Quarterly Outlook
Macro Outlook: The US rate cut cycle has begun
Peter Garnry
Chief Investment Strategist
Summary: Another coordinated selloff in US equities and bonds overnight after ECB clears the air about near-term rate hike path but retaining uncertainties for a post-summer outlook. Also, risk of a US CPI coming in above expectations is hurting market sentiment and China lockdown and regulation concerns are back on the radar.
Some shivers seen from the ECB's hawkish message and that saw equities and bonds plunge across the board. US equities had the worst day since mid-May. China lockdown concerns are also back on the horizon, as we had thought, and the optimism on Chinese tech is unlikely to last as well with the flipflop in policy. US CPI on watch and risk of a further hawkish surprise is significant. Both Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) lost over 2%. Asian equities also started the day in red. Treasury yields were slightly firmer although the longer end yields were lower after a strong US 30yr auction.
Both were down about 1% following global equity market sell-offs overnight, reintroduction of temporary lockdown to do PCR testings in some districts in Shanghai, and the CSRC saying that the regulator has not been evaluating or reviewing any IPO application from Ant Financials. Late afternoon yesterday, a Bloomberg report suggested that Ant Financials was closed to getting approval from the Chinese regulator to list in overseas exchanges. Alibaba (09988/BABA) was down as much as 3.9% at the open but recovered to only 0.6% lower as of writing. Bilibili (09626/BILI) reported weaker-than-expected results and was down almost 10%. NIO (09866/NIO), also having reported weaker-than-expected results, fell as much as 8% in early trading and rebounded to only 2.6% lower. In A shares, CSI300 (00300.I) was little changed.
The USD strengthened due to the downbeat risk tone and losses in its major counterparts including the EUR. EURUSD was bid up initially to 1.0774as Eurozone yields rose following the ECB setting out a rate hike path, but the lack of a fragmentation deal indicated that the potential for ECB tightening may remain limited and EURUSD plunged below 1.0700 subsequently. EURGBP also traded down to 0.8500, despite GBPUSD pushed below 1.2500 with the UK looking to move forward on cutting taxes. USDJPY was slightly firmer above 134 with the US CPI ahead.
Crude oil was softer, remaining stuck around 120 as fresh lockdown fears from China sent demand shocks again. Still, with prices rallying over the last two months, Brent was on track for a fourth consecutive weekly gain and WTI was set for a seventh straight weekly increase as tight supply concerns persist. Meanwhile, peak summer gasoline demand in the US continues to boost crude prices.
Central banks are likely to continue to get inflation forecasts wrong and that will cause further shocks to market. Forward indicators are telling us inflation will continue to get painfully worse, higher for longer. The RBA for example only has one tool to slow inflation, rising rates. We think as a central bank raises rates, interest costs rise, and debt the public owes swells, which will cause calamity and financial strain. To put it into context. if the average mortgage is AUD$700,000 and rates rise from 0.8% to 3% it will cost extra $800 per month. This is why we’ve been bearish on banks and continue to be bearish, expecting another very sharp pull back as foreclosures are likely to rise, bad debts and delinquency rates will soar, hurting the economy, and banks (one of the largest components of the ASX). The warning signs have been here for months, lending has been slowing for some time, and will continue to slow, as Aussies are hurt by higher grocery and petrol bills (30-year high inflation - which will get worse). As such we think there could be a potential 30% pull back from here and the technical indicators are also warning of a sharp pull back.
In yesterday's ECB monetary policy press conference, there was some level of certainty for the near-term rate hike path with a 25bps rate hike cemented for July. Th September move still remains a call between 25 or 50bps, and will depend on if inflation outlook persists or deteriorates. The ECB also upgraded its Eurozone inflation forecast to 6.8% from 5.1% for 2022, 3.5% from 2.1% for 2023 and 2.1% from 1.9% for 2024. All remaining above 2% ECB inflation medium-term target, and the 2023 cooling remaining a tad too optimistic. The lack of a fragmentation tool, which is needed to protect the Italy-Germany bond spread was key, and may continue to cap the pace of ECB tightening in the months to come.
Japan’s May PPI rose 9.1% y/y but remained flat on a m/m basis. The y/y number was also slower than last month’s 9.8%. Increased fuel subsidies, along with other support measures, may have helped put a cap on rising price pressures. Still, the yen continues to weaken and likely to bring more inflationary pressures. The Bank of Japan will have enough room to stay dovish nonetheless.
BILI reported in-line Q1 revenues but worse than expected operating margin of negative -33.9% (vs -29.3% in Q4, 21; -20.9% in Q1, 21) and net margins of negative -32.7% (vs. -28.6% in Q4, 21; -22.8% in Q1, 21). Net loss for the quarter widened to CNY1.65 billion (vs. consensus RMB1.57bn), a 86% deterioration from Q1 last year.
NIO reported in-line revenues but worse-than-expected net loss of RMB1.3bn due to mainly higher batter costs. The Company’s gross margin was down 2.8pp from last quarter to 18.1%. The delivery of 25,768 units of vehicles in Q1 or growth of 28% YoY was lower than the +150%plus growth rates at rivals LiAuto and XPEN. Management’s Q2 revenue guidance of RMB9.3 bn to 10bn was below market expectations.
Over the last two weeks, across APAC when it comes to Stocks (shares and CFDs) clients are increasingly selling or shorting. We have observed Saxo clients changing their stance over the last couple of months. Large caps like Tesla (TSLA), Microsoft (MSFT), as an example, both are increasingly being sold, or potentially shorted by clients, compared to prior months ago when larger positions were longs. As for what APAC Client are trading in FX: the most transacted pair is the USDJPY and a slight larger majority are selling/shorting it. For Indices, APAC clients are seen increasingly selling/shorting the Nasdaq, the S&P500, Japan 225 and the Hong Kong Index. Moving to commodity and financial heavy Australia; two of the most transacted upon Stocks (shares and CFDs) are in lithium; Pilbara Minerals (PLS) and Core Lithium (CXO) are mostly sold/shorted. The next stock on the list is the biggest bank in Australia, Commonwealth Bank (CBA) with a lot of the clients are also taking a bearish view on as well, which reflects Saxo’s bearish view on Banks. CBA is increasingly being sold/shorted. In the positive corner, in Australia the most bought Stock (share and CFD) is Woodside Petroleum (WDS), Australia’s biggest oil company, the 10th biggest in the world after buying majority of BHP’s (BHP) oil assets.
US CPI is scheduled for release today ahead of the FOMC meeting next week. Consensus expectations are flat at 8.3% y/y with core at 0.5% vs. 0.6% last month and this will be key to watch. Even a slight upside surprise can further increase the chance of a third 50bps rate hike by the Fed in September. USDJPY and EURUSD are likely to react, with USDJPY on course to test resistance at 135.70.
Remain defensive consider being in commodities to offset the hole food and oil inflation is burning into your pockets. Bloomberg’s Commodity Index for example, continues hit another record high, tracking the most traded commodities. Food protectionism is continuing to be an issue as we’ve mentioned, and this will push up food price inflation at time when demand is outpacing supply. So, consider looking at Food sectors, stocks and ETFs, and Agricultural and Fertilizer stocks.
The largest contributor to inflation (measured by CPI) is Oil. Crude oil (OILUKAUG22 & OILUSJUL22) is at a 3-month high despite falling almost 1% to $120.43. As guided previously, oil will set higher levels; we also mentioned this yesterday. China’s oil demand will rise, and US and Europe Summer travel is going ramp up on roads and with air travel, while gas inventories are at their lowest levels since 2014, and we see supply constraints lingering on. So we think clients should consider being overweight to the energy sector, with oil and gas companies as well likely to guide for higher 2022 earnings.
For a weekly look at what’s on the radar for investors, and traders this week - read, watch or listen to our Monday Saxo Spotlight.
For a global look at markets – tune into our Podcast.