Summary: Investors to relearn investing as Fed set to rise rates by the most in a decade, The RBA to make first rate hike since 2000. Why shares in a US flooring giant, Mohawk may look more exciting than Amazon. Qantas to start the world's longest direct flights, while citing domestic capacity is above pre-pandemic highs and international travel to pick up. How to potentially trade ahead of the RBA and Fed meeting, plus why to look at Australia's most profitable companies. And the major US and Australian companies reporting this week.
Written by Jessica Amir
What’s happening in markets that you need to know?
US major indices set to slightly higher on Monday after bleeding red on Friday. Ahead of the Fed hiking rates and aggressively scaling back bond buying this week, stocks continue to get revalued lower. On Friday The Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I)saw their biggest pull back since 2008, falling 3.6% and 4.2% hitting new 2022 lows. However, in after hours trading Apple (AAPL) and Tesla (TSLA) shares saw a small amount of buying/nibbles, suggesting these stocks could rise at Mondays open. Keep in mind though, volatility is ferocious and set to linger until at least after June’s interest rate hike, so we remain cautious, preferring quality names, in themes with high reoccurring revenue, i.e. in Megacaps Apple for example, in cybersecurity, Crowdstrike(with 97% of revenue in subscriptions) for example.
Amazon’s (AMZN) results, far less than amazing and guided for weaker quarter; Amazon swung to a net loss in year; guides for another loss, sees higher costs from wages, smaller sales and books a loss after investing in Rivian. Amazon shares plunged 14% on Friday, its biggest drop since 2006, taking the stock 33% off its November high. Amazon, arguably a proxy for the tech sector, is the world’s 4th biggest company. Investment analysts expected far more from Q1 results, and got far less. How could investment analysts forget Amazon is the second biggest employer in the US and wages rose? It hired 780,000 people in the last two years, taking its employee count to 1.62 million. Amazon rose wages, paid out bonuses and this pushed costs to $113 billion. Meanwhile, sales growth is slowing. Sales rose at its slowest pace since 2001, rising 7.3% last quarter to $116.4 billion. Its the first time, back-to-back quarterly sales were recorded of less than 10% revenue growth. Q2 is also predicted to miss expectations and be as much as $121 billion. Amazon declared its first net loss, in seven years, (a $3.8 billion loss, vs $8.1 billion profit same time last year). Not only are higher costs, and less sales hurting, but Amazon declared a $7.6 billion loss from investing in Rivian Automotive. Amazon trades at 70.8 times earnings; 57 sell side analysts rate Amazon as a buy, one analysts has it as a sell, one has it as a hold. For a technical analysis update click here.
Flooring company, Mohawk (MHK) surged up 7.8%, becoming Friday’s best US performing stock in the S&P500, on delivering better than expected quarterly earnings, and a Q2 outlook. Mohawk boosted clay inventory (used for ceramic tiles) ahead of Ukraine’s clay supply being cut off. So this supported Mohawk’s stronger results and outlook. Net sales rose 13% y/y to $3.03 billion (vs $2.86b expected), boosted by home renovation demand with employment being elevated. 10 sell side analysts have Mohawk as BUY, 4 have buys, 3 have sells.
The Australian share market’s ASX200 erases Friday’s gain, trading 1.5% lower on Monday after Australian bond yields hit their highest levels since 2014. As bond yields spiked Australian tech stocks continued to revalue lower, ahead of the RBA making its first rate hike tomorrow. The Tech sector fell 3.8% today, while the Real estate sector is down 3%, with tech down 35% from August last year, and property stocks down 12% from January this year, with rate hikes to arguably hurt these sectors the most. On the flip side; amid Australian reporting season, a handful of stocks reporting better than expected news are outperforming the market.
In the reopening theme, Australia’s biggest airline Qantas (QAN) revives plans to start world’s long direct flights. Qantas wants to connect Sydney to London, and Sydney to New York, nonstop from 2025. As part of the plan Qantas will buy 12 A350—1000s. A350s can carry 238 passengers, A350s 300 passengers. Economy seats will have two more inches of leg room and first class will have a seat, a bed and door. The planes will also have a well-being area for stretching and there may be a gym and bunks. In the current quarter, Qantas domestic capacity is at 105% of 2019 levels, and international capacity is at 50% and is expected to rise to 70% in the quarter starting July. Qantas (QAN) soared 3.1%, to a 5- month high on the news and the technical indicators suggest Qantas shares are likely to head higher over the long-term amid international reopening. However, if you are a trader, keep in mind, the RSI suggests Qantas (QAN) could see some profit taking.
What to consider?
US rates could rise more than expected on Wednesday, seeing tech stocks sell off. A new cycle is being ushered in; The US Fed is expected to rise rates by 0.5% to 1%, making it the first 0.5% hike since 2000. It will be another reality check if rates rise by 0.75% (based on what a Fed speakers previously hinted). If that happens, tech stocks will likely be sold down, and there will likely be further broad based selling in equites. On the positive, banks and financial stocks could likely rise. Separately, the US dollar, is expected to be heavily bought, continuing its uptrend. A higher dollar will also put pressure on commodity prices, given they are mostly all priced in US dollars. So brace for volatility. Either way, an entire generation of tech entrepreneurs, and tech investors who built their businesses and investment philosophies on tech, and low interest rates will have to re-learn a thing or two. The Fed will not only be rising rates but will further reduce its balance sheet, taking out $95 billion a month of the economy. Taking liquidity out of the market, will see bond yields rise, and broad tech stocks will likely continue to lose further value as their operating expense rise.
Australia’s official intertest rates to rise on Tuesday in Australia. The Reserve Bank of Australia (RBA) is expected to rise rates for the first since 2020, given inflation surged to a 20 year high and inflation is likely to get worse. Rates expected are rise from by 0.15% to 0.25% followed by a suite of interest rate hikes. If rates hike more than expected, expect Australian tech stocks and property stocks to see further selling, and expect banking stocks to rise.
Possible trading ideas?
Iron ore volatility continues, but long term investors look to take advantage. Last week, iron ore fell 8.5% then rebounded 5.4% to where its trading today $144.95. Iron ore buying is expected to ramp up not only because of Chinese President Xi’s calls for ‘all-out efforts’ to boost infrastructure construction like it did in 20074-2008, but also as US President Biden’s $1.2 trillion infrastructure bill will be put to work. So this supports recoveries in BHP (BHP), Fortescue (FMG) and Rio (RIO) still trading lower than two week highs. These three stocks offer the highest dividend yields in the market, and are far above the average 2.8% yield. BHP (BHP) has a yield of 10%, Rio Tinto (RIO) 9.6%, Fortescue (FMG) 13.7%. BHP’s trades on 10.68 times earnings, Rio 6.09 times earnings and Fortescue (FMG) 5.2 times earnings and they all have free-cash flows, unlike most growth and tech stocks.
With volatility expected to continue; with Fed meeting this week, the RBA, and volatility to linger until at least June's FOMC meeting, you could consider going long the USD and long volatility. As previously mentioned, the dollar rises in times of uncertainty, while it’s also likely to move higher as the US dollar traditionally rises after the Fed hikes rates.
Earnings results to watch?
US earnings results to watch:
Australian company earnings results to watch:
For a global look at markets – tune into our Podcast.
2024: The wasted year
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Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
