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.
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 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.
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.
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.
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 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.
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.
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.
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.
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.
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