RBA’s first rate hike in a decade. Fed’s biggest hike is next. Biden offers $3b grants for EV metals
APAC Strategy Team
Summary: Australia’s central bank rises rates for the first time in decade, hiking rates more than expected spooking growth investors, while FX investors rejoice after the Australian dollar (AUDUSD) rallies off its low. Australia’s banks are due to report results this week, expected to report lackluster results after lending has dropped. The world’s largest EV battery maker, CATL reported impressive 154% growth in revenue. The US announces $3.2 billion in grants for key battery metal producers in lithium, cobalt and nickel to shore up US battery supply. Here is what to consider.
US major indices rallied on Tuesday despite US 10 bond yields hitting 3% for the first time since 2018; The Nasdaq 100 (USNAS100.I) rose 1.6% and S&P 500 (US500.I) gained 0.6% ahead of the Fed rising rates on Wednesday, with the market pricing in rate hike of 0.5% (its biggest hike since 2000). Expedia (EPE) reported better than expected results after the market closed and its shares rose 3.6% after hours. The online travel agency reported revenue rose 80% y/y to $2.25b with its Trivago business revenue far beating expectations, while air revenue missed. It also guided for a stronger recovery in the US summer.
“Compulsory measures” against a person named “Ma” sent tech stocks down briefly this morning. Hang Seng Index (HSI.I) gained modestly after initial selling at the open. Hang Seng TECH Index (HSTECH.I) was down about 1%. Earlier in the morning, shares of Chinese internet companies, in particular Alibaba (09988) were sold following a news report saying an individual with the last name “Ma”, which is the same as Alibaba’s Jack Ma’, had been put under “compulsory measures” in Hangzhou, the city in which Alibaba is based. Alibaba’s shares fell as much as 9% before it rebounded on clarification from the Hangzhou police that the individual’s name differed from that of Jack Ma.
The Australian share market (as measured by ASX200) fell into the red, after the RBA rose interest rates far more than expected today. The Reserve Bank of Australia (RBA) rose rates for the first time since November 2010, after receiving the hottest inflation read in 20 years, while forecasting inflation will surge to a peak of 6% in 2022. The RBA rose rates by 0.25% to 0.35% (vs a 0.15% hike expected). Market expectations now suggest the RBA will rise rates another 8 times after today’s move, which could take rates to 2.8% by the year end. But we think rates will rise further than that, given what happened today, plus many companies are forecasting inflation and supply shocks will linger this year. Stocks that traditionally suffer from higher rates, like property were sold down today. While the down beaten Tech sector remained surprising elevated up 1.1% boosted by Wall Street sentiment. Appen (APX) the co-creator of Siri rose 6.6% (but Appen is still down 85% from its 2020 high). Block (SQ2) is up 5.6%, hitting a month high. EML Payments (EML) rose off its two-year low.
What to consider?
We could see a very short term rally in beaten down stocks; With financial conditions tightening ahead of the Fed’s interest rate decision on Wednesday, The Fed could be more dovish. Since the Fed’s last meeting; the 10 year yield topped 3% for the first time since 2018 (today), the US dollar rallied 5%, The S&P500 has fallen 8.74%, and hedge fund exposures fell to a 1.5 year low. So the Fed may be a little more dovish than expected, and we could see a very short term rally in tech and cyclical stocks that have been hit the hardest. Keep in mind though, the longer term picture is still very bearish, medium and longer-term, as the Fed is taking out $1 trillion a year out of the system and the economy is expected to slow.
Longer-term investors will need to revisit their investment strategy; in this new sink or swim phase of tight money. As mentioned yesterday an entire generation of investors will have to adjust their investment strategy, and look at stocks that are likely to thrive in a wave of tightening monetary conditions. So consider looking at commodity kingpins, companies with strong balance sheets (that can survive record inflation (oil and wages)) and those companies that have guided for stronger outlooks and are beating expectations.
China’s CATL (300750) net profits fell 24% YoY on a 12pp gross margin compression. The world’s largest EV battery maker, China’s CATL reported impressive 154% growth in revenues YoY but a worse than expected fall in net profits. The battery maker was unable to pass on the sharp increases in materials to EV automakers. The company’s gross margin in Q1 fell 12.9 percentage points YoY or 10.2 percentage points QoQ. According to analyst estimates, the company’s domestic market share has shrunk to 47% in March 2022.
Investors of Chinese internet stocks are put on a red light green light game. The press release statement from China’s Politburo generated much excitement among investors and analysts about ending of crackdown on Chinese internet companies and stepping up of fiscal and monetary stimulus. Much of the hype, however, is prone to fade. For details, please refer to our latest China Updates.
Earnings results to watch next?
US earnings results to watch:
- In the Travel/Tourism/Reopening theme Ceasers (CZR) (May 4th)
- Car makers: VW (VOW) reports May 4th
Australian company earnings results to watch:
- Logistics: Amcor (AMCR, AMC) reports on May 4
- Banking: ANZ (ANZ) reports on May 4, NAB (NAB) on May 5th Virgin Money (VUK) May 5th, Macquarie (MQG) on May 6, Westpac (WBC)
- Bitcoin/Payment tech: Block (SQ) reports on May 6th
For a global look at markets – tune into our Podcast.
Quarterly Outlook Q2 2022
Quarterly Outlook Q2 2022: The End Game has arrived
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The great EUR recovery and the difficulty of trading itIf the terrible fog of war hopefully lifts soon, the conditions are promising for the euro to reprice significantly higher.
Tight commodity markets – turbocharged by war and sanctionsWith supply already tight, commodities keep powering on. But will it last for yet another quarter?
Between a rock and a hard placeGeopolitical concerns will add upward price pressures and fears of slower growth, while volatility will remain elevated.
The Great ErosionInflation is everywhere and central banks try to combat it. But will they get it under control in time?
Australian investing: Six considerations amid triple Rs: rising rates, record inflation and likely recessionWhile global financial markets are struggling in an uncertain world, the commodity-heavy Australian ASX index is poised to keep a positive momentum.
Cybersecurity – the rush to catch up with realityWith the invasion of Ukraine, governments and private companies are rushing to reinforce their cyber defenses.