PETER’S BUSINESS & FINANCE BRIEFING – Friday 24 May 2024, 06:00 Hong Kong
• China starts military drills around Taiwan as ‘harsh punishment’ • US Composite PMI highest in over 2 years • Hang Seng drops below 19,000 as tech stocks slide
Friday’s Opening Call
Hang Seng (Hong Kong) Projected Open: 18,596 -272 points -1.4%
Nikkei 225 (Japan) Projected Open: 38,555 -548 points -1.4%
Quick Summary - 4 Things To Know Before Asian Markets Open
China has started two days of military exercises around Taiwan as 'strong punishment' for the self-ruled island's 'separatist acts'. The drills, which were unannounced, were launched around 7:45 a.m. local time yesterday. The drills come three days after the inauguration of President William Lai, who has been called a ' dangerous troublemaker' by Beijing. A spokesperson for the Chinese People's Liberation Army (PLA) called the drills "a harsh punishment for separatist plots for ‘independence’ and a serious warning against outside interference and provocations.”
Leaders of South Korea, China and Japan will meet next week in Seoul for their first trilateral talks in more than four years, South Korea’s presidential office announced Thursday. The trilateral summit among South Korean President Yoon Suk Yeol, Chinese Premier Li Qiang and Japanese Prime Minister Fumio Kishida will take place in Seoul on Monday, Yoon’s presidential office said. The three leaders are scheduled to hold bilateral talks among themselves on Sunday, according to the South Korean presidential office. Since their inaugural stand-alone trilateral summit in 2008, the three Asian countries were supposed to hold such a meeting among their leaders each year. But the summit has been suspended since they were last held in December 2019 in China.
The annual inflation rate in Hong Kong slowed to 1.1% in April from 2% in the previous month and compared to economists’ forecasts of 2.1%. It was the lowest inflation rate since June 2021, as inflation moderated for food (1.8% vs 1.9% in March) and housing (1% vs 3.1%), and prices fell further for electricity, gas & water (-9.3% vs -8.7%). Costs accelerated for alcoholic drinks and tobacco (20.8% vs 17.7%). The underlying inflation rate, which excludes subsidies, ticked down 0.9% in April compared to 1% in the prior period. On a monthly basis, consumer prices fell 0.7% after showing no growth in the previous month.
Business activity in the US private sector has hit the highest level in over two years. The S&P Global US Composite PMI surged to 54.4 in May, up from April's 51.3, marking the highest level since April 2022 and beating market expectations of 51.1 according to preliminary data. The service sector drove the upturn with a PMI of 54.8, from 51.3 in the previous month, the biggest growth in a year. Manufacturing also saw strong growth with a PMI of 50.9, rebounding from 50 in April, and beating forecasts of 50. Despite ongoing job cuts, the pace of employment decline slowed as businesses showed increased confidence in the coming year and saw greater order book intakes. Future output expectations also improved from a five-month low in April. Input costs and output prices rose more quickly, with manufacturing leading the way in price growth in recent months.
Goldman Sachs CEO Predicts Fed Won’t Raise Rates This Year
Goldman Sachs CEO David Solomon said he currently expects that the Federal Reserve won’t cut interest rates this year. “I still don’t see the data that’s compelling to say we’re going to cut rates here,” he said, adding that he’s currently predicting “zero” cuts. Investments in AI have also helped the economy be more resilient to the Fed’s monetary tightening. Still, the consumer is starting to feel the pinch from higher prices, Mr. Solomon said. He pointed to recent earnings from McDonalds and AutoZone as evidence that consumers are starting to curb spending.
Meanwhile, some US Federal Reserve officials signalled they would be prepared to raise interest rates further if inflation picked up, according to a record of the Federal Open Market Committee’s (FOMC) last meeting at the start of May. “Various participants mentioned a willingness to tighten policy further should risks to inflation materialise in a way that such an action became appropriate,” the minutes of the May 1 meeting, published on Wednesday, said. The summary stated, “participants observed that while inflation had eased over the past year, in recent months there had been a lack of further progress toward the Committee’s 2% objective” and “it would take longer than previously anticipated” for them to gain greater confidence that inflation was moving toward 2%. The meeting followed a slew of readings that showed inflation was more stubborn than officials had expected to start 2024.
JPMorgan CEO Jamie Dimon Says US Could See A ‘Hard Landing’
JPMorgan Chase’s chairman and CEO Jamie Dimon said Thursday the US economy could see a “hard landing.” Speaking at the JPMorgan Global China Summit in Shanghai Mr. Dimon said the worst outcome for the US economy will be a “stagflation” scenario, where inflation continues to rise, but growth slows amid high unemployment. “I look at the range of outcomes and again, the worst outcome for all of us is what you call stagflation, higher rates, recession. That means corporate profits will go down and we’ll get through all of that. I mean, the world has survived that but I just think the odds have been higher than other people think.” However, he said that “the consumer is still in good shape” even if the economy slips into recession. He pointed to the unemployment rate, which has been below 4% for about two years, adding that wages, home prices and stock prices have been going up. However, Mr. Dimon also pointed out that consumer confidence levels are low. “It seems to be mostly because of inflation. The extra money from COVID has been coming down. It’s still there, you know, at the bottom 50% it’s kind of gone.”
RBNZ Governor Orr Disappointed Domestic Inflation Remains High
New Zealand's central bank governor, Adrian Orr, said on Thursday that while inflation was coming down it was disappointing how stubborn the domestic component of inflation remained to moving lower. "The biggest risk we run is that we don't get inflation low and stable," Mr. Orr told New Zealand radio station NewstalkZB. The central bank governor was speaking following Wednesday's decision to hold the official cash rate at 5.5% while it increased the likelihood that it will hike rates and pushed back forecasts for a rate cut. Mr. Orr later told a parliamentary select committee that there were particular sectors of the economy where sticky inflation was evident including insurance, dwelling rates and local government costs. "We've made significant progress across large parts of the consumer price bracket, but it is always traditional that there are less sensitive parts of the economy that take longer for the low inflation rates to come through," he said. New Zealand's government is due to release its 2024-25 budget next week and is under intense pressure to curb spending in the fight against inflation.
New Zealand Retail Sales Rebound After 2 Years Of Declines
Retail sales in New Zealand rebounded by 0.5% quarter-on-quarter in the first quarter of 2024, following a 1.9% decline in the prior quarter, beating expectations of a 0.3% drop. This marked the first increase after eight consecutive quarters of declines, with 9 out of 15 retail industries experiencing higher sales volumes compared to the previous quarter. Notable contributors to the rise were food and beverage services (+2.2%), motor vehicle and parts retailing (+1.1%), recreational goods retailing (+4.7%), and accommodation (+4.1%). On an annual basis, retail spending decreased by 2.4% in the first quarter, compared to a 4.1% drop in the same period of the previous year.
Australia Inflation Expectations Lowest In 2-1/2 Years
Consumer inflation expectations in Australia fell to 4.1% in May from 4.6% in April, the lowest level since October 2021 as cost pressures continued to ease despite the pace of moderation being slower than expected due to persistent service inflation. The Reserve Bank of Australia, in its latest monetary policy statement, said that inflation will be within its target range of 2 to 3% in the second half of 2025 and hit the midpoint of the target in 2026. Australia's headline inflation stood at 3.6% in Q1, the lowest in nine quarters.
Australia Business Activity Grows At Slowest Rate In 3 Months
Australia’s business activity in May grew at its slowest rate in three months, with the composite purchasing managers’ index (PMI) sliding to 52.6 from 53.0, according to flash estimates from Judo Bank. Australia’s manufacturing PMI held steady at 49.6, registering a joint nine-month high, while the services PMI fell to 53.1 from 53.6. A PMI reading above 50 indicates expansion in activity, while a reading below that level points to a contraction. New business expanded notably, posting the fastest growth in two years, with solid gains in service providers and marginal growth in manufacturing orders, including an increase in foreign orders for the first time in 15 months. Consequently, job creation accelerated, with staffing levels rising at the fastest rate in eight months, enabling businesses to clear backlogged orders.
Japan Manufacturing Activity Grows For The First Time In A Year
Japan’s manufacturing activity expanded for the first time in a year, while services continued to grow in May, according to a private survey. The headline au Jibun Bank flash Japan manufacturing PMI rose to 50.5 in May from 49.6 in April. The flash services PMI grew 53.6 in May, down from a final reading of 54.3 in April. Business activity expanded at its fastest pace in nine months at 52.4 in May compared with April’s 52.3. “The expansion in business activity remained services-led, but the near-stabilisation of manufacturing output offers hope of growth broadening out later in the year,” the survey read. The au Jibun Bank Japan Composite PMI ticked up to 52.4 in May from 52.3 in the prior month, the highest reading since last August.
Bank Of Korea Holds Benchmark Policy Rate At 3.5%
South Korea’s central bank held its benchmark policy rate at 3.5% as expected by economists. It was the 11th consecutive meeting at which the Bank of Korea (BOK) held interest rates steady. Inflation, while gradually easing, continues to hover above the Bank's 2% target. The BOK stated that consumption recovery is modest, and it will maintain a restrictive policy stance for a sufficient period of time. BoK Governor Rhee said the chances of a policy interest rate increase are "limited" adding it is unclear when they will start discussing interest rate cuts given the uncertainty in the inflation path. He said they have not discussed the size of cuts needed.
The BOK expects this year’s consumer price inflation to be at 2.6%, and core price inflation at 2.2%, the same as the levels it estimated in February. The country's economy grew 3.4% in Q1 of 2024, marking its most rapid expansion since Q4 of 2021. The BOK said it expects the economy to grow 2.5% this year, higher than its prior forecast of 2.1%. The central bank is expected to cut rates by 50 bps in the fourth quarter, according to a Reuters poll of economists.
Hong Kong Inflation Rate Lowest Since 2021
The annual inflation rate in Hong Kong slowed to 1.1% in April from 2% in the previous month and compared to economists’ forecasts of 2.1%. It was the lowest inflation rate since June 2021, as inflation moderated for food (1.8% vs 1.9% in March) and housing (1% vs 3.1%), and prices fell further for electricity, gas & water (-9.3% vs -8.7%). Costs accelerated for alcoholic drinks and tobacco (20.8% vs 17.7%). The underlying inflation rate, which excludes subsidies, ticked down 0.9% in April compared to 1% in the prior period. On a monthly basis, consumer prices fell 0.7% after showing no growth in the previous month.
Singapore Inflation Rate Stays At Lowest Since September 2021
Singapore’s annual inflation rate remained at 2.7% in April, unchanged from March, marking a 32-month low. The figure was slightly above economists’ forecasts of 2.6%. Prices continued to rise for food (2.8% vs 3.0% in March), housing & utilities (4.0% vs 3.7%), transport (0.9% vs 0.9%), education (3.3% vs 3.3%), and healthcare (4.8% vs 5.0%). The annual core inflation rate stood at 3.1% in April, the same as in March and compared with consensus forecasts of 3.1%. Monthly, the CPI was up 0.1%, compared with the prior 0.1% drop. The so-called “MAS core inflation measure,” which strips out prices of private transport and accommodation, also held steady at 3.1% from March. This measure is also considered by the Monetary Authority of Singapore when it formulates the country’s monetary policy.
Singapore Q1 GDP Growth Strongest In 1-1/2 Years
Singapore’s economy grew by 2.7% y/y in Q1 of 2024, matching flash data and beating economists’ forecasts of 2.5%. The latest result followed a 2.2% advance in Q4 of 2023. It was the 13th straight quarter of GDP growth and the fastest pace since Q3 of 2022. Growth in the service sector accelerated sharply (3.9% vs 2.0% in Q4), amid further rises in finance & insurance, transport & storage, and wholesale trade. Meanwhile, construction output slowed (4.1% vs 5.2%). Manufacturing output shrank (-1.8% vs 1.4%), dragged lower by falls in biomedical manufacturing, electronics, and general manufacturing. Quarterly, GDP grew by 0.1%, the softest pace in a year, after a prior 1.2% rise. For 2024, the government kept the GDP forecast at 1 to 3%. Last year, GDP grew 1.2%, a sharp slowdown from 3.6% in 2022.
Taiwan Retail Sales Growth At 4-Month Low
Retail sales in Taiwan rose by 1.6% year-on-year in April, easing from an upwardly revised 1.9% growth in the previous month. This was the lowest reading since December 2023. On a monthly basis, retail sales tumbled by 1.1% in April, following a 5.8% gain in the prior period.
Taiwan Industrial Output Surges 14.6% In April
Industrial production in Taiwan surged 14.6% year-on-year in April, following an upwardly revised 4.2% in the previous month. It marked the sharpest growth in industrial activity since January, as output climbed for manufacturing (14.9% vs 4.2% in March) and electricity & gas supply (10.8% vs 4.5%). On a seasonally adjusted monthly basis, industrial production rose 0.5% in April 2024, rebounding from a downwardly revised 0.7% drop in the previous month.
Thailand Trade Gap Largest in 3 Months
Thailand’s trade deficit increased to US$1.64 billion in April from US$1.47 billion in the same month of 2023. It marked the fourth straight month of deficit in the trade gap and was the largest since January as exports rose less than imports grew. Exports grew by 6.8% from a year earlier to US$23.28 billion, rebounding sharply from a 10.9% plunge in the prior month, highlighting strengthened global demand. Shipments easily beat economists' forecasts of 0.4% growth. Imports rose 8.3% to US$24.92 billion, accelerating from 5.6% growth in the prior month. It was the fourth straight month of growth in purchases so far this year and the steepest pace since last November amid a recovery in domestic demand. In the first quarter of the year, the trade balance posted a deficit of US$6.11 billion, with exports rising by 1.4% while imports climbed by 4.9%.
India Private Sector Growth Remains Robust
The HSBC India Composite PMI edged up to 61.7 in May from 61.5 in the previous month, flash data showed. The latest figure indicated the third-strongest rate of expansion in 14 years, supported by a sharp increase in the services sector. Although the manufacturing sector rose at a softer pace during the month due to a slowdown in new orders and production, the manufacturing industry continued to record a stronger rate of output growth than services. New export orders expanded for both sectors, rising at the quickest pace since the series began in September 2014. In response to this, firms increased their staffing levels, with employment growth reaching its highest level since September 2006. Optimism about the year-ahead increased to its highest in over 11 years. On the price front, a faster increase in input costs pushed prices charged for Indian goods and services higher.
Eurozone Business Activity Picks Up
The Eurozone economy showed more signs of recovery as companies’ orders and hiring picked up at the fastest pace for a year and price pressures eased, according to a closely watched survey. The HCOB Eurozone Composite PMI rose to 52.3 in May, compared to 51.7 in April and beating forecasts of 52, preliminary estimates showed. The reading showed the economic recovery in the Eurozone gained momentum, amid faster increases in business activity, new orders and employment while business confidence hit a 27-month high. Meanwhile, rates of inflation of both input costs and output prices softened but remained above pre-pandemic averages in each case. The manufacturing PMI increased to 47.4 in May, the highest in 15 months, up from 45.7 in April and above analysts’ expectations of 46.2. The services PMI was at 53.3 in May of 2024, remaining unchanged from the near-one-year high in the previous month, and roughly in line with market expectations of 53.5. Sharper increases in business activity were recorded in Germany but France saw output decrease following a slight rise in the previous month.
Eurozone Pay Gains Approach Record High In Q1
Collective wage agreement in the Eurozone surged to 4.69% year-on-year in Q1, up from 4.45% in the previous period and edging closer to the record 4.7% increase in Q3 2023, according to data published by the European Central Bank on Thursday. This has raised concerns about potential inflationary pressures resulting from escalating wages and is a setback for investors hoping for back-to-back interest rate cuts from the ECB, which is widely expected to slash borrowing costs on June 6. The mounting costs could ultimately be transferred to consumers, potentially prolonging inflation levels above 2%. The gauge, which indicates potential pay pressures, is closely watched by ECB policymakers as they consider when to adjust interest rates. The ECB has said the timing and amount of rate cuts depends on whether pay rises for workers moderate this year and if those extra costs are absorbed by companies cutting profit margins instead of passing them on with higher prices.
UK Private Sector Activity Expands Less Than Expected
Growth in UK business activity unexpectedly dropped to a two-month low in May, according to a closely watched survey that will provide disappointing news for the prime minister ahead of the election on July 4. The S&P Global UK Composite PMI dropped to 52.8 in May, below the expected 54, and a decline from April's 54.1, according to flash estimates. The manufacturing PMI increased to 51.3, compared to 49.1 in April and beating forecasts of 49.5. The reading pointed to the strongest expansion in the manufacturing sector since July 2022, with production rising the most since April 2022. However, growth in the services sector slowed more than expected. The services PMI fell to 52.9 in May from the one-year high of 55 in the earlier month, missing economists’ expectations of 54.7. New orders and export sales continued to grow, although hiring challenges resulted in only marginal job creation. Additionally, businesses in the UK reported the slowest rise in average selling prices in over three years, attributed in part to a decrease in input cost inflation following April's sharp increase. Chris Williamson of S&P Global Market Intelligence said the data signalled a further expansion of UK business activity, “with an encouraging revival of manufacturing accompanied by sustained, but slower, service sector growth.”
US Composite PMI Highest In Over 2 Years
Business activity in the US private sector has hit the highest level in over two years. The S&P Global US Composite PMI surged to 54.4 in May, up from April's 51.3, marking the highest level since April 2022 and beating market expectations of 51.1 according to preliminary data. The service sector drove the upturn with a PMI of 54.8, from 51.3 in the previous month, the biggest growth in a year. Manufacturing also saw strong growth with a PMI of 50.9, rebounding from 50 in April, and beating forecasts of 50. Despite ongoing job cuts, the pace of employment decline slowed as businesses showed increased confidence in the coming year and saw greater order book intakes. Future output expectations also improved from a five-month low in April. Input costs and output prices rose more quickly, with manufacturing leading the way in price growth in recent months.
US New Home Sales Decline
Sales of new single-family houses in the United States declined 4.7% month-over-month to a seasonally adjusted annualised rate of 634,000 in April, as high prices and mortgage rates weighed on buyers' affordability. The figures were well below economists’ forecasts of 680,000, and below March data which was revised down to 665,000. The 30-year fixed rate has remained above 7% for the past five weeks, according to Freddie Mac, creating affordability challenges for would-be buyers. The softer demand has meant inventory for new builds rose 7.1% to bring levels to 9.1 months of supply at the current sales rate. The median price of new houses sold in the period was $433,500, while the average sales price was $505,700, both above $417,200 and $500,900 respectively a year earlier.
US Initial Unemployment Claims Drop More Than Expected
US jobs data released on Thursday showed initial applications for US unemployment aid fell by 8,000 to 215,000 in the week to May 18. Economists had forecast 220,000 new applications. The four-week moving average for initial claims, which reduces week-to-week volatility, rose by 1,750 to 219,750. Continuing jobless claims rose by 8,000 from the week earlier to 1,794,000 in the second week of May, the highest level in over one month. The figures, although better than expected, suggest the labour market remains relatively tight,
China, Japan & South Korea To Hold 1st Trilateral Summit Since 2019
Leaders of South Korea, China and Japan will meet next week in Seoul for their first trilateral talks in more than four years, South Korea’s presidential office announced Thursday. The trilateral summit among South Korean President Yoon Suk Yeol, Chinese Premier Li Qiang and Japanese Prime Minister Fumio Kishida will take place in Seoul on Monday, Yoon’s presidential office said. The three leaders are scheduled to hold bilateral talks among themselves on Sunday, according to the South Korean presidential office. Since their inaugural stand-alone trilateral summit in 2008, the three Asian countries were supposed to hold such a meeting among their leaders each year. But the summit has been suspended since they were last held in December 2019 in China.
The summit is planned to cover six areas of cooperation that include sustainable development, people-to-people exchanges as well as economy and trade, Yonhap News cited Principal Deputy National Security Adviser Kim Tae-hyo as saying. Mr. Kim added the summit would serve as a turning point for fully restoring a three-way cooperation system, Yonhap reported. China will likely try to push Japan and South Korea not to join US-led efforts in further restricting exports of advanced chipmaking equipment, after Tokyo imposed export controls last year. Japan has been resisting US pressure to further curb sales to China. The Biden administration is also trying to bring South Korea into the agreement that includes Japan and the Netherlands.
China Holds Military Drills Around Taiwan As 'Harsh Punishment'
China has started two days of military exercises around Taiwan as 'strong punishment' for the self-ruled island's 'separatist acts'. The drills, which were unannounced, were launched around 7:45 a.m. local time yesterday. The drills come three days after the inauguration of President William Lai, who has been called a ' dangerous troublemaker' by Beijing.
A spokesperson for the Chinese People's Liberation Army (PLA) called the drills "a harsh punishment for separatist plots for ‘independence’ and a serious warning against outside interference and provocations.” They are happening all around the main island, including the Taiwan Strait to its west, and around the Taiwanese islands of Kinmen, Matsu, Wuqiu and Dongyin. The PLA said they will focus on joint sea-air combat-readiness patrols, precision strikes on key targets, and integrated operations inside and outside the island to test the "joint real combat capabilities" of its forces. Analysts said this is the first time China is simulating a full-scale attack on the island, rather than an economic blockade as it did in 2022. They note that for the first time Taiwan’s outlying islands close to the Chinese coast have been included as targets.
Taiwan said the drills on Thursday "highlight Beijing's militaristic mentality". Its defence ministry has dispatched naval, air, and ground forces to "defend the island's sovereignty", it said in a statement. "In recent years, the continuous harassment by Chinese aircraft and ships has significantly harmed global peace and stability,” Taiwan's defence ministry said. “This military exercise not only fails to contribute to peace and stability in the Taiwan Strait but also highlights the aggressive militaristic mentality of the Chinese military," it added.
UK PM Rishi Sunak Gambles On Early Election
UK Prime Minister Rishi Sunak has announced a July 4 election, starting the gun on a six-week election campaign with his Conservative party trailing the opposition Labour Party by more than 20 points in opinion polls. Parliament will be dissolved on May 30. Mr. Sunak had been widely expected to wait until the autumn, the deadline was January, to allow more time for a cost-of-living crisis to recede before Britons cast their ballots. Party officials say Mr. Sunak made his move after concluding with Chancellor of the Exchequer (the UK’s finance minister) Jeremy Hunt that there was no point holding out until the autumn in the hope of better economic news coming to the rescue. Mr. Sunak’s team now also doubts that the Bank of England will cut interest rates early enough to have any significant effect on voters’ finances.
The Conservatives are attempting to win a fifth successive general election, extending a run in power that began with David Cameron’s coalition government in 2010. Labour last won a British general election in 2005, under Tony Blair’s leadership, and in 2019 crashed to its worst postwar defeat under hard-left leader Jeremy Corbyn.
US Questions UK Claims That China Is Providing ‘Lethal Aid’ To Russia
The US has questioned claims by Britain’s defence secretary that China was providing Russia with “lethal aid” for its war in Ukraine. British defence minister Grant Shapps accused China on Wednesday of providing or preparing to provide Russia with lethal aid for use in its war against Ukraine. “Today I can reveal that we have evidence that Russia and China are collaborating on combat equipment for use in Ukraine,” Mr. Shapps told a defence conference in London on Wednesday. Mr Shapps said there had been a 64% increase in trade between the countries since the start of the Ukraine war and "they are covering each other's back". But US national security adviser Jake Sullivan said Washington had not observed that China had directly provided weapons to Russia and added that he would speak with UK colleagues to better understand the defence secretary’s comments. “We have not seen that to date. I look forward to speaking with the UK to make sure that we have a common operating picture,” Mr. Sullivan said.
On Thursday, China rejected the UK's accusations. “We condemn the irresponsible smearing of China by British politicians,” Foreign Ministry spokesman Wang Wenbin said at a regular news briefing in Beijing. “It must be pointed out that it is the British side, not the Chinese side, who are involved in fueling the Ukraine issue,” he added.
EU Opens 6th Antidumping Case Against China In A Month
Chinese producers of lysine, a chemical mainly used in food, healthcare and animal feed, are to face an EU dumping investigation over unfairly priced imports. The only EU producer of lysine has filed a complaint over cheap imports with the European Commission trade department. It is the sixth antidumping investigation launched by the EU against China in a month.
The two sides have been expanding their trade investigations against each other. The biggest cases are an EU investigation into subsidised electric vehicle imports and a Chinese probe into dumping of brandy by the EU. It is being reported that Beijing is considering a 25% levy on imported cars with big engines, in response to the EU investigation and the Biden administration decision to hike tariffs on a range of Chinese goods coming into the US.
Tesla CEO Elon Musk Says He Favours ‘No Tariffs’ On Chinese EVs
Tesla Chief Executive Elon Musk, speaking Thursday at a technology conference in Paris, said his company doesn’t need government incentives to stay competitive with China. Mr. Musk, who attended the Viva Technology event remotely, said he was surprised when the Biden administration announced new tariffs on Chinese electric vehicles, as well as EV batteries and other parts, earlier this month. “Tesla competes quite well in the market in China with no tariffs and no deferential support,” Mr. Musk said. “I’m in favour of no tariffs.” He remarked, “neither Tesla nor I asked for these tariffs. In fact, I was surprised when they were announced.” Mr. Musk added that he doesn’t agree with tax incentives for EVs, either.
The Biden administration last week said it was placing a 100% tariff on Chinese-made electric vehicle imports to the US in a bid to stop cheap Chinese EVs from flooding the US market. The White House says Beijing’s subsidies are helping companies overproduce cheap clean energy products like solar panels and EVs that outpace domestic demand.
China Asks Carmakers To Use Up To 25% Local Chips By 2025
China is urging the country’s top carmakers to source up to a quarter of their chips locally by 2025 as the world’s biggest automotive market looks to build a semiconductor supply chain amid escalating tensions with the US. The Ministry of Industry and Information Technology has asked carmakers including SAIC Motor, BYD, Dongfeng Motor, GAC Motor and FAW Group to increase their local procurement of automotive-related chips to 20-25% by next year, with an eventual goal of increasing the ratio well beyond the initial target, according to sources who briefed the Financial Times. The government-led local procurement guidelines are not mandatory so far, the FT reported. Instead, an award or credit system will encourage domestic carmakers to adhere to the national policy. The 20-25% goal refers to both the number of chips per car and their share of the total procurement value. More than 30mn cars are sold in China each year, about a third of global sales, but local automotive chip supplies are only about 10%. “The goal is ambitious,” one of the people said, “to eventually use all locally made chips for automobiles.”
Evergrande EV Unit Asked To Return $262.4mln Of Subsidies
China Evergrande New Energy Vehicle said on Wednesday its unit had received a letter from the country's local administrative bodies demanding repayment of 1.9 billion yuan (US$262.42mn) given as subsidies and incentives, after the company failed to produce cars. The local bodies sent a letter of demand for Evergrande Automotive Holdings to terminate a series of investment cooperation agreements made between the parties since April 29, 2019, the electric vehicle unit of China Evergrande said in a statement. "The above demands of the letter, if ultimately implemented, could have a material adverse impact on the financial position and operations of the Company or each of the relevant subsidiaries." Evergrande NEV losses for 2023 stood at 12.3 billion yuan, while liabilities were 72.5 billion yuan. The company produced a total of 1,700 cars and sold only 1,389 units last year. The company’s shares have been suspended from trading since May 17 until further notice.
Disney Reportedly To Sell Stake In Tata’s India TV Platform
Walt Disney has struck a deal to sell its minority stake in a subscription TV broadcaster to Tata Group, according to Bloomberg News, allowing the US media giant to focus on the merger of its Indian unit with billionaire Mukesh Ambani’s media arm. The transaction values Tata Play at about US$1 billion. Tata Group took full control of the TV platform after buying the 29.8% stake from Disney. The deal came as India's media landscape is going through a major shakeup. Disney signed a binding agreement in late February to combine its India unit with Viacom 18 Media, creating an US$8.5 billion entertainment giant that will have 750 million viewers and dominate the sector in the world’s populous country.
Asian Shares Mixed Following Nvidia’s Earnings
Asia-Pacific markets were mixed on Thursday following first quarter results from chipmaker Nvidia. The company at the centre of an artificial intelligence boom gave another bullish sales forecast, showing that spending on AI computing remains strong. Investors also digested the minutes of the last FOMC meeting which showed Fed policymakers concerned about sticky inflation and no closer to cutting interest rates. Regionally, South Korea’s central bank held its benchmark policy rate at 3.5% as expected. Singapore’s final first-quarter GDP figures remained unchanged from its advance estimate of 2.7%.
In Australia, the S&P/ASX 200 lost 0.5%. BHP shares fell sharply on Thursday after its latest all-share offer for Anglo American opened the door to a further week of talks over a potential takeover. The Australian miner’s third “final” and conditional offer was pitched at £38.6bn (US$49.1bn). Anglo American rejected the approach over concerns over the structure of a potential takeover but agreed to engage with BHP for a further week. Shares in BHP fell almost 3% in Sydney, altering the value of the bid for Anglo.
Japan’s Nikkei 225 climbed 1.3%, reclaiming the 39,000 level with the index helped by recent currency weakness and as tech stocks were boosted by Nvidia's strong earnings report. The yield on 10-year Japanese government bonds rose to 1.01%, the highest level since 2012. The Bank of Japan kept its policy rate unchanged last month, holding its benchmark interest rate at 0%-0.1%. The BOJ had said it would continue to conduct bond purchases in line with its March decision.
South Korea’s Kospi added 0.2%. South Korea has unveiled a US$19 billion package of incentives to bolster its chip sector. The 26 trillion won program includes 17 trillion won of financial support for certain investments as well as tax incentives, the presidential office said in a statement. The total is more than double the 10 trillion won Finance Minister Choi Sang-mok had proposed less than two weeks ago. Shares in Samsung reversed earlier losses to gain 0.8% in Seoul after the announcement. SK Hynix’s stock extended its morning gains following Nvidia’s earnings report and was up 1.2% after the news.
Singapore’s Straits Times Index rose 0.2% after reopening from a public holiday Wednesday. Shares of Singapore’s national carrier Singapore Airlines fell 0.7% on Thursday, its largest drop in more than a month. This comes after SIA flight SQ321 encountered extreme turbulence on Tuesday, resulting in one fatality and the flight making an emergency landing in Bangkok.
In Mumbai, the BSE Sensex Index gained 1.6% to a record high of 75,418 on Thursday. All but three stocks in the index rose. India's private sector reported its third-strongest upturn in business activity since July 2010, powered by the services sector.
Hang Seng Drops Below 19,000 As Tech Stocks Slide
Stocks in Hong Kong led losses in Asia, declining for a third day, amid ongoing trade tensions and mainland China’s “punishment” drills around Taiwan. There was also mounting scepticism that China's policy steps to stabilise the property downturn will bring a sustainable turnaround in demand and confidence. The Hang Seng index tumbled 327 points, or 1.7%, to a two-week low of 18,869. The city’s benchmark index has declined 3.5% this week, on track to post the worst weekly performance since January.
Local developers retreated with Henderson Land losing 2.4% and New World Development declining 4.9%, after the US Federal Reserve minutes showed interest rates are likely to remain on hold for most of this year. Hong Kong’s interest rates move in lockstep with the US as the local currency is pegged to the US dollar.
The Hang Seng Tech index dropped 2.4%. GDS Holdings, which builds and operates data centres in mainland China, led losses with a 11.8% drop after reporting first-quarter results. Hong Kong-listed shares of Alibaba ended the day 5.2% lower, after falling more than 6% earlier in the day. Bloomberg reported that the Chinese tech giant is considering selling convertible bonds to raise US$5 billion. JD.com lost 4.1%, after rival PDD reported a 131% surge in revenue last quarter, increasing its market share amid intensive competition. Gaming firm NetEase lost 7.9% and smartphone maker Xiaomi fell 2.6% ahead of their first quarter earnings reports.
The Shanghai Composite fell 1.3% to 3,116, the lowest level in over three weeks. Resource-related stocks led the declines on weaker commodity prices, with sharp losses from Zijin Mining (-3.2%), North Copper (-7.8%) and Beijing Xiaocheng (-10.2%).
European Markets Rise
European stocks edged higher on Thursday, thanks in part to another set of blockbuster quarterly results from chipmaker Nvidia. Europe’s region-wide Stoxx 600 added 0.1%. Technology stocks jumped 1.1%, helped by Nvidia. Utilities dropped 2.8%. London’s FTSE 100 fell 0.4%, dragged lower by utilities. The previous day, UK inflation figures came in higher than expected, causing traders to slash bets on a June interest rate cut. Investors are also assessing UK Prime Minister Rishi Sunak’s surprise announcement Wednesday that a general election will be held on July 4.
UK electricity and gas company National Grid dropped almost 11% after announcing a £7 billion (US$8.9bn) equity raise in its full-year results. Shares in the UK investment platform Hargreaves Lansdown were up 14.4% after the company’s board unanimously rejected a £4.67bn (US$5.94bn) takeover approach from a group of private equity firms, including CVC Capital Partners and a subsidiary of Abu Dhabi’s sovereign wealth fund. UK aircraft engineering firm QinetiQ was 13.4% higher, after posting a 20% increase in operating profit in its full-year results. Germany’s Gerresheimer soared 12.7%, after the medical products and packaging producer announced it would acquire the holding company of Bormioli Pharma Group for an enterprise value of around 800 million euros (US$866mn).
German two-year bond yields rose to 3.07%, their highest level since late November. The move came after collective wage agreements in the first quarter gave Eurozone workers an average 4.7% annual pay increase, up slightly on the previous three-month period. Traders reacted by paring back the number of rate cuts expected from the European Central Bank this year.
US Stocks Tumble Despite Nvidia Reaching $2.5tn Market Cap
On Wall Street Thursday, US stocks retreated from record highs hit in the morning session following Nvidia’s record earnings, after flash PMI data surged past expectations and pointed to a robust growth in US private sector activity. The data also showed a fresh acceleration in inflationary pressures in May. All three major indices finished lower. The move cut into recent gains for stocks, which have climbed for much of May. The Dow and S&P 500 are on track for weekly losses.
The Dow saw its worst day of 2024 with the blue-chip index off 606 points, or 1.5%, at 39,065. All 30 index components fell for the first time since December 20. The S&P 500 closed 0.7% lower at 5,268, having made small gains to reach a record intraday high earlier in the session. The losses in stocks were broad-based, with IT the only one of the S&P 500's 11 sectors logging gains. Only 54 stocks in the benchmark index advanced. The Nasdaq Composite dropped 0.4%, to 16,736, also retracing an earlier advance.
Shares of Nvidia jumped 9.3% pushing the chipmaker’s market value above US$2.5tn for the first time, following its first quarter results. The company also announced a 10-for-1 stock split and raised its quarterly cash dividend by 150%. The company at the centre of an artificial intelligence boom gave another bullish sales forecast, showing that spending on AI computing remains strong. Second-quarter revenue was forecast to be about US$28 billion compared to analysts' predictions of US$26.8 billion. Results in the fiscal first quarter also beat projections, jumping 262% from a year ago.
Chip companies including ASML (+1.3%) and Marvell Technology (+1.8%) were swept up in the Nvidia-inspired rally, with the Philadelphia Semiconductor index, which tracks 30 of the world’s biggest semiconductor manufacturers, outperforming the major gauges and closing flat.
Shares of Boeing dropped 7.6% after Boeing’s chief financial officer Brian West on Thursday said the company would burn cash this year, while second quarter jet deliveries would remain muted. The company’s 737 Max deliveries have fallen as it has slowed production to improve quality following the mid-air blowout of a door panel on a commercial flight in January. The drop in Boeing shares was responsible for almost 100 points of the losses in the Dow.
Treasury Yields Jump After PMI Data
The flash PMI data raised concerns that interest rates will remain elevated for much more time, sending Treasury yields higher. Yields on interest rate-sensitive two-year Treasuries rose 6 bps to 4.94%. The yield on the 10-year note rose 5 bps to 4.48%, extending its rebound from the one-month low of 4.35% on May 15th. Traders are currently pricing just a 51% chance the Fed will cut rates in its September meeting, down from 58% a day ago and nearly 68% in the prior week, according to the CME FedWatch Tool. The probability of just a single cut this year jumped to nearly 58%.
Asian Currencies Weaken
The US Dollar Index pared early losses, rising 0.1% and moving above 105 on Thursday, following the PMI data. Most Asian currencies weakened against the US dollar. The Malaysian ringgit led the declines, falling 0.5%. The Philippine Peso dropped 0.4%. The Japanese yen depreciated 0.1% toward 157 per dollar, hovering at its lowest levels in three weeks.
The People’s Bank of China set its daily fixing point around which the renminbi can be traded at Rmb 7.1098 a dollar, its weakest level since January. The move came as the currency slid in the spot market this week amid signs investors are avoiding yuan-denominated assets for higher-yielding ones and bets the dollar will stay strong. The offshore yuan weakened towards Rmb 7.26 per dollar, a three-week low. Sentiment was hurt after China's military initiated two days of "punishment" drills across five areas near Taiwan, citing a response to perceived "separatist acts". Taiwan's military mobilised in response, expressing confidence in the island's defence capabilities.
The greenback was steady against the euro at $1.0809, although stronger-than-expected PMIs for Germany and the Euro Area raised doubts about additional ECB rate cuts post-June. In the UK, Services and Composite PMI metrics missed expectations, although Manufacturing beat. However, Services inflation and wage data are more pivotal for the UK rate outlook. Sterling fell 0.2% to $1.2692.
Slump In Copper Extends Into A Second Day
Copper futures fell 1.5% after slumping 4.9% on Wednesday, the metal’s biggest decline in almost two years. The slide follows a massive runup driven in part by the prospect of all the wiring needed to power AI data centres.
Gold Falls For Third Day
Gold fell for a third day running, putting a recent rally into reverse. Spot gold fell throughout the session ending 1.9% lower at $2,332 an ounce. It's now about 4% off its 2024 closing highs.
Oil Prices Give Up Gains
Oil prices also gave up their gains after the US PMIs, with a firmer dollar and risk-off sentiment weighing on prices. Brent crude oil settled 0.5% lower at a three-month low of $81.36 a barrel.
Bitcoin Reverses
Bitcoin hit $70,000 and was immediately sold, ending the day 3% lower at $67,240. But Ethereum held on to its gains as hopes for approval of Ethereum ETFs rose.
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