Caution is thick in the air, bonds yields rise, oil moves up to 13-week high, and another growth warning
APAC Strategy Team
Summary: Global banks, property and the consumer discretionary sectors look susceptible to further carnage with central banks joining the aggressively hike party, with the ECB decision next. Given inflation is at records and set to continue to march up, how much more damage can be done? Meanwhile, Crude oil jumps to a 13-week high and is supported higher on expectations China’s oil demand will rise, and US and European travel will pick up this summer while supply concerns linger on. Plus why the US equity rally from May could reverse, and the Chinese bear market rally could also wane. We share the stocks and ETFS to watch in Uranium and Hydrogen as the world attempts to play catch up with climate change.
What’s happening in markets that you need to know?
US stocks back pedal with caution thick in the air, ahead of Fridays US inflation data , next weeks’ Fed meeting and shortly after that we will get more updates ahead of Q2 earnings, (likely to be lackluster excluding commodities).On Wednesday The Nasdaq 100 (USNAS100.I) fell 0.7%, and the S&P 500 (US500.I)lost 1.1% with the technical indicators looking bearish suggesting the market could fall further and give back some of the gains made from the rally since May 20.
Hong Kong and Chinese equities’ rally takes a pause this morning. In earning trading, Hang Seng Index (HSI.I) and CSI300(000300.I) fluctuated between modest gains and losses. After impressive session yesterday in Hong Kong and ADR trading in New York, Chinese technology also gave back some of the gains. Hang Seng TECH Index(HSTECH.I) was little changed. Bilibili (09626) fell 4% ahead of reporting results later today.
Australia’s ASX200 dropped to a three week low, with banks leading the sell off. We alluded to this happening for some time, cautioning the market of our bearish view on banks. We also think banks are susceptible for further selling, here is why.
AUDUSD looks bearish and is likely to give back some fresh gains as the US dollar index rallies up on uncertainty rising. We have observed some Saxo clients placing short on the AUDUSD ahead of Friday US inflation data and the Fed starting its balance sheet reduction at next weeks meeting. For a look at the technical indicators, click here. Click for an update on other currencies
What to consider?
Another global growth warning. The OECD also slashed its global growth outlook for 2022 to 3% from 4.5% earlier in December. The comments that the world economy will pay a “hefty price” for the Ukraine war and the impact on supply chains would be long lasting were risk-negative especially as the inflation outlook has also doubled to almost 9% for its 38 member states.
Supply/demand imbalance in Crude oil (OILUKAUG22 & OILUSJUL22) continues. UAE Energy Minister said the situation is not encouraging when it comes to the amount of crude OPEC+ can bring to the market and noted that conformity with the OPEC+ deal is more than 200%. He also said that prices are “nowhere near peak” and China reopening is likely to further aid demand pressures. US EIA weekly crude stocks declined for a 10th straight week.
China’s May passenger vehicle retail sales fell 17% YoY but grew 30% MoM. Whole sales were down 3% YoY but grew 64% MoM. China is scheduled to release May trade data later this morning and aggregate financing data as early as today.
ECB meeting on tap today. The European Central Bank (ECB) is scheduled to meet today. While expectations are broadly set for a lift-off in July, eyes will be mainly on the Bank’s inflation forecasts and any hints of an earlier-than-expected 50bps rate hike moves. For in depth analysis, click here. Recall May CPI rose to a fresh record high of 8.1% y/y from 7.5% y/y previously, and ECB tightening expectations have picked up since this economic read. We expect more of the policymakers to tilt hawkish in the coming weeks, which will likely bring forward the expectation of the 50bps move to Q3 rather than in December.
Potential trading and investing ideas?
We maintain our view that the recent rise in Chinese equities has been a tradable bear market rally that may wane anytime. The prospect of concluding cybersecurity investigations into Didi and other tech companies, the approval of second batch of online games, and U.S. Treasury Secretary Yellen’s repeated signals, including the latest one from yesterday, to reduce or rollback tariffs on some goods from China to lower inflation in the U.S., contributed to this week’s strong performance in Chinese stocks, in particular tech stocks listed overseas. It is important to note that the slope to climb is still steep for the Chinese economy and valuation of Chinese stocks in general is inexpensive but not dirt cheap once we take into consideration of the plausibility of earnings downward revisions and misses. Common prosperity and stability remains a key focus of the Chinese leadership, instead of economic growth.
Clean energy remains on watch with the oil price likely to head higher. As tweeted yesterday Hydrogen stocks are in focus with a $36 billion Asian renewal energy hub seeking approval. The potential new Asian hydrogen hub aims to help tackle climate change by installing solar and wind capacity in Western Australia to produce green hydrogen. Most hydrogen stocks are not profitable. However the following two stocks are; Chart Industries (GTLS) that makes 51% of revenue from America, 32% EMEA, 17% from APAC. And Bloom Energy (BE) which makes 62% of revenue from the US, AND 38% from APAC. For more inspiration look at Saxo’s Energy Storage Basket and look at Hydrogen ETFs: like HGEN which tracks some of the biggest hydrogen companies globally.
Uranium stocks, take a haircut, but appear supported following yesterday’s $4.3 billion pledge to support US uranium. So, the US wants to buy enriched uranium directly from domestic producers to wean off Russian imports, which is critically important especially if the Russia ceases exports. The ETF, Global X Uranium ETF (URA) that tracks some of the largest global uranium mining companies fell slightly overnight, 0.3%, after rocketing up 6% the day before on the stimulus news. US Uranium stocks to keep on your radar include Cameco (CCJ) that makes about 52% of its uranium income from the US, and the rest from Canada. Another company to look at is Energy Fuels (UUUU), which makes 100% of its revenue from the
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Quarterly Outlook Q2 2022
Quarterly Outlook Q2 2022: The End Game has arrived
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Productivity and innovation have never been more importantAs the world economy hits physical limits and central banks tighten their belts, could equities be facing a 10-15% downside?
The great EUR recovery and the difficulty of trading itIf the terrible fog of war hopefully lifts soon, the conditions are promising for the euro to reprice significantly higher.
Tight commodity markets – turbocharged by war and sanctionsWith supply already tight, commodities keep powering on. But will it last for yet another quarter?
Between a rock and a hard placeGeopolitical concerns will add upward price pressures and fears of slower growth, while volatility will remain elevated.
The Great ErosionInflation is everywhere and central banks try to combat it. But will they get it under control in time?
Australian investing: Six considerations amid triple Rs: rising rates, record inflation and likely recessionWhile global financial markets are struggling in an uncertain world, the commodity-heavy Australian ASX index is poised to keep a positive momentum.
Cybersecurity – the rush to catch up with realityWith the invasion of Ukraine, governments and private companies are rushing to reinforce their cyber defenses.