Summary: Fed’s hawkishness in the overnight session remained insufficient to erase China reopening gains, and markets continued to rally. Strong US overnight also boosted risk sentiment, but some reversal has been seen in Asia. Technology stocks may continue to suffer as financial conditions tighten, and Energy, Commodities and Reopening remain our key investment themes.
What’s happening in markets?
Technical triggers cause rally in markets: In the US, S&P500 rose 2%, Nasdaq gained 2.8% after quant traders and fund managers bought in automatically when a technical trigger was met (with the MACD and RSI indicating the key indices were in oversold territory). The most gains in the US were in Materials (Copper), Airlines and Semiconductors on hopes that China will reopen soon after three days of no covid infections. The gains also came in the face of the US Fed chair vowing further hikes will be made.
Asian markets ex-China rally led by tech, semiconductors and materials. Japan’s Nikkei (NI225.I) was in gains of 0.7% led by gains in technology such as NTT Data Corp (9613) and Fujitsu (6702) as well as semiconductors like Tokyo Electron (8035) and Advantest (6857). Singapore’s STI index (ES3) gained close to 0.8% eying earnings from Singapore Airlines as passenger traffic starts to improve. Australia’s ASX200 rose for the fourth day, rising 1.1% before investors trimmed profits, leaving the ASX up 0.8% at noon; with Materials fuelling the charge with the minerals sector up 2.4%, and Industrials (led by airlines) are up 1.5%; on hopes that China’s impending slow recovery will see miners earnings and airlines benefit.
Hong Kong and mainland China equity markets lost momentum after yesterday’s rally. Hang Seng Index (HSI.I) fell 1% and CSI300 (000300.I) dropped 0.6%. Chinese internet stocks pared yesterday’s gains. Hang Seng TECH Index (HSTECH.I) was down 1.5%, mega-cap Alibaba (09988), Tencent (00700) and Meituan (03690) falling about 2%. JD.COM (09618) reported Q1 revenues (+18% YoY), -operating income (+33% YoY) and net income (-4% YoY) beating market expectations. Both gross margins and net margins improved and are better than expectations. The Company’s share price however was down over 2% as the management’s guidance in April and Q2 revenues as a whole weaker than market expectation. In A shares, ChiNext (399006.I) outperformed other indices as digital economy stocks benefited from the Chinese authorities’ reiteration of promoting the development of digital economy. Nonetheless, the hype in mega-cap internet companies traded in Hong Kong receded as investors reassess the lack of new information in Vice Premier Liu He’s speech yesterday on the Chinese People’s Political Consultative Conference.
U.S. April retail sales show the U.S. domestic economy is very resilient. Retail sales were out at 0.9% versus expected 1%. After adjusting for monthly inflation, it was at 0.6%. This is still very solid. There is no sign of imminent recession in the United States when we look at the U.S. consumer.
Japan Q1 GDP contracted less than expected. Japan’s Q1 GDP showed a contraction of 1% q/q sa following a 3.8% expansion in Q4, but it was still better than expected. The omicron wave and supply drags created pressures, but the outlook for Q2 is appearing to be better as the economy reopens and pent up demand boosts consumer spending.
What to consider?
Fed speakers unable to surprise markets on the hawkish side. There were a number of Fed speakers on the wires yesterday, including Chair Powell himself. As hawkish as they could get, they still stuck with the market view of multiple 50bps rate hikes and did not surprise. Powell repeated his view that the Fed will raise rates until inflation retreats in a ‘clear and convincing’ way and this will likely mean some economic toll. Soft landing appears to be the base case for the Fed but we believe the US consumer is still strong and that will provide an offset.
Vice Premier Liu He’s remarks in yesterday’s Chinese People’s Political Consultative Conference does not send a new signal different from the Chinese authorities’ initiatives to promote and at the same time regulate the digital and platform economy systematically and comprehensively. While supporting the “healthy” development of the platform economy and private enterprise economy, including capital raising, Liu also emphasizes the importance of streamlining the relationship between the Government and the market, as well as competition (anti-monopolistic behaviours?) and using competition to facilitate innovation (new technologies, new applications and new entrants rather than semi-monopolistic giants profiting from network effects due to scale?).
After Fed and RBA, now ECB brings greater than 25bps rate hikes on the table. ECB governing council member Klaas Knot said that fifty basis point hikes should be on the table if conditions warrant. This took ECB rate tightening anticipation for this year over 10 basis points higher, with a positive 50 basis point policy rate almost fully priced now. This is the second day in a row of hawkish talk from the ECB after Bank of France head Villeroy warned on the weak euro yesterday.
UK unemployment drops to a 50-year low of 3.7%. For the first time since records, job openings (1.3 million) outnumber those out of work. In addition, the number of payrolled employees grew by 121,000 between March and April, to 29.5 million. A lot of people have chosen salaried employment over self-employment due to fear of recession and higher cost of living. Wages continue to move upward. But this is not enough to cope with inflation. Pay, excluding bonuses, rose by 4.2 % between January and March while cost of living was at 7 % in March and is expected to jump to 9 % in April. The situation is becoming unbearable for many households. We believe that the Bank of England will have no other choice but to speed up the interest rate hike cycle before pausing perhaps after the summer.
The bar for dollar bulls is higher. GBP was the biggest winner as the USD lost some ground despite a hawkish Fed, and GBPUSD is now facing resistance at 1.2500. UK inflation will be on watch today with the consensus at 9.1% against 7% previously. That might also mean jumbo rate hikes from the BOE. EURUSD retook the important 1.0500 area yesterday, a level that was a clear sticking point on the way down.
Broad market short-rally not for the faint hearted, the outperforming themes - commodities and industrials - will continue, and likely leave tech for dust. Consider that the last time the S&P500 made a 2% gain in two and three days, coming off a 52-week low, it was March 2009 and March 2020. So, could the history repeat itself? We are not saying that, we reiterate, our long-term bearish view, as financial conditions are set to tighten with most central banks around the word, rising rates. But beware of the bear-market-bounce over the short term, caused by a technical rally (as markets were in oversold territory). The key to getting sustained, long-term gains is to have positions in Energy, Commodities and the Reopening theme (Industrials/Airlines), as we mentioned previously. Take a look at the ETF, iShares Global Energy (IXC) for example. It’s up 33% since tech fell like a led balloon since November last year. We remain bullish on sectors like energy that are likely to see long term earnings growth.
Potential trading ideas to consider?
A tradable rally in China and Hong Kong equities but the market has not bottomed yet. The prospect of relaxation of Covid control measures, in particular the lockdown of Shanghai, will continue to give some support to the much beaten down Chinese equity market and gloomy view of the Chinese economy. A lot of pessimism has been in the price and recent improvements in the Covid situation is providing some relief. However, we doubt the near-term rally can sustain beyond a few sessions or a couple of weeks as Omicron being extremely contagious and the situation of outbreaks is fluid, plus a hawkish U.S. Fed on the path to tighten financial conditions to the extent that may exceed what the market has priced in. Traders can trade the counter-trend rally in the broad Chinese markets, including mega-cap internet companies, but investors probably should focus on the sectors that are benefiting from government spendings and policies such as traditional infrastructure and new infrastructure, which have policy tailwind in an otherwise turbulent investment environment. Some relevant ETFs are: Global X MSCI China Industrials CHII:arcx, Globax X MSCI China Materials CHIM:arcx, Global X China Cloud Computing 09826:xhkg, Global X China Robotics & AI 02807:xhkg, Global X China Semiconductor 09191:xhkg)
Singapore airlines earnings on tap today. With the regional border reopening appearing firm, there is potential for a solid guidance from Singapore Airlines (C6L) today. Consensus estimates revenues of S$7.5 bn in FY2022 (year ending March 2022) from S$3.82 bn last year, and the loss is expected to narrow to S$895.1 million from S$4.27 bn last year. Cargo yields are expected to continue to climb higher due to the prolonged supply issues, but main focus will be on the recovery in passenger yields. Also on watch will be the details on fuel hedging and staff shortages. Singapore airlines trades at a P/BV of 0.74 currently, which is lower than most of its peers.
Key economic releases this week:
Key earnings release this week:
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Head of Commodity Strategy
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