APAC Market Digest: Caution possible downside ahead, while Commodities command attention APAC Market Digest: Caution possible downside ahead, while Commodities command attention APAC Market Digest: Caution possible downside ahead, while Commodities command attention

APAC Market Digest: Caution possible downside ahead, while Commodities command attention

Equities 7 minutes to read
Jessica Amir

Market Strategist

Summary:  Gold and silver are expected to hit new highs, so too is oil. Inversely, Australian and US equities are a risk of further pull backs. Here is what to watch. Plus the stocks that are shooting the lights out, and those that are weak at the knees. Plus why consider a position in soft commodities, and why you shouldn’t ignore iron ore and the commodity kings.

Co-written by Market Strategists Jessica Amir in Australia and Redmond Wong in Hong Kong. 

What’s happening in markets?

  • What’s going on, in a 15 second read? After Russia invaded Ukraine and launched an attack, oil rallied above $100/barrel, equities were sharply sold off and the Russian currency (the Ruble) dropped heavily. But, then US President Biden gave an address that seemed to calm nerves and stocks on Wall Street on Thursday rallied in the final hours of trade. The Nasdaq 100 (USNAS100.I) rose 3.4% and S&P 500 (US500.I) rose 1.5%. But beware, the volatility index (VIX.I) is jumping around like nothing else, and the fundamentals and technical indicators suggest further dark days are likely ahead in Australia and the US. 
  • Where to next for the S&P 500 Index? Expect future downside in equities: The S&P 500 has historically fallen 5% after shock geopolitical warfare type events. But this is a unique situation. There are now a long list of countries putting sanctions (restrictions) on Russian businesses and individuals. We now watch whether Putin is personally sanctioned, a move that would be unprecedented and some would argue, a direct attack on the sovereign state (according to Russian media). Remember, all this comes at time when the world is dealing with extremely high inflation and bracing for interest rate rates, so since November investors have been rapidly moving out of high growth and tech stocks and into commodities. For more see our Chief Economist’s note.
  • Expect gold and silver to hit new highs: In Commodities news, after Gold (XAUUSD) and Silver (XAGUSD) surged to fresh highs with gold up 3.2% to $1,968 (to a new one year high) but both paired back after Biden's address. But note, the safe havens Gold and silver are likely to remain in demand with higher inflation and interest rates ahead. Gold’s next level of upper resistance after breaking above $1960 is $2000.
  • The oil price (OILUSMAR22 & OILUKAPR22) could possibly hit $110-$126 in Brent next week, if the conflict deepens and escalates in the wake of sanctions. Remember, Russia exports millions of tons of oil monthly to Western destinations and vast quantities of natural gas exports. So, slowing natural gas flows over Europe would push up the price of oil, when the winter lack of supply has already caused havoc (taking oil to 7-year highs before tension even escalated). For other considerations on why to consider investing in energy, click here.
  • In Australia, the ASX200 (ASXSP200.I) rose 0.3% on Friday, after falling 3% on Thursday (which was its biggest fall in 17 months). However be on guard, the market appears to be bracing for further downside as inflation is set to get worse, rates are set to rise in May possibly and the technical indicators are also suggesting the market could be headed lower. As such, the Australian theme is let’s be on the defense side. Consumer staples stocks are the best performers this month; Endeavour (EDV) shares up 12% amid Australia reopening its borders. GrainCorp (GNC) shares are up 11% this month benefiting from record high soft commodity prices and a stronger outlook for 2022. Zooming out to the bigger picture, the rotation out of tech and mining mining and energy continues. This year the best performing sector is energy, up 12%, benefiting from record jumps in earnings (with average energy sector earnings up 500%, thanks to higher oil prices). Meanwhile, energy and coal companies are expected to continue to outperform this year. Stand outs in the energy sector include; Australia's’ biggest oil company Woodside (WPL) up 27% this year, and Australia’s biggest coal company, Whitehaven Coal (WHC) up 21% this year.
  • Stand outs shares on the ASX on Friday include Block (SQ2) which rose 31% on reporting better than expected profits. Life360 (360) surged 19% after Credit Suisse and Bell Potter reiterated Life360 as a BUY stock. Appen (APX) the company who created Siri with Apple, rose 13% after I suspect traders exercised their shorting positions, after the stock has now fallen 84% from September 2020. Meanwhile, Blackmores (BKL) shares fell 13% to a new year low after it avoided giving revenue guidance for the year ahead.
  • In Asia, Hong Kong’s Hang Seng (HSI.I) and China’s CSI300 (000300.I) Hang Seng and CSI300 markets rallied 0.5% and 1.3% respectively in early trading on Friday.  Alibaba (09988) reported results in line with expectations overall.  Revenues rose 10% YoY and adjusted EBITDA fell 27% YoY. Customer management revenue declined 1.3% YoY. Active customers rose 43 million to 1.28 billion globally. Alibaba rallied over 2% this morning after a 6.7% fall on Thursday.  NetEase (09999) reported in line revenues +10% YoY and better than expected non-GAAP net profit +71% YoY. CNOOC (00883) got approval for A share listing in Shanghai to raise RMB 35 billion for exploration and development projects. 
  • In Singapore, the Straits Times Index (STI) opened more than 1% higher Friday morning after falling 3.5% on Thursday.  Singapore Airlines (SIA) returned to profit the first time in eight quarters, on pickup in passenger traffic (1.1 million, a 5-fold increase from a year ago or doubling from the previous quarter). 

What to consider?

  • Expect high prices for oil and commodities: With potential disruptions to oil exports' from Russia and grains from Ukraine, plus the fact that much of European fertilizer production relies on Russian natural gas, consider that global oil prices and food prices are likely to rise. Higher oil prices and food prices tend to adversely affect Asian economies, except Indonesia and Malaysia.  China imports about 73% of its oil consumption and much of its grains, including 80% of its soybean consumption. Potentially higher oil and food prices will have upward pressure on China’s inflation.
  • Semiconductors at risk too: Ukraine also supplies 70% of the global demand for neon, an essential material used in semiconductor manufacturing.  While the cost of neon is a very small portion of the cost of making semiconductor wafers, there are concerns a disruption to neon exports from Ukraine could worsen the supply chain and production of semiconductors. This could add further selling pressure to tech stocks.
  • Iron ore (SCOH2, SCOH3) is holding relatively steady at $136.55. From a technical perspective, the iron ore price has found support and looks like it could march back up toward $155.25. However, if iron ore falls under $132, a larger correction could be expected. However for now, the iron ore uptrend looks in tact as China continues to pour money into its banking system, and there is expectation China will roll out more stimulus in line with its 5 year infrastructure plan. So look out for iron ore attempting to knock on that $150 level again, which will likely benefit iron ore giants like BHP (BHP), Rio (RIO, Fortescue Metals (FMG) and Champion Iron (CIA).

Trading ideas

  • Energy, mining and materials stocks may serve investors well as hedge, amid the worsening inflationary pressures from the energy crisis and rising commodity prices. 

Company earnings calendar

  • Australia: Feb 25: Brambles (BXB), Medibank (MPL), Iluka (ILU), National Storage REIT (NSR)  Charter Hall  (CHC), Novonix (NVX), Lynas Rare Earths (LYC), PolyNovo (PVN)
  • Hong Kong & China A Shares: Feb 25: Li Auto Inc. (02015), AIA Group Ltd. (01299), Beigene (06160), New World Development Co. Ltd (00017), HKT Trust & HKT Ltd (06823), Seazen Group (01030.HK), NWS Holdings Ltd (00659), Great Eagle Holdings (00041),  Angelalign (06699), Sunlord (002138)
  • Singapore: Feb 25, 2022 Singapore Technologies Engineering (STD)

For a global look at markets – tune into our Podcast 

For prior Australian market and APAC updates - click here. 


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