Markets Markets Markets

What does rising hawkishness from global central banks bring? Fears of economic slowdown, haircut in commodities and a rush to safe havens

Equities 7 minutes to read
APAC Strategy Team

Summary:  With an uptick in the hawkish rhetoric from global central banks last week (barring the ever-dovish Bank of Japan), we have seen stagflation concerns taking centerstage as we enter a new week. This means commodities, especially industrial metals, could take a further dip but remember that supply tightness needs to be considered. Crypto rout has also extended further with Bitcoin now below key levels, signaling broader panic in financial markets is still building as liquidity taps close out.


What’s happening in markets?

Big picture

The global economy is on a runaway train; with growth likely to slow, and the biggest consumer of commodities, China, not likely to come out of lockdown till next year. This is at a time when the US, UK, Australia are raising rates and the ECB, is next. So far this year, Commodities are the strongest performers in Saxo’s equity theme baskets, but commodities are taking a haircut.

The US benchmark – S&P500 is in a downtrend

The S&P has already fallen 23%, but it looks like there is room to fall again still, with next support at 3,500. The next question is when do we think we will see the bottom, well not yet. We have to get through Q2 earnings season and see what companies guide for the year ahead. We will need to see corporate profit growth and upgrades to earnings, and consumer confidence levels pick up before we start to see markets move higher. And we think we are long way off those collective measures being in unison before we see the market move up. 

Equities may pop before another move lower

While the general downbeat mood from the slip in Wall Street last week and the double whammy of central bank tightening as well as recession fears has seen Asia Pacific equities start the week on a backfoot. Nikkei (N225.I) is down 1.5% as the yen continued to slide after the Bank of Japan’s divergence to global tightening continued last week. Australia’s ASX200 is in a downtrend, it’s already fallen 14% from its high, and the market is showing support for the 6,000 level. Meanwhile, Singapore’s STI (ES3) is down 0.3% with May CPI on the wires this week which will show a further uptick in inflation pressures and that would mean that Monetary Authority of Singapore needs to tighten policy further.

Hang Seng Index (HSI.I) and CSI300 (000300.I) were fluctuating between gains and losses

Chinese property names surged with COLI (00688) and CR Land (01109) rising more than 7%.  With COVID outbreak, Macao gaming stocks fell. China’s 1-year and 5-year Loan Prime Rate remain unchanged. 

Yen stays under pressure after dovish BOJ

USDJPY reprinted a 24-year high of 135.44 this morning after Bank of Japan refused to cave in to global tightening pressures on Friday. This means that the divergence between global yields and Japan’s capped low yields will continue to weigh on the yen. We believe BOJ’s resolve will be tested again by the markets especially as we approach the July FOMC meeting and if the expectations of a 75bps Fed rate hike start to build again. This means yen pressure is likely to stay unless we see real policy action from BOJ.

Crude oil had a tough week on demand destruction concerns

Crude oil prices (OILUKAUG22 & OILUSJUL22) tumbled with WTI crude down over 9% last week on global recession fears as tightening pressures have picked up lately. On top of that the short-term technical outlook has weakened following several failed attempts to break higher. However, the tight supply outlook is a big factor to consider, also highlighted by the IEA last week. Along with this, we are seeing a continued surge in the margins refineries earn from their production of fuels, especially diesel – the fuel that keeps the world and economies on the move.

 

What to consider?

The tug of war between inflation and recession means room for policy error

With the central banks bucking up on the tightening bandwagon last week, we are seeing a more serious fight against inflation which is set to rise further above 9% levels in the UK this week and remains in the 8% range for the US. However, this historic tightening pace following the Fed’s 75bps rate hike last week has meant further fears of an economic slowdown. A slew of weak US data reported last week also aggravated those concerns. Markets will continue to be choppy as investors weigh inflation/recession concerns but the long term bear trend is here to stay. The abrupt policy turn also means an increasing scope of policy error.

Pivot from industrial metals to gold to continue

As mentioned in our Saxo Spotlight, we’ve seen global growth already starting to fatigue and gold buying has been increasing being picking up. Our Head of Commodity Strategy says we see potential in gold hitting a fresh record in the second half.


Crypto rout extends with Bitcoin down

Bitcoin, the largest and one of the more stable crypto assets, plunged below the critical 20k level over the weekend after it slid 15% on Saturday. This signals not just further stress in the crypto space but also broader stress in financial markets as liquidity conditions tighten.

Australia in Energy Crisis; and coal, oil, gas companies’ profits are being questioned

As mentioned in our Saxo Spotlight, wholesale electricity is being removed from the grid, and this is hurting coal stocks like New Hope Coal (NHC) that was added the ASX200 today, just as an example. Given households are left limiting power, coal and gas companies are left with profits being squeezed.

 

Potential trading and investing ideas to consider?

Dollar cost averaging for a long term investor

Markets are tricky and volatile, and coordinated selloffs across asset classes have meant little choice of havens. While staying defensive is key, remember that maximum profits are made from positions taken in a bear market. For long-term investors, dollar-cost averaging is critical during this period but with the threshold for short-term losses in mind.

         

For a weekly outlook – tune in to our Saxo Spotlight.

For a global look at markets – tune into our Podcast. 

Disclaimer

Saxo Capital Markets (Australia) Limited prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at https://www.home.saxo/en-au/legal/.

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication.

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments.Saxo Capital Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Capital Markets or its affiliates.

Please read our disclaimers:
- Full Disclaimer (https://www.home.saxo/en-au/legal/disclaimer/saxo-disclaimer)
- Analysis Disclaimer (https://www.home.saxo/en-au/legal/analysis-disclaimer/saxo-analysis-disclaimer)
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)

Saxo Capital Markets (Australia) Limited
Suite 1, Level 14, 9 Castlereagh St
Sydney NSW 2000
Australia

Contact Saxo

Select region

Australia
Australia

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-au/about-us/awards

Saxo Capital Markets (Australia) Limited ABN 32 110 128 286 AFSL 280372 (‘Saxo’ or ‘Saxo Capital Markets’) is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms, Financial Services Guide, Product Disclosure Statement and Target Market Determination to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Saxo Capital Markets does not provide ‘personal’ financial product advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Capital Markets does not take into account an individual’s needs, objectives or financial situation. The Target Market Determination should assist you in determining whether any of the products or services we offer are likely to be consistent with your objectives, financial situation and needs.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan.

Please click here to view our full disclaimer.