Bear market bounce continues ahead of QT, Shanghai to resume manufacturing on Wednesday boosting mining sentiment. Infant milk stocks rally

Bear market bounce continues ahead of QT, Shanghai to resume manufacturing on Wednesday boosting mining sentiment. Infant milk stocks rally

Equities 7 minutes to read
Saxo Be Invested
APAC Research

Summary:  The bear market rally continues ahead of end of HY as investment manager rebalance in US and for EOFY in Australia causing downbeat stocks to rally. The oil price topped $120 in brent as Shanghai eases restrictions and Hong Kong is expected to relax some covid testing rules. The Fed is to kick of QT, further restricting money supply in the market. Iron ore and copper rally with Shanghai expected to resume manufacturing on Wednesday. Plus why to look at infant milk formulae stocks.


What’s happening in markets that you need to know     

Bear market bounce roars. But for how long? A technical rally’ is continuing in the downbeat names of 2022 which has helped the Nasdaq rally 7.1% last week, and the S&P500 gain 6.6%, marking its first positive week in 8 weeks. The technical indicators suggest this short term secular rally could continue, as technical traders (i.ie Quant traders) may be forced to buy into stocks that are in oversold territory, like Apple (AAPL), Microsoft (MSFT) and IBM (IBM) were. Secondly, keep in mind, we could likely see down beat stocks rally into the end of half year in the US, and EOFY in Australia (30 June); whereby fund managers are somewhat forced to bring their asset allocations back into alignment; i.e. top up their tech positions, which have fallen 30% for example and take profits from commodities, which are up 50% for instance. This reflects why Moderna (MRNA) and Tesla (TSLA) rose 7% each for example on Friday, despite both companies likely to see earnings growth slow in 2022. And we alluded to last week, we think caution remains in the air, and tech stocks could resume their limbo long term bearish pull back, as the Fed starts QT this week, and most businesses in the S&P500 are  guiding for profit growth to slow.

Asia Pacific equities are trading higher buoyed by the tech rally, end of Half-year top-ups and China reopening hopes. Australia’s ASX200is trading up 1.2%, at its highest level 4-weeks with Tech, Miners and Healthcare fueling the rally. Downbeat tech names like Block (SQ2) are up 10% on the back of no news. Block’s shares are down 27% this year and ETFs like iShares ASX200 (IOZ) for example, typically have a 0.5% weight to SQ2. So using the above theory, given SQ2 shares have fallen a lot, you’d think the ETF would need to top up its SQ2 holding to bring the ETF’s asset allocation back into alignment. This is something to keep on your radar – as it’s end of month, half year and EOFY next month. So consider watching your favorable profitable tech stocks that are growing earnings. In other news, AGL (AGL) torched its demerger of its retail and power generation businesses and the company’s Chairman will resign. Billionaire Cannon-Brookes says it’s a huge day for Australia and means Australia’s green path is ahead. 65% of AGL’s profit comes from selling electricity, 34% from gas, and the business wants to pivot to clean energy and away from coal. If the company split, AGL proposed to run its coal-fired power station for another two decades.  

Japan’s Nikkei (NI225.I) was trading close to 2% led by Fast Retailing and Sony. Singapore’s STI index (ES3) saw modest gains of 0.2% led by REIT stocks that remain a key inflation hedge. Singtel shares continue d to slide after the earnings miss on Friday, but reopening theme remains at play and poised to benefit consumer stocks.

Hong Kong and China equity markets rallied on relaxation of lockdowns and recent better-than-feared results from large internet companies .   New local COVID cases fell to 67 in Shanghai and 12 in Beijing.  The Shanghai municipal government announced 50 measures to support the economy, corporate and households to recover from the 2-month long lockdown.  Starting from June 1, factories are allowed to resume production without having to apply for pre-approval from the authorities. Domestic consumption stocks gained on the prospect of reopening. Jiumaojiu(09922) jumped over 8% and China Resources Beer(00291) gained 7%. Chinese internet stocks followed through from last week’s post result rallies, further rising between 3% and 8% this morning. Low expectations and bearish positions before result announcements contributed to the strong price performance. Meituan (03690) is scheduled to report Q1 results on June 2 and rose 6% this morning.  Bloomberg’s survey of analyst estimates expect the company’s Q1 revenue to come at RMB45.3 billion, a 22% year-on-year increase and to have an adjusted net loss of RMB4.8 billion in the quarter.  Hang Seng Index (HSI.I) gained 1.7% and Hang Seng TECH Index (HSTECH.I) surged 2.6%.  CSI300(000300.I) gained 0.7% by mid-day.

Crude oil heating up amid China easing hopes. Brent crude has touched early March highs of $120/barrel today and WTI is at $116 as China eased anti-virus lockdowns and the EU worked on a plan to ban imports of Russian crude. Thursday’s OPEC+ meeting remains a key event risk. US natural gas prices are also approaching $10 ahead of the summer driving season as the market remains tight.

What to consider?

US core PCE prices. US core PCE data was out on Friday, and it came in as expected at 4.9% y/y and 0.3% m/m. This was slower than last month's 5.2% y/y and may prompt more talk of inflation peaking out. While PCE is the preferred Fed metric, what cannot be ignored right now is that food and energy prices still have more room to run on the upside suggesting that inflation will remain higher for longer. The May CPI print is due on June 10, so that will be the next one on the radar for further cues in terms of Fed's rate hike trajectory but for this week, the focus will be on the jobs report due on Friday.

Eurozone inflation prints out this week. The energy price shock has been bigger for Europe, and May prints are due for Spain, Germany, France, Italy and the Euro-area in the week ahead. Food price pressures continue to build up amid the supply shortages and protectionist measures, and further gains in May will add more weight to the ECB’s resolve to exit negative rates from Q3 with more aggressive tightening. EUR has gained 1.5% against the USD last week, and is now trading above 1.07, and resistance is seen near 1.0780 and the 1.0800 big figure.

When a company delivers weaker than expected results, what’s next? The world’s biggest electric vehicle maker, CATL (CATL) is facing further hurdles and started to receive broker downgrades for 2022, after missing earnings expectations. Market consensus dropped its price target 13%. This highlights that after a company misses expectations and guides for a weaker outlook; a stock can be susceptible to downgrades by investment banks. It’s worth noting, that not only are Electric Vehicle (EV) companies, at the mercy of paying for higher battery metals costs (lithium, nickel, copper, cobalt), which hurts earnings growth, but so too are battery makers. This is another reason why at Saxo, we prefer commodity companies, that are key beneficiaries of higher raw material prices, which are likely to continue in 2022.

Potential trading ideas

Infant formulae makers are not to cry over. As mentioned last week, the baby formulae shares have been cast into the lime light as the US is amid a 50% shortage. New research suggest, the situation worsened, and US supply is down 70%. Last week, the US received supply from Nestle (NESN) via a special Air Force one delivery. Today, the US FDA said Australia’s Bubs Australia (BUB) will also assist, and provide at least 1.25m cans of infant formulae to the US. Bubs Australia’s shares (BUB) rose 44% as a result, as earnings upside could extend beyond the short term if the US increases the order. Peer-infant milk company A2 Milk (A2M) shares rallied 9.5% on the news.

For a weekly look at what’s on the radar for investors, and traders this week; read, watch or listen to our Monday Saxo Spotlight.

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


Quarterly Outlook

01 /

  • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Quarterly Outlook

    Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Althea Spinozzi

    Head of Fixed Income Strategy

  • Equity Outlook: Will lower rates lift all boats in equities?

    Quarterly Outlook

    Equity Outlook: Will lower rates lift all boats in equities?

    Peter Garnry

    Chief Investment Strategist

    After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto...
  • FX Outlook: USD in limbo amid political and policy jitters

    Quarterly Outlook

    FX Outlook: USD in limbo amid political and policy jitters

    Charu Chanana

    Chief Investment Strategist

    As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ...
  • Macro Outlook: The US rate cut cycle has begun

    Quarterly Outlook

    Macro Outlook: The US rate cut cycle has begun

    Peter Garnry

    Chief Investment Strategist

    The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c...
  • Commodity Outlook: Gold and silver continue to shine bright

    Quarterly Outlook

    Commodity Outlook: Gold and silver continue to shine bright

    Ole Hansen

    Head of Commodity Strategy

  • FX: Risk-on currencies to surge against havens

    Quarterly Outlook

    FX: Risk-on currencies to surge against havens

    Charu Chanana

    Chief Investment Strategist

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperfo...
  • Equities: Are we blowing bubbles again

    Quarterly Outlook

    Equities: Are we blowing bubbles again

    Peter Garnry

    Chief Investment Strategist

    Explore key trends and opportunities in European equities and electrification theme as market dynami...
  • Macro: Sandcastle economics

    Quarterly Outlook

    Macro: Sandcastle economics

    Peter Garnry

    Chief Investment Strategist

    Explore the "two-lane economy," European equities, energy commodities, and the impact of US fiscal p...
  • Bonds: What to do until inflation stabilises

    Quarterly Outlook

    Bonds: What to do until inflation stabilises

    Althea Spinozzi

    Head of Fixed Income Strategy

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain ...
  • Commodities: Energy and grains in focus as metals pause

    Quarterly Outlook

    Commodities: Energy and grains in focus as metals pause

    Ole Hansen

    Head of Commodity Strategy

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities i...

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research 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. To the extent that any content is construed as investment research, you must note and accept that the 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 under relevant laws.

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

Saxo Bank (Schweiz) AG
The Circle 38
CH-8058
Zürich-Flughafen
Switzerland

Contact Saxo

Select region

Switzerland
Switzerland

All trading carries risk. Losses can exceed deposits on margin products. You should consider whether you understand how our products work and whether you can afford to take the high risk of losing your money. To help you understand the risks involved we have put together a general Risk Warning series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. The KIDs can be accessed within the trading platform. Please note that the full prospectus can be obtained free of charge from Saxo Bank (Switzerland) Ltd. or the issuer.

This website can be accessed worldwide however the information on the website is related to Saxo Bank (Switzerland) Ltd. All clients will directly engage with Saxo Bank (Switzerland) Ltd. and all client agreements will be entered into with Saxo Bank (Switzerland) Ltd. and thus governed by Swiss Law. 

The content of this website represents marketing material and has not been notified or submitted to any supervisory authority.

If you contact Saxo Bank (Switzerland) Ltd. or visit this website, you acknowledge and agree that any data that you transmit to Saxo Bank (Switzerland) Ltd., either through this website, by telephone or by any other means of communication (e.g. e-mail), may be collected or recorded and transferred to other Saxo Bank Group companies or third parties in Switzerland or abroad and may be stored or otherwise processed by them or Saxo Bank (Switzerland) Ltd. You release Saxo Bank (Switzerland) Ltd. from its obligations under Swiss banking and securities dealer secrecies and, to the extent permitted by law, data protection laws as well as other laws and obligations to protect privacy. Saxo Bank (Switzerland) Ltd. has implemented appropriate technical and organizational measures to protect data from unauthorized processing and disclosure and applies appropriate safeguards to guarantee adequate protection of such data.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc.