Gas, coal, agricultural prices rise up, pushing ESG focus down & making central banks fight harder ahead. Markets on tender hooks ahead of CPI & Twitter v Musk
APAC Strategy Team
Summary: The ESG push seems to have vanished in 2022 with the world’s focus increasingly shifting to critical energy. Gas and coal prices push to fresh highs, while weaker US crop conditions mean food inflation will pick up again. So don’t get comfy. Regardless of what US CPI shows for June on Wednesday, the proof is in the pudding, costs for July are on a tear, meaning central banks will have to get a lot tougher at keeping inflation under control. But can they? Meanwhile, APAC markets trade lower, but Australia’s ASX trades higher lifted by coal stocks creeping back to record highs.
What's happening in markets?
Overnight markets see red ahead of US inflation data
In the US, S&P500 fell 1.1%, Nasdaq lost 2.2%. In Europe, markets were quiet as many are on holiday there, but Euro Stoxx 50 fell about 1%. The biggest stock that fell last night was Twitter (TWTR) tumbling 11.3% after Elon Musk plans to terminate the $44 billion takeover. While Tesla (TSLA) shares fell almost 7% as the Twitter Chairman plans to sue Musk. Meaning, Musk might be forced to pay $54.20 a share to Twitter or Musk could return to taking over the company at a smaller value. But best case for Elon Musk might be walking away with a $1 billion breakup fee. This is new uncertainty for these stocks might continue until the case is resolved in court for those two entities. However, on the positive side for Tesla, it may be moving into selling used EVs which could be a new lucrative revenue line item for the business.
APAC markets trade in the red, except for Australia pushing up, buoyed by coal
Australia’s ASX200 trades higher, up 0.2%, for the first day this week, buoyed by corporate news and the Newcastle coal price hitting fresh highs as it attempts to hit its record high again. One of the best performers today was Zip (ZIP) trading 6% up, after scrapping its merger with Sezzle (SZL). Meanwhile, two other best performers were coal giants; New Hope (NHC) and Whitehaven (WHC) up 4-6% with coal demand to pick up amid tight supply and likely boost their earnings. A few dime a dozen stocks are also driving the market higher after upgrading earnings estimates; Australia’s biggest car dealer Eagers (APE) trades up 2.1% after upgrading its first half profit levels. Viva Energy (VEA) also trades up over 2% after upgrading its underlying earnings, with expected EBITDA to rise 140% from the first half, to the second half. On the downside, tech stocks are falling again and are now collectively down 41% from their peak and likely to come under pressure.
In spite of strong credit data, equities decline in Hong Kong and mainland China on Covid-19 concerns
Hang Seng Index (HSI.I), Hang Seng TECH Index (HSTECH.I) and CSI300 (000300.I) continued to consolidate this morning, being lower 0.9%, 1.6% and 0.2% respectively as of writing. In spite of stronger-than-expected aggregate financing and new loan data released yesterday after market close, investors’ primary concerns are the renewed worries about potential disruptions to economic activities due to rise in Covid-19 cases and looming recession risks in the U.S. and Europe. For Monday July 11, mainland China reported 347 new locally transmitted cases, including 59 cases in Shanghai. Shanghai is doing mass PCR testing today and again on Thursday in nine out of 16 districts. PCR mass testing and VAT rebates have been putting a lot of pressures on local governments’ budgets and limiting their capacities to stimulate the economy
Food prices and food inflation to pick up again. While USDJPY hits 24-year high
US crop conditions point to a heat wave in the crop's (corn and soybeans) key development periods. Indeed markets are reacting; Corn Price futures are now up 6.6% in the Asian session following’s yesterday’s strong move. Higher inflationary pressure mean the US will have more ammo to hike rates. This support US yields rising and thus markets are pre-empting this to continue. And as the US and Japan have two of the most divergent policies, the USDJPY soared to 24yr high (137.29). The next level to watch is the record of 147.65
What to consider?
Why to expect further selling in consumer discretionary sectors, despite sales like Amazon Prime day
Consumer confidence in the US, and Australia are continuing to slide. In Australia the consumer confidence index is released tomorrow for July. It’s probably going to be the worst read in two years. It will give an indication of why we’re likely to see further selling in consumer spending stocks. Another indicator to watch is Amazon Prime Day, held today. As we wrote yesterday, it’s Amazon’s biggest sales event. This year, we will probably no see sales records set. Unlike their previous records. Instead, what will likely be revealed is regardless of goods discount, consumers are doing it tough. Indicators we’ve gone through previously, point to slowing further spending. Monthly credit card spending is growing at half the pace it was last year, e-commerce spending is only up 1.1% YOY, while consumers are being forced to eat into savings to fund rising living costs. US consumption data showed Fuel/ convenience spending rose 42.1% YOY, Grocery spending rose 14% YOY in June. Meanwhile, data also tells us the consumer is more likely to spend on experiences, (to see loved ones) rather than shop for goods online. This was reveled with Lodging/accommodation spending is up 33.7% YOY in June. We see these move continues to be exaggerated in 2022 as long as we have runaway inflation.
The Australian macroeconomic pulse slows. You can’t ignore the numbers
Australian business confidence data today fell more than expected in June, weighed by global uncertainty. What’s most concerning is that sales, profitability and employment at the business level all declined. Cost price growth hit new survey records, as labour costs grew 3.6% in quarterly terms, while buying cost growth came in at 4.8%. The takeaway? Australian businesses are increasingly wary of how the economy will hold up over the months ahead, all while the RBA is rising rates over the coming months.
Potential trading and investing ideas to consider?
It's timely to remember Saxo’s take on markets right now
With much of Europe still on holiday, liquidity is thinner and so we encourage you to please remember moves in July can be amplified. As we wrote last week, we urge investors to consider long-term fundamentals. Holding US Dollar exposure and cash are a prudent way to save guard against market shocks and falls to the downside. But keep in mind, when holding cash at the bank, or under your mattress, with inflation remaining higher for longer and being on a runaway train, cash values will effectively continue to erode. However, we do see selective quality stocks should perhaps be considered as well, especially in coal and gas as we mentioned in our Q3 outlook, with both of those commodities being supported. And lastly consider, the commodity supply side of the market is still not resolved. We think once demand from China picks up, and the market moves away from speculative trading, the lack of real asset supply will be brought back into focus.
Aussie dollar FX pairs on watch
AUDUSD facing selling pressure.
AUDUSD is down 7% less this year, and facing further pressure with iron ore continuing to fall as China’s lockdowns pick up again. Iron ore is already down 10% this year. While copper prices face further pressures and are down 20% this year. Remember, the USD is likely to rise as the Fed will likely be given more reasons to rise rates 0.75% at their next July meeting. We think the next AUDUSD level to watch is 0.65.
AUDJPY seeing strength at 7-year highs
The AUD vs JPY could be worth watching ahead of Thursday’s employment data in Australia. If stronger than expected, it will give room for the RBA to continue to rise rates over the coming months..
USD/JPY ready for a fresh record high
As mentioned yesterday, the USD/JPY may be returning to being the strongest long USD/JPY trade of 2022. As mentioned in our quarterly, inflation is the Feds greatest threat right now, and we see higher US yields coming. In such an environment, the yen is typically pressured lower and the USD is supported higher. We will be watching if the USD/JPY can break higher and perhaps re-sent a new record
Stocks catching bids/seeing buying pick up are in gas and coal
Euro Gas Stocks - it's worth watching gas stocks exposed to higher prices. As we mentioned yesterday, Gas stocks in Canada are worth watching in particular. Some names might include Suncor (SU) and Cenovus (CVE). Coal stocks - as mentioned heavily lately, we think might likely re-test record highs again. Stocks to watch in Australia include WHC, NHC as examples.
Latest Market Insights
Quarterly Outlook Q3 2022: The Runaway Train
- Central banks' attempts to kill inflation is a paradigm shift, which could end in a deep recession.
Tangible assets and profitable growth are the winnersWith US equities officially in a bear market, the big question is where and when is the bottom in the current drawdown?
Understanding the lack of investment appetite among oil majorsThe everything rally seen in recent quarters has become more uneven, as its strength is driven by commodities in short supply.
The pressure is on as the wind leaves the sailsWith cryptocurrencies in sharp decline, are we entering a crypto winter or is the bear market a healthy clean-up of the crypto space?
Why the Fed can never catch up and what turns the US dollar lower?Many other central banks are set to eventually outpace the Fed in hiking rates, taking their real interest rates to levels higher than the Fed will achieve.
Bank of Japan: Swimming against the tideThe Japanese economy has gone from the age of deflation to rapidly rising prices in no time, leaving the Bank of Japan in a pickle.
Green transformation detour and bear market hibernationWith the impending risk of global econonomic derailment, we share the five things investors need to consider in this new half year.
Crisis redux for the eurozone?Whether there's going to be a recession in Europe or not, the path towards a stable economy will be agonizing.
Technical Outlook: Gold, Oil and a remarkable multi-decade perspective on EquitiesThe Nasdaq bubble pattern, USDJPY resistance, crude oil uptrend losing steam and the technical outlook for USD.
China: the train of new development paradigm left the station two years agoChina is transiting to a new development paradigm, as they are hit by deteriorating terms of trade, a slower global economy and an uncertain future while continuing attempts to contain the pandemic.