/m, compared with July's 0.2% drop. NBS attributed to weak market demand and price drops in certain global commodities.
Growth concerns put markets on back foot:
Markets on back foot after weak August US payrolls added to concerns about growth outlook, mirroring early August reaction to soft July jobs data that also resulted in a heavy equity market drawdown. Outsized reaction to big misses in key economic data underscores heightened market sensitivity to US growth concernsgiven soft landing has been key plank of bullish narrative. Concerns about AI momentum seem to be exacerbating market downside given heavy concentration of big tech, with semiconductor stocks logging their worst week since Mar-2020 (Bloomberg). US election uncertainty looms as near-term overhang with S&P 500 historically weaker in two months prior to election day while polls show Trump and Harris essentially tied. Around Asia, growing attention on narrowing US-Japan yield differential as concerns about US growth outlook contrast with normalization rhetoric from BOJ policymakers, driving yen back towards Dec-2023 high against dollar and weighing heavily on Japan equities. Latest China dataalso shows its economic deceleration shows no signs of letting up, prompting strategists to downgrade their outlook for China GDP and equities.
Japan Q2 GDP growth unexpectedly revised down:
Japan final Q2 GDP growth unexpectedly revised down to 2.9% q/q annualized from preliminary 3.1%, against expectations 3.2% growth. Quarterly growth revised down to 0.7% from 0.8% (also consensus), driven by slight negative revisions to private consumption and capex. Inflation pressures evident with GDP deflator revised up to 3.2% from 3.0%. Japan economic growth rebounded in Q2 after Noto earthquake and auto certification scandal impacted manufacturing output in Q1. Bloomberg consensus looking for annualized growth slowing to 1.7% in Q3, though still above BOJ's potential growth estimate of 1.0%. Central bank widely expected to leave policy unchanged in September though recent remarks from board member Takata and Governor Ueda reinforced expectations of another rate hike this year if prices and economy evolve in-line with BOJ's outlook. At same time, policymakers mindful of market volatility and have ruled out tightening during periods of instability. Economists eyeing October or December rate hike with December seen as more likely.
Narrowing US-Japan yield spread fueling yen appreciation, weighing on Japan equities:
Soft August US payrolls drove yen towards its highest against dollar since beginning of January. Traders see yen appreciating beyond 142.00 per dollar in near-term with options markets last week pricing in 85% chance of upside break in coming week and 48% chance of yen hitting 140 per dollar (Bloomberg). Another sizable Treasury rally last week saw US-Japan 2Y spread narrow to 329 bp from 371 bp in mid-August. Concerns about US growth outlook has prompted markets to price in more 50% chance than Fed will follow up 25 bp cut this month with 50 bp cuts in November and December (Bloomberg). Conversely, BOJ policymakers signaling they remain on track to tighten again this year if inflation and economy evolve in-line with outlook. That is playing into debate around whether yen carry unwind has more room to run, weighing on sentiment towards export-oriented firms. TOPIX down more than 7% in past four trading sessions while Nikkei VIX up 48% over past week to highest since mid-August.
Dollar selling by China exporters seen as unlikely to spark meaningful yuan turnaround:
Yuan rebound has generated debate whether appreciation has more room run as Fed prepares to cut rates. Much has been made of potential for China exporters to sell excess dollars with resultant repatriation fueling more yuan gains (Bloomberg). Estimates of excess dollar holdings vary wildly, ranging from $220B to as much as $2T (reflecting different assumptions of FX settlement ratio, which has changed over time). Even then, FX strategists doubtful yuan will experience significant appreciation with BofA arguing disorderly dollar selling unlikely in its base case scenario. Noted even if exporters sold $30-40B a month that can be balanced by other BoP components that showed net $46.8B in dollar purchases in July. JP Morgan attributed recent yuan appreciation more to short covering and positioning shakeout. Additionally, PBOC considered to have limited appetite for yuan depreciation given exports have been China's main economic engine in recent months and country remains susceptible to capital outflow pressures. Fed rate cuts also seen unlikely to result in a meaningful narrowing of US-China yield spread given China's weak economy and PBOC's dovish stance. Prospect of Trump tariffs seen as further yuan headwind.
Notable Gainers:
+15.6% 9926.HK (Akeso Inc): ivonescimab monotherapy reduces risk of disease progression or death by 49% compared to pembrolizumab monotherapy in first-line treatment of patients with PD-L1 positive advanced NSCLC in China
+3.0% 4205.JP (ZEON Corp): holder Oasis Management discloses 6.29% stake
+2.4% 3382.JP (Seven & i): Alimentation Couche-Tard remains highly focused on consummating a transaction with 7&i
+0.5% 4188.JP (Mitsubishi Chemical): says report that it plans to sell Mitsubishi Tanabe Pharma is not true
+0.5% 068270.KS (Celltrion): issues mid-long term strategy; guides FY25 revenue KRW5T vs FactSet KRW4.583T
Notable Decliners:
-66.6% 1911.HK (China Renaissance Holdings): fulfills HKEX resumption guidance; resumes trading after being suspended since April 2023 pending publication of 2022 annual results, and following investigation of then-chairman Bao Fan by Chinese authorities
-3.2% 7203.JP (Toyota Motor): reportedly to cut 2026 EV production guidance by 30%
-3.2% 2202.HK (China Vanke): reports August contracted sales CNY17.24B; StreetAccount notes year-ago CNY22.61B
-3.1% 000333.CH (Midea Group): launches 492.1M-share offering in Hong Kong at HK$52-54.8/share
-2% 8331.JP (The Chiba Bank): to launch tender offer for 100% stake in EDGE Technology at ¥841/share
-0.7% WBC.AU (Westpac Banking): CEO Peter King to retire, effective 15-Dec; Chief Executive of Business & Wealth division Anthony Miller appointed as Group CEO and MD
-0.1% MER.PM (Manila Electric): subsidiaries to sell 40% stake in Terra Solar Philippines to Actis for $600M
Data:
Economic:
China August
CPI +0.6% y/y vs consensus +0.7% and +0.5% in prior month
PPI (1.8%) y/y vs consensus (1.4%) and (0.8%) in prior month
Japan
Final Q2 GDP +2.9% q/q annualized vs consensus +3.2% and preliminary +3.1%
GDP +0.7% q/q vs consensus +0.8% and preliminary +0.8%
August bank lending +3.0% y/y vs +3.2% in prior month
Markets:
Nikkei: (175.72) or (0.48%) to 36215.75
Hang Seng: (247.34) or (1.42%) to 17196.96
Shanghai Composite: (29.32) or (1.06%) to 2736.49
Shenzhen Composite: (8.95) or (0.59%) to 1496.23
ASX200: (25.30) or (0.32%) to 7988.10
KOSPI: (8.35) or (0.33%) to 2535.93
SENSEX: 246.68 or +0.30% to 81430.61
Currencies:
$-¥: +0.89 or +0.63% to 143.2040
$-KRW: +1.84 or +0.14% to 1340.4500
A$-$: (0.00) or (0.05%) to 0.6665
$-INR: (0.04) or (0.05%) to 83.9451
$-CNY: +0.02 or +0.32% to 7.1114
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