Chief Investment Office14 Oct 2021

US

Technology shares climbed amid lower Treasury yields after data showing inflation is running hot lifted companies seen as better equipped to pass on higher costs to consumers without harming their businesses.

Traders also assessed minutes of the Federal Reserve’s latest policy meeting, with officials broadly agreeing they should start reducing stimulus in mid-November or mid-December amid increasing concern over inflation. Central bankers discussed an illustrative tapering path featuring “monthly reductions in the pace of asset purchases, by USD10b in the case of Treasury securities and USD5b in the case of agency mortgage-backed securities”.

The tech-heavy Nasdaq Composite Index climbed 0.73% to 14,571.63, outperforming major equity benchmarks, while the NYSE FANG+ Index of giants like Amazon.com and Google’s parent Alphabet climbed more than 1%. The S&P 500 rebounded 0.30% to 4,363.80, following a three-day drop. The Dow Jones Industrial Average was flat at 34,377.81. Ten-year yields fell below 1.55%. The two-year rate – which is more sensitive to policy moves – rose. Delta Air Lines Inc led losses in US carriers after warning that rising fuel costs will threaten earnings this quarter.

Prices paid by US consumers rose by more than forecast in September, underscoring inflationary pressures. The Biden administration is trying to relieve supply chain bottlenecks ahead of the Christmas shopping season, but officials acknowledge their options are limited. Unprecedented shipping challenges, materials shortages, and high commodities prices have driven up costs for producers. Many have passed a portion of those costs to customers, leading to more persistent inflation. – Bloomberg News.

EUROPE

New home sales in London leaped to their strongest levels in a year in the third quarter as confidence in the capital rebounded, but a slump in completed projects due to labour and material shortages clouded the outlook.

Purchases of newly built homes in developments tracked by data company Molior jumped 21% from the previous three months, according to a preliminary report seen by Bloomberg. The number of completed homes, however, fell 30% and construction programmes are being delayed, the report said.

“The reasons for this slump cover the full range of labour, plant, and materials shortages,” Molior researchers said in the report. “Build costs are expected to rise.”

Builders have joined the growing number of UK companies citing a shortage of workers as a concern for the months ahead, just as London’s apartment market shows signs of a revival. Slack demand for units that weighed on prices and rental values is reversing as lockdown restrictions ease and people return to live and work in the city centre.

The third quarter sales increase was largely thanks to investments in purpose built rental units across the capital. Purchases of homes which have been converted into affordable housing and international buyers also bumped up the numbers.

While London’s rental growth still lags the rest of the country, its 2.7% year-on-year increase in the third quarter was the first rise seen since the start of the pandemic, according to property portal Rightmove. As well as workers coming back to the office in ever higher numbers, a return of international students since the start of the academic year in September has also buoyed demand for housing in the capital. – Bloomberg News.

On Wednesday (13 October), the Stoxx Europe 600 Index rose 0.70% to 460.39.

JAPAN

Caution is needed if considering making some of the Bank of Japan’s bond holdings perpetual, according to Japan’s Prime Minister Fumio Kishida.

“From the perspective of stable financing and retaining trust in Japan’s fiscal policy, consideration of these ideas needs to be cautious,” said Kishida, responding to opposition party member Kohei Otsuka’s questions on the subject in parliament Wednesday (13 October).

Otsuka’s Democratic Party For the People has suggested within their policy platform that part of the BOJ’s enormous bond holdings should be made perpetual.

The BOJ has assets that surpass the country’s economy in size as a result of its massive asset buying programme. But if some of the bank’s bond holdings become perpetual, it would relieve the government from having to pay back the principal, thus easing its already major debt servicing costs.

Otsuka’s party also suggests the creation of a special bracket of debt to fund education. The party argues that JPY5t (USD44.1b) a year should be funnelled towards education for a decade. That would double Japan’s current budget for education, science, and technology, an increase the party says would boost future growth and tax revenues.

Still, moves like this could rattle investor trust in Japan’s fiscal future. The nation’s finance ministers, including former long-term holder of the position Taro Aso, have repeatedly emphasised the importance of market participants believing that Japan will eventually pay back its debts.

Shunichi Suzuki, Aso’s replacement as finance minister, has already reiterated the country’s goal of balancing its budget by the fiscal year 2025, despite the government’s own projections that it could not achieve that target. – Bloomberg News.

The Nikkei 225 Index rose 0.46% to 28,270.50 at the open on Thursday, rebounding from Wednesday’s 0.32% fall to 28,140.28.

MAINLAND CHINA & HONG KONG

WM Tech Corporation, controlled by founder and chairman Zhang Wenzhong, has shelved its Hong Kong initial public offering (IPO) after letting the application lapse, according to people familiar with the situation, following queries from the city’s bourse.

The Beijing-based company behind the Wumart supermarket chain and Metro AG’s outlets in China is no longer actively pursuing a listing, the people said.

The proposed IPO, which could have raised as much as USD1b, was facing delays as Hong Kong Exchanges & Clearing Ltd questioned the supermarket owner on its business operations, Bloomberg News reported in July.

Separately, Beijing DMall E-commerce Co Ltd, an online retail service provider also controlled by Zhang, is shifting its planned US IPO to Hong Kong, people with knowledge of the matter said.

The company has picked new advisers to work on the re-routed Hong Kong listing, which could take place as soon as next year, the people said. DMall had planned to make its market debut in the US to raise about USD500m, but the offering came to a standstill in July, people familiar with the matter said at the time.

Dmall provides retail software and e-Commerce digital services to WM Tech, according to the latter’s exchange filing. WM Tech is a significant contributor to Dmall’s revenue, it said.

Deliberations are ongoing and DMall could still decide against a Hong Kong first-time share sale, the people said. WM Tech could decide to revive its IPO plan, they said. A representative for WM Tech and DMall did not immediately respond to requests for comment.

Founded by Zhang in 1994, WM Tech has developed into one of the country’s biggest retailers with more than 426 Wumart stores and 97 Metro stores across China, according to the filing. Germany’s Metro agreed in 2019 to sell a majority stake in its Chinese business to Wumei Holdings Inc for about EUR1.5b (USD1.7b), completing the deal the following year. – Bloomberg News.

On Wednesday (13 October), the Shanghai Composite Index gained 0.42% to 3,561.76. The Hang Seng Index climbed 0.23% to 25,020.34.

REST OF ASIA

Investors cautious over lofty valuations in Indonesia’s booming technology market have sent a gauge of the shares tumbling over the past two months.

The IDX Sector Technology index has fallen 27% from its August peak after surging 540% since inception in January. Investors have sold shares of data centre provider DCI Indonesia, media company Elang Mahkota Teknologi, and Bukalapak.com PT, which make up a combined 76% weighting of the gauge.

The 23-member measure spiked in late May after media reported that Bukalapak – one of the country’s fastest growing e-Commerce platforms – filed for local listing. The stock has fallen about one-third from an August high as the company struggled to make a profit despite rising revenues in the first half.

A global selloff in tech stocks on concerns over rising yields and China’s crackdown on private enterprises has also hurt broader sentiment.

Still, the gauge is up 368% since launch, compared with a near 9% advance in the Nasdaq 100 during the same period. Rudiyanto expects investor interest in the sector to be rekindled if there Is a mega listing from marketplace giant GoTo Group next year and firms such as Traveloka getting additional funding. – Bloomberg News.

Australia’s S&P/ASX 200 Index was 0.86% higher at 7,335.40 on Thursday (14 October) after losing 0.11% to 7,272.50 on Wednesday.

South Korea’s Kospi Index added 1.11% to 2,977.05 morning, reversing its previous gain of 0.96% to 2,944.41.

The Taiwan Stock Exchange Weighted Index fell 0.70% to 16,347.99.

COMMODITIES

Oil closed lower as traders assessed the Organization of the Petroleum Exporting Countries’s (OPEC) scepticism around the strength of crude demand even after prices hit the highest since 2014.

Futures in New York fell 0.3% on Wednesday (13 October) after trading little changed for most of the afternoon. OPEC revised down its estimate for 2021 global oil consumption in its monthly market report. The group said that while the spike in natural gas prices could boost petroleum use in some areas, such as power generation, it could potentially curb demand in other areas, such as refining.

Meanwhile, the industry-funded American Petroleum Institute (API) reported a 5.21m barrel gain in US crude supplies last week (ended 8 October), according to people familiar with the data.

Crude has surged this year as a rebound in activity from the pandemic has boosted consumption, depleting inventories. In addition, shortages of natural gas and coal have driven rising demand for alternative power generation and heating fuels in Asia and Europe ahead of the winter. In fact, oil prices may even spike to over USD100.00 a barrel because of fuel switching, according to a financial firm.

West Texas Intermediate (WTI) for November delivery fell 0.25% to USD80.44 a barrel. Brent for December settlement dropped 0.29% to end the session at USD83.18 a barrel.

The API also reported supplies at the nation’s largest storage hub at Cushing, Oklahoma, fell 2.28 million barrels. A decline of that size would be the largest since February if Energy Information Administration (EIA) data confirms it on Thursday.

Meanwhile, OPEC’s estimate for global oil demand growth this year was reduced to 5.8m barrels a day, down from 5.96m barrels a day previously. The change was due to lower consumption data in the first nine months of the year, while total fourth quarter demand was revised up by 120,000 barrels a day to 99.82m barrels a day. 

Russian President Vladimir Putin also said crude prices could reach USD100.00 a barrel. He also said that his country is ready to supply as much gas to Europe as it needs. – Bloomberg News.

CURRENCIES

The yen has emerged as the best bet for currency traders looking to position for tapering of Federal Reserve stimulus.

The Japanese currency has weakened almost 4% vs the dollar in the past three weeks, the worst performance among its G-10 peers. Yet, signs are growing this may be just the beginning of much bigger declines to come.

The greenback, which traded in a tight range for six months, has embarked on an impressive run as monetary policy outlooks diverge between the US and Japan. The prospect of the Fed scaling back its asset purchases next month, and completing the process by mid-2022, has sent Treasuries sharply lower at a time the Bank of Japan is seen maintaining its policy mix unchanged.

If history is any guide, the yen may be on course for losses exceeding 10%. In 2012-2015, similar policy divergence became the main driver of a sustained decline in the yen.

Both fundamentals and technicals are working against the yen now.

An energy crisis has been no friend to yen bulls as Japan is one of the biggest importers of oil. With West Texas Intermediate crude surging by a third in less than two months, the pressure on yen has only increased.

Charts suggest that the dollar-yen pair could rally strong should key resistance at 114.55 be taken over. Options gauges show that bullish greenback bets have taken over while traders in London and Frankfurt say that large hedge funds and real money accounts are just getting started in following the momentum. – Bloomberg News.

On Wednesday (13 October), the US Dollar Index tumbled 0.46% to 94.080, the euro climbed 0.56% to USD1.1594, the pound gained 0.52% to USD1.3659, and the yen strengthened 0.32% to 113.25 per dollar.