What’s happening in markets?
U.S. equities rallied strongly
The jump in new home sales to 696K in June and a upward revision to 629K in May from 591K previous reported dampened some of the hype of recession fear somewhat. At the same time, the downward revision of the long-term inflation expectation in the University of Michigan consumer survey to 3.1% from 3.3% provided a modest relief to worries about inflation. These, together with quarter-end rebalancing trades from pension funds and short covering from traders, took the S&P 500 to close the holiday shortened week 6.5% higher.
APAC stocks buoyed by China and Wall Street gains
Following a strong week on the Wall Street, APAC equities kicked off the new week with strong gains even as US equity futures were slightly lower. Sentiment was also boosted by Shanghai reopening which boosted the beaten-down Copper and Iron Ore stocks, as well as gains in tech. Market gains were led by Australia’s ASX…
Japan’s Nikkei (NI225.I) was also up by 1% led by energy sector as shares of Japanese electricity companies rose with spot power prices jumping higher due to electricity shortage concerns. Tight supply continues to risk blackouts in Japan, and the restart of coal-fired plants or a switch to nuclear may be the only alternatives as global supply lags. Tokyo Electric Power (9501) rose over 6%, while Chubu Electric (9502) was up over 3% as profits for electricity companies is set to soar with spot prices doubling from a week ago. Singapore’s STI (ES3) also rose 0.5% with EV-maker NIO at fresh highs.
Australia’s ASX200 is up 1.7% on Monday, kicking off the last trading week for the financial year on a high note
The stocks seeing the most buying are stocks that have been sold down the most of late, as fund managers bring their asset allocations into alignment before end of financial year, June 30. So lithium stocks are rising the most as a collective; with Core Lithium (CXO) up 13%, Liontown Resources (LTR) and Lake Resources (LKE) up 9% teach. Meanwhile, gold stocks succumb to profit taking and selling. Evolution Mining (EVN) shares are down the most, 21% today after the copper-gold giant advised 2022 revenue will higher but its output will be lower, as covid has affected its workforce with 30% of staff absent for at least a week since early March. Other gold stocks are following EVN lower with Northern Star (NST) down 11%, with other gold stocks like Ramelius Resources (RMS) and Gold Road (GOR) and Newcrest Mining (NCM) down 7-5%.
Chinese stocks continued to charge higher
Investors have been bringing up Chinese equity exposures to rebalance their portfolios towards quarter-end, given still light positioning and the desire to catch up with Chinese stocks’ impressive outperformance since mid-March. Hang Seng Index (HSI.I) rose 3.2% and Hang Seng TECH Index surged 5.6%. Technology led the charge higher. Xiaomi (01810) jumped more than 12%. Alibaba Health (00241) and JD Health (06618) climbed over 9%. Sunny Optical (02382) was 10% higher. Consumption stocks, such as home appliance retailers, sportwear and catering also registered impressive gains in share prices. In A shares, tourism, airlines, auto and other consumption stocks outperformed. CSI300 (000300.I) climbed 1.3%.
USDJPY slide looks shaky
The Japanese yen has been stable especially in light of the underlying spread move in US-Japan and EU-Japan yield spreads. Even the reaction to comments from the ex-official responsible for intervention hinting at a possibility of a unilateral intervention saw a muted response. But the risk of sharp reversal is still there and we would continue to caution clients about the potential volatility in USDJPY and the yen crosses. EURJPY was rejected at 143 but potential to test that again remains with EZ inflation print due this week which may embolden calls for a jumbo rate hike by the ECB.
What to consider?
University of Michigan inflation expectations revised lower, Fed hawkishness getting louder
University of Michigan 5-year inflation expectations were revised down to 3.1% from prelim reading of 3.3%. At the June Fed meeting, Fed Chair Powell cited the jump in inflation expectations as a big reason why the FOMC shifted to 75bps from 50 bps. Now with the measure revised back to where it was for most of the past year, odds of a 50bps rate hike at the July meeting have picked up. Nonetheless, Fed talk is setting the bar higher on hawkishness, and we may see more on that in the week ahead. Fed's Bullard on Friday reaffirmed his call for front-loaded hikes to 3.5% Fed Funds by year-end and said the US economy was strong.
Japan likely to issue power crunch advisory
After Australia, now Japan is facing a power shortage. The trade ministry will issue an advisory if reserves are expected to fall below 5%, and risk of blackouts remains. The country’s power supplies have been stretched thin since last week’s strong earthquake. Power reserve are also limited due to as older oil-powered plants have been retired and most nuclear reactors remain shut after Fukushima. This raises the possibility of switching back to traditional energy sources such as coal, as Australia is doing, but also a greater shift to nuclear sources.
Australian inflation to worsen and spook markets
Inflation is the key item the RBA wants to tackle and the central bank only has one tool to fight it - rate hikes. However today, the Federal Treasurer conceded Australian inflation will worsen over the coming months before only improving in 2023. Jim Chalmers said the RBA’s forecast of 7% YOY inflation is too low and ‘widely off the mark’. This is something we at Saxo, have been saying for some time, that the inflation expectations are too low, and as such when inflation numbers do get released, that the market will be shocked and face selling pressure. For more clues for what to watch see our rate hike checklist.
China’s fall in industrial profits narrowed in May
China’s industrial profits fell 6.5% YoY in May, moderated from the -8.5% YoY decline in April. The mining sector continued to lead in profits, growing 92% YoY. Coal mining and oil and gas exploration’s profits were more than doubled from last year. The manufacturing sector’s profit dropped 18.5% YoY in May, having narrowed by 3.9 percentage points from April. Among the 13 basic consumption industries, eight registered growth in profits, with alcohol and food processing leading the charge.
Potential trading and investing ideas to consider?
The commodity bull run may not be overCommodity sector was spooked by demand destruction fears last week, and we saw a broad-based selloff in energy, metals and agriculture. However, the oil market is still very tight with supply constrained due to the war and recent shift to ESG and demand collapse for now is just anticipated. A modest recession wouldn't cut the demand as heavily to bring the market back in balance. So we believe medium-term price pressures could return.
Gold (XAUUSD) may be key this week
After being range bound for a long time, we may finally see Gold breaking out of its recent range. Demand destruction fears are set to face a further uptick in the week ahead as US eco data continues to raise recession fears. US yields will find it tougher to run much higher even as Fed’s hawkishness continues, given that markets are now focusing on a recession next year and Fed’s subsequent easing. In addition, four of the G7 countries are banning imports of Russian gold which will provide further impetus to the yellow metal. China’s reopening also brings a potential bid, and we still see the potential for gold hitting a fresh record high during the second half of 2022 as growth slows and inflation continues to remain elevated.
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