23/09/2022
Overnight Asia
Asian stocks and US equity futures extended declines following another day of losses for US shares and surging Treasury yields that underscore expectations for tighter monetary policy and a slowing global economy. The MSCI Asia Pacific Index posted deeper losses on Friday and was headed for a sixth weekly decline, the longest streak since May. Equities fell in Hong Kong, Australia and South Korea after the S&P 500 Index closed at the lowest level since June. Goldman Sachs Group Inc. slashed its year-end target for the S&P 500 to 3,600 from 4,300, arguing that a dramatic shift in the outlook for interest rates moving higher will weigh on valuations for US equities.
A Dollar gauge held near a record high after a day of dramatic moves in currency markets that saw Japan intervene to prop up the ailing Yen for the first time since 1998. The Yen strengthened for a second day on Friday as traders brace for more action.
The offshore Yuan weakened in the face of efforts to slow its depreciation, with the People’s Bank of China setting the daily reference rate stronger-than-expected for a 22nd day.
The 10-year Treasury yield was steady at around 3.7%, its highest in a decade. Yields in Asia pushed higher, led by a jump of more than 20-basis points in Australia as trading resumed there after a holiday.
There is no trading of cash Treasuries in Asian hours with markets closed in Japan for Autumnal Equinox Day.
Japan’s intervention hasn’t addressed the underlying cause of Yen weakness — the yawning gap between Japan’s ultra-loose monetary policy and rising rates in other countries — leaving the currency vulnerable. “There is value in slowing the decline of Yen. It gives companies and people more time to react in more time to adjust contracts, processes, et cetera,” James Sullivan, Head of Asia Pacific Equity Research at JPMorgan Chase & Co., said on Bloomberg Television. “Ultimately fundamentals will determine the value of the Yen and the fundamentals are significant in rising rate differentials.”
Rate hikes in the UK, Switzerland and Norway, along with increases on Thursday in Asia in the Philippines, Indonesia and Taiwan, damped market sentiment.
The Federal Reserve has given its clearest signal yet that it’s willing to tolerate a recession as the necessary trade-off for regaining control of inflation, with officials forecasting a further 1.25 percentage points of tightening before year-end.
Elsewhere in markets, Gold edged towards a two-year low and Bitcoin pushed higher, extending gains to a second day, while remaining below $20,000. Oil slid as it headed towards a fourth weekly loss.
The energy market faces a very volatile last quarter of the year, Amrita Sen, Co-Founder and Research Director of Energy Aspects Ltd. said on Bloomberg Television. “It’s just too many different and contradictory factors driving prices right now,” she said, citing demand concerns from recessionary fears and supply constraints relating to Iran and Russia, as well as a lack of spare capacity from OPEC.
Here are some of the main moves in markets:
Stocks
• S&P 500 futures lost 0.10% as of 7.05 am in London. The S&P 500 fell 0.80%
• Nasdaq 100 futures dropped 0.20%. The Nasdaq 100 dropped 1.20%
• Hong Kong’s Hang Seng Index fell 0.70%
• China’s Shanghai Composite Index slipped 0.60%
• South Korea’s Kospi Index tumbled 1.80%
• Australia’s S&P/ASX 200 Index retreated 1.90%
• Euro Stoxx 50 futures were up 0.10%
Currencies
• The Bloomberg Dollar Spot Index was up 0.50%
• The Euro was down 0.10% to $0.9835
• The Japanese Yen strengthened 0.20% at 142.13 per Dollar
• The offshore Yuan weakened 0.20% to 7.0985 versus the Dollar
Bonds
• The yield on 10-year Treasuries was at 3.72%
• Australia’s 10-year yield jumped more than 25 basis points to 3.92%
Commodities
• West Texas Intermediate Crude fell 0.20% to $83.35 a barrel
• Gold was up 0.10% to $1,673.10 an ounce
US Market Wrap:
US equities retreated into the red for a third straight session on Thursday as investors sold off technology and financial stocks amid fears of a more hawkish end to the year. The S&P 500 declined 0.8% with bond yields hitting multi-year highs on rates jitters. Nine of 11 major industry groups were lower and semi-conductors were the worst performers. The tech-heavy Nasdaq 100 Index sank 1.4%, while the blue-chip Dow Jones Industrial Average shed 0.4%. Losses were broad, led by tech stocks, banks and retailers. The 10-year US yield hovered near 3.7%, its highest since February 2011, while the two-year rate topped 4.15%. Tech stocks are sensitive to higher interest rates because they’re typically valued on projected profits, so the present value of those future earnings falls as yields rise.
Chip stocks took a beating on fresh worries about corporate America’s earnings power, with the US potentially heading for a recession. Demand for semi-conductors have slowed, as weak earnings reports from Micron and Nvidia heightened concerns. That sent the Philadelphia Semi-conductor Index down 2.8% to its lowest level in almost two years. The Fed and a host of other Central Banks from Britain to South Africa are raising rates aggressively to tame the highest inflation in a generation. On Wednesday, the Fed lifted rates by three-quarters of a percentage point for a third straight time and indicated it expects that rate to be a full percentage point higher by year end. Chair Jerome Powell also signalled that he would risk a recession to fight inflation, spurring fears that Central Banks may derail global growth which would put pressure on corporate earnings.
“The Fed has succeeded in convincing markets that they will remain aggressive with fighting inflation and that has many expecting another 75bp rate increase in November,” wrote Ed Moya, Senior Market Analyst at Oanda. “Most of these rate hikes around the world are not done yet which means the race to restrictive territory won’t be over until closer to the end of the year.”
Aggressive rate increases have injected another bout of turbulence into equity markets, with the Cboe Volatility Index, or VIX, now trading above 27 after falling below 20 a month ago.
Thursday’s losses erased the S&P 500’s gains since the start of July, putting the Index on track to notch three straight quarters of declines.
Hawkish policy is making investors feel gloomy in what is historically the worst month for stock investors. Pessimism among individual investors reached its highest level in more than a decade after bearish sentiment, or the expectation that stocks will fall over the next six months hit 60.9%, in the latest American Association of Individual Investors survey. That marks the highest level of pessimism since March 2009.
Sentiment is often considered a contrarian indicator, which typically means that a gloomy reading could signal brighter times ahead. But analysts at Bespoke Investment Group expect equity losses to accelerate from here. “It would seem that there is ample precedent for the current market to worsen even further from current levels despite the extreme level of bearishness from investors that serves as a contrarian bullish signal,” strategists at Bespoke wrote in a note to clients.
Sectors in Focus:
• FedEx shares jumped as much at 4.8%, after the company unveiled a plan to save up to $2.7 billion in costs
• The S&P Supercomposite Restaurants Index declined nearly 3% after Darden Restaurants reported weaker-than-expected same-store sales at Olive Garden
• Shares for credit rating companies including Moody’s Corp. and S&P Global Inc. continued to retreat for an eighth consecutive session
• Bank stocks slipped, with shares of Credit Suisse Group dropping nearly 6% as it weighs a possible exit from US markets
