Summary: On Monday, gold buying mounted, iron ore continued its rally, and grain stocks sewed up amid Russian tension escalating and parts of Australia flooding. This supported the commodity rich Australian stock market rallying and outperforming most global markets. Meanwhile, US markets are bracing for stocks to fall as Russia warned it could use its nuclear powers, while the US is likely to put sanctions on Putin, and NATO looks set to defend Ukraine with commandoes on foot. Here are the equity considerations for the week ahead, and trading ideas.
Co-written by Market Strategists Jessica Amir in Australia and Redmond Wong in Hong Kong.
So, what’s happening in equites markets?
- It is probably NOT TIME to buy the dip, yet be selective and consider stocks and markets that could benefit from geopolitical tension worsening and commodities rallying. Here are some examples and considerations;
- On Friday the Nasdaq 100 (USNAS100.I) lifted1.6% and S&P 500 (US500.I) rose 2.4% after quant traders were forced to buy stocks after a technical triggers occurred - with markets in oversold territory. But today US stocks are pricing a fall of 2.9% on Monday, which will reverse Friday’s rally. We saw these moves in Australian and US markets last week, with one day rallies and sharp falls the next. We reiterate our cautious tone, expect more wild swings until uncertainty with Russia: Ukraine passes and until we know the future of interest rates in the US.
- Meanwhile, the ASX200 (ASXSP200.I) rose 0.5% at 1pm with Mining and Energy stocks beefing up the market, with those sectors up 2.3% and 1.1% respectively. Elsewhere, listed Australian property stocks, collectively rose 0.9% as the RBA is now expected to rise interest rates in August, instead of May. As for stand out stocks, Graincorp (GNC) shares rose 6% as the wheat price rose 7% due to Russian sanctions, while Australia grapples with floods. Gold stocks, Gold Road Resources (GOR) rose 5% after the gold price bolstered. And shares in rare earth giant, Lynas (LYC) rose 4.9% to a two month high on better than expected profits with the company guiding that demand is likely to increase in FY22.
- In Asia: With the European Commission’s decision to remove selected Russian banks from access to SWIFT, markets have given back their overnight gains from last Friday’s U.S. ADR trading. Hong Kong’s Hang Seng (HSI.I) fell over 1% and China’s CSI300 (000300.I) was down modestly. Last Friday, Chinese coal miners were sold off, following the NDRC’s announcement to cap price of thermal coal effective from 1 May 2022 at about 30% below current market price. In Singapore, the Straits Times Index (STI) fell more than 2%. Last Friday, Singapore Technologies Engineering announced full year results. Revenues rose 7.5% and net income was up 9.3%. Businesses recovered across all segments.
What to consider?
- What’s the latest on Russia; Ukraine? Russia’s invasion and war on Ukraine worsened on Sunday; Russian military entered Ukraine’s second largest city, and face to face combat started, with residents now warned to stay in shelters. Russia President Putin said his nuclear forces are now on high alert. Meanwhile, the global military alliance, NATO has now stepped and will deploy thousands of commandos to defend Ukraine. Australia will also send weapons with NATO. Meanwhile, in a rare unprecedented move, the White House will personally sanction Putin. While the US and European allies agreed to exclude selected Russian banks from the SWIFT bank messaging system. PLUS, the EU, and countries including Japan, Australia, New Zealand and Taiwan also hit Moscow with new sanctions. And Global companies like Google (and their business YouTube), along with Facebook blocked Russian stated owned media from earning money for their ads.
- Commodities price are poised to rise again. Russia supplies 40% of Europe’s gas. It’s the worlds’ largest grains and fertilizer exporter, the largest palladium and nickel producer. It the world 3rd largest exporter of coal and steel, and the fifth largest timber exporter. So think about how the brand new sanctions will likely cause commodity prices to rise at a time when supply is already anemic
- The oil price (OILUSMAR22 & OILUKAPR22) rose 5.5% on Monday, with crude oil back at $96.63/barrel on concern, Russia, the third largest oil producer will likely see supply restricted to the world. Two major banks, Credit Suisse and Société Générale stopped financing commodity trading to Russia, at a time when the country is finding it tough to boost output. In January Russia pumped 11.3 million barrels of oil a day, but of late, it’s only been pumping out 400,000 barrels each month. So, we at Saxo think oil could hit $110-$126 in Brent next week, if the conflict deepens and escalates in the wake of sanctions. For other considerations on why to consider investing in energy, click here.
- Wheat prices jumped 9%, as supply of wheat is likely to worsen, with two of the world’s largest producers in conflict, adding to pressure when supply is short with South American, US and Canada in drought and Australia in flood. This means the price of Chicken (poultry) is going to rise again, as Wheat is the biggest price of producing a chicken. So consider looking at ASX stocks like GNC, ING,
- Iron ore (SCOH2, SCOH3) continued to rally up, rising 2.6% on Monday to $136.75, with BHP (BHP) shares up 3.5%, Rio (RIO) up 2.7% Fortescue Metals (FMG) trading 2% down while and Champion Iron (CIA) is up 3.1%. These businesses make most of their revenue from iron ore and we see the iron ore price rallying over the long term, supported by China’s expected pick up in iron ore purchases after cutting interest rates and reduced its emissions targets. From a technical perspective, the iron ore price could rally back up toward $155.25. Should iron ore fall under $132, a larger correction could be expected. However for now, the iron ore uptrend looks intact.
- In Equities - Expect future downside in US equities; The S&P 500 has historically fallen 5% from geopolitical warfare type events. US equities are now down 3.5% since tensioned worsened. But there is so much uncertainty in the air. This time is different; inflation in at multi decade highs, and set to get worse, while markets are ignoring this at times and turning a blind eye and are forgetting that we are about to enter an increase rate hike cycle for the first time in 13 years, which will put equities into a new era. So we expect tech to continue to lose its shine and for Commodities to be king. The rotation out of tech and into commodities has been happening since November.
- In Australia, its stock market is supported by commodities charging up. This week all eyes are the RBA’s monthly meeting on interest rates Tuesday March 1, and quarterly economic growth data released Wednesday March 2, with growth expected to show the Australian economy grew at 3.4% YOY last quarter. On Thursday March 3, the balance of trade is released for January, expected to show Australia’s trade surplus fell after iron ore’s price fell.
- What to consider in Asia? In Hong Kong & China: Consider China’s imports of energy and minerals from the Russia will be affected by sanctions Also consider, China’s relationship with the U.S and that further rises in energy and commodities prices will become additional headwinds for the Chinese economy. Tomorrow, March 1, China releases February PMIs and Caixin China Manufacturing PMI. Expect further declines in Manufacturing PMI to fall to 49.8 (from 50.1), Non-manufacturing PMIs to fall to 50.7 (from 51.1) and Caxin China Manufacturing PMI to fall to 49.0 (from 49.1). In Singapore, note that January industrial production grew at a much weaker rate of +2% YoY (vs +16.7% in Dec). A sharp decline in the volatile pharmaceuticals output accounted for much of the downside surprise
- Equites: We reiterate we have a defensive stance on equities. We see continued upside in energy, mining and commodity stocks.
- Also consider look at actual defense companies Keep in mind European countries defense expenditure has declined over the past three decades. Excluding The UK, France and Poland, major European countries spend less than 2%of their GDP on defense (which is the NATO guidance level). However, in the wake of the Ukraine situation, countries may increase their defense budgets, taking this escalating as a wake up call. Saxo monitors a basket of listed companies in the defense industry, that could benefit from shift, Click here
- Hedging: We are also seeing clients protect their portfolios from potential further pull backs by shorting markets (depending on what country they are in), click here for ideas.
Upcoming company earnings calendar
- Hong Kong & China A Shares:
- Feb 28: Xinyi Energy (03868), Xinyi Solar (00968), Xinyi Glass (00868). Mar 1: United Energy (00467), Zai Lab (0968).
- Mar 2: Angelalign Technology (06699), China Evergrande (03333), GCL-Polu (03800), JD Logistics (02618), Smoore (06969).
- Mar 3: Wharf Real Estate Investment (01997), Weibo (09898)
- Feb 28: Jardine C&C (C07), Olam (O32), UOL (U14).
- Mar 2: Netlink NBN (CJLU).
- Mar 3: Jardine Matheson (J36), Hongkongland (H78), Yangzijiang Shipbuilding (BS6).
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