Equities: New extremes and a challenging opportunity set
Discover insights on the future of equity markets in Q1 2024 and navigate the potential recession with strategic investment choices.
APAC Strategy Team
Summary: Markets are still coming to grips with hotter than expected CPI and inflation expectations, while awaiting this week’s US housing data out, speeches from Fed speakers, China’s GPD data, as well as Australian RBA minute minutes and jobs data. The S&P500 sees its biggest wealth destruction since the GFC and why the risk off mode could continue. Plus what to watch this week amid earnings seasons, from defense giant, Lockheed Martin, to Procter and Gamble the consumer staples major, CATL the world’s largest battery maker, as well as Schlumberger the oil & gas juggernaut, along with Netflix, IBM and Tesla.
This week, the US. economic calendar is relatively light, with most releases of secondary importance. Traders will monitor the housing starts data on Wednesday in order to assess the state of the U.S. housing markets after mortgage rates have soared. The median forecast in the Bloomberg survey suggests a 7% M/M decline. The initial jobless claims data on Thursday will inform us about the labor market. Bloomberg consensus is forecasting an increase to 230K from 228K.
UK political drama is unlikely to end soon. PM Liz Truss removed Chancellor Kwasi Kwarteng from office last week. Unfunded tax cuts have also been reversed, while the plan to hike corporate taxes stays. Still, these U-turns in the first few weeks of coming to power have meant the loss of confidence in the government and high risk premiums will be demanded by investors for UK assets. The government is trying to repair some of this damage now, and more announcements can be expected this week. Meanwhile, the UK inflation report for September is also due on Tuesday and is expected to touch double digits with Bloomberg consensus at 10.1% y/y from 9.9% y/y previously. However, this will likely be the peak in UK CPI as the government has introduced a cap on household energy bills. However, the Bank of England will need to stay hawkish until services inflation slides lower, as UK assets need support as well.
Japan’s inflation data for September is due for release on Friday, and as signalled by the Tokyo CPI released earlier this month, price pressures are likely to pick up further. Bloomberg consensus expects the core measure (ex-fresh food) to come in at 3.0% y/y from August’s 2.8% y/y while the core measure (ex-fresh food and energy) is expected at 1.8% y/y in September from 1.6% y/y previously. The headline is expected to be a notch softer at 2.9% y/y from 3.0% y/y, but still remain way above the 2% target level. Weakness in the yen prompted an intervention from the Bank of Japan in September but the effect faded fast and the currency was significantly weaker in the month, which possible led to import price pressures. Still, the central bank is unlikely to shift its easing stance and will likely continue to wait for the global pressures to ease and USD to top out.
China’s Q3 GDP data is scheduled to be released on Tuesday. After slowing sharply to +0.4% Y/Y and -2.6% Q/Q seasonally adjusted in Q2, China’s GDP growth rate is expected to rebound to +3.4% Y/Y and +3.4 Q/Q SA as well. The rebound was likely driven by the relaxation of lockdowns in late Q2 which saw the recovery gradually picking up in the early part of Q3 until pandemic control tightened again in September.
China releases September retail sales, industrial production, and fixed assets investments on Tuesday. According to Bloomberg surveys, economists are expecting China’s industrial production and fixed assets investment in September to moderately improve from August but retail sales are expected to slow in growth due to a high base and the tightening of pandemic control in some large cities in September
The Chinese Communist Party’s (CCP) 20th National Congress commenced yesterday Oct 16. General Secretary Xi made a speech in which he reaffirmed China’s current policies in key areas. On Saturday, Oct 22, before the National Congress adjourns, the delegates will vote to amend the CCP’s constitution and elect the members of the 20th Central Committee. On Sunday, Oct 23, the newly elected 20th Central Committee will decide who will get onto the most powerful 25-member Politburo and its 7-member Standing Committee as well as the Central Military Commission. For more details, please refer to our notes published last Friday.
On Tuesday the RBA releases its meeting minutes after it rose interest rates by just 0.25% earlier this month. We think the market will dissect the minutes to ensure the RBA won’t perhaps pivot back to a hawkish stance. We think that’s unlikely given the unemployment rate recently increased. That said, on Thursday, Australian unemployment data will be released for September, with the market expecting the rate will remain at 3.5%. Another item to watch will be how many jobs were added to the Australian economy last month. Less jobs are expected to be added in September than August (when 58,800 jobs were added), as rate rises and rising inflation will likely have had an impact. On top of that, Australian mining companies have also been reporting labour shortages are continuing.
Infrastructure related sectors might garner attention ahead of the Australia Federal budget to be announced next week. According to Australian Associated Press, AUD$9.6 is set to be put aside for infrastructure projects. So it could be worth watching stocks in the sector perhaps including like Lendlease (LLC), CIMIC (CIM), Macquarie (MQG), as well as Adbri (ABC), as well as road and highway companies Transurban (TCL) and Atala Arteria (ALX).
After the US equity market gave back nearly almost of the Thursday’s gains with the S&P 500 closing 2.4% lower on Friday and down 1.5% over the week and closing at 3,583, with the 3,500 point level firm it its sights, the toll of wealth destruction is about $15 trillion year-to-date. When viewed next to GPD, the destruction of wealth has started to approach levels seen since the 2008 financial crisis. While the stock market is not the economy, but a signal and input into it, it is also reacts to everything from consumer sentiment, to the price of companies likely future cashflows being eroded from higher inflation and interest rates. But also consider; the reverse wealth effect is also playing a greater role markets now, with housing prices going down. We think this will also be a new added layer of concern for equites and financial markets, with the consumer likely to rein in their purses, which could cause a ripple effect on the economy.
Besides Tesla and semiconductor company ASML, our focus is also on aerospace and defense giant, Lockheed Martin on Tuesday - being interesting given the ongoing war in Ukraine. Procter and Gamble, one of the largest consumer staples companies in the world, reports earnings on Wednesday and thus will be a very important company to watch in order to get insights on consumer goods inflation. On Thursday Tesla reports. Tesla is probably the most important release to watch this week due to its market valuation and affiliation with retail investors. Tesla recently missed on Q3 deliveries and analysts also reduced Q3 EPS estimates by 3.6%. Also on Thursday industrial companies ABB and Danaher are worth watching for getting a sense of the outlook for industrial goods. On Friday, investors should pay attention to CATL, the world’s largest battery maker, and Schlumberger being the first energy company to report Q3 earnings. Given Schlumberger is an oil & gas services provider, it will be a good leading indicator on capital expenditures and future production in the oil & gas industry.
Monday 17 October
Tuesday 18 October
Wednesday 19 October
Thursday 20 October
Friday 21 October
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