bear bear bear

More pain ahead for tech as bond yields spike, banks on weak footing, US dollar index climbs to 19.2 year high

Equities 6 minutes to read
APAC Strategy Team

Summary:  The mood shifts from defensive to cautionary with the odds of a 0.75% rate hike from the Fed getting louder, with some calling for a 1% (100bps) hike. This has resulted in defensive plays gaining momentum; with the US Dollar Index rising to 19.2 year high. Elsewhere, oil stays firm around $120 and wheat holds its ground. Meanwhile, in equities the S&P is poised for further downside, to test the lower 3,510 level. Other riskier assets continue to be sold off with bitcoin falling below $23,000, hurting stocks like Block (SQ, SQ2). Elsewhere, commodity investors heavily take profits thinking iron, copper, nickel demand will fall as Beijing endures more covid outbreaks.


What’s happening in markets?

 

 

Caution, and fear in the air ahead of more central banks hikes

As we’ve been saying and as we reiterated last week, we think more pain is ahead with inflation  to get worse and rates to rise more than expected which will cause further market shocks. We’ve already seen a lot of pain already, company earnings are slowing, and costs are likely to swell, all ahead of more powerful rate hikes, which will pressure the consumer. We know the S&P 500 shed 9.1% over the past four sessions, closing at 2021 March lows but we think a larger pull back is still ahead. The S&P 500's top 9 companies (by market cap) shed over $1 trillion in value the past four days. Apple Inc. (AAPL) has lost $242.94 billion; Microsoft (MSFT) has shed $205.00 billion; Alphabet Inc. (GOOGL) has lost $124.72 billion; Tesla Inc. (TSLA) has dropped $64.66 billion in market cap; Berkshire Hathaway Inc. has lost $62.97 billion;  The fundamentals look shaky and the technical indicators suggest more long-term pull backs are ahead in growth and tech names in particular.

Asia Pacific equities slide with the onset of official bear markets on Wall Street

As we have warned over the weeks, S&P closed in bear territory last night and is now poised to test 3510. The odds of a 75bps rate hike from the Fed has increased with some even calling for a 100bps hike. The consensus still stands at 50bps, but that may run the risk of being perceived as dovish now. APAC equities are weighed by a confluence of Wall Street pain, inflation worried and faster Fed tightening risks. Australia’s ASX200 fell 4.8% for their first trading day of the week, with the Australian Tech sector down 7.2% as most Aussie tech stocks are pegged to the US economy while more attractive Australian bond yields also seen ASX Tech stock carnage. Meanwhile, Australia’s mining sector is seeing a brunt of profit taking down 6%; with mining magnate Fortescue Metals (FMG) down 9.3% leading smaller iron ore stocks lower after the iron ore price fell 4% yesterday with commodity investors thinking Beijing’s covid outbreak could see commodity demand fall back again the short term. Japan’s Nikkei 225 (JP225.I) is down 2% and Singapore’s STI (ES3) down close to 1%. Indonesia’s Jakarta Composite Index however stayed in green, reaffirming our positive view on the back of favorable demographics, abundant natural resources and a strong reform progress.

Hong Kong and Chinese equities are down moderately


 

The region remain relatively calm following a massive selloff in risk assets overnight with overseas equity markets down 2% to 4% and a massacre in U.S. treasuries jumping 34bps to 3.4% and 10-year rising 27bps to 3.36%.  The U.S. money market has raised their Fed hike expectations to 195bps for the next three FOMCs, pricing in a 75bps for this week, another 75bps in July and almost surely a 50bps in September.  The fear of a more aggressive path of monetary tightening and a slower global economy continue to put pressure on equity markets, including Hong Kong and China A shares.  The risk of resurgence of COVID-19 breakouts and strengthening pandemic control measures in China is another one that keep investors awake at night.  As of writing, Hang Seng Index (HSI.I) and CSI300 (000300.I) were down 0.5% and 1% respectively. 

Oil holding up as supply concerns outweigh slowdown risks

Crude oil (OILUKAUG22 & OILUSJUL22) remained firm in the Asian session with Brent at $122 and WTI around $120 despite concerns around China’s fresh lockdowns, India’s increasing imports from Russia and global economic slowdown. Market still remains tight with Libya's decline in production after a political crisis has hit output and ports, while other producers in OPEC+ struggle to meet their production quotas and remain short of covering for the lost output from Russia amid the bans


What to consider?


The task for Bank of Japan keeps getting tougher

USDJPY is back below the key resistance at 135.15 but the yields on long-dated bonds still keep the threat of a Bank of Japan (BOJ) policy tweak alive. The central bank boosted scheduled purchases of five-to-10-year debt to 800 billion yen ($6 billion) Tuesday from an expected 500 billion yen after the benchmark yield climbed to 0.255%, above the upper end of its 0.25% tolerance band. The selling threat for longer than 10-year bonds still continues and may prompt BOJ to conduct an unscheduled operation.


RBA to get more aggressive with employment will soar, giving more market shocks and tech on notice again


Australian employment is soaring and poised to hit another high with monthly unemployment for May set to hit another historical low (3.8% consensus expectation, with 25k jobs expected to be added). But wait, there’s more….the RBA sees unemployment falling to 3.5% by 2023. So the employment picture is bright and wages are growing. But on Thursday If the jobs numbers are better than expected, Australia bond yields will move higher, and continue their strong uptrend from August 2021 with the 10-year bond yield chasing the 4% level. This also means, Australian tech stocks will continue to be pressured lower, showing no signs of bottoming yet with Tech stock working inversive to yields.

Weak UK April GDP weighed on GBP

UK’s April GDP contracted 0.3%, coming in worse than expected (+0.2 % and prior -0.1 %). The drop is partially explained by the fact the UK government rolled back overall state support more quickly than other G7 countries (think France or Germany for instance). This is a worrying figure for the Bank of England. But we don’t think it will weigh on Thursday’s monetary policy decision (the consensus expects a 25bps interest rate hike). Extra government support will likely be needed to avoid a consumer-led recession. GBPUSD is at cycle lows below 1.2200, with sights on 1.2000. EURGBP pushed higher towards 0.8600 with European yields sharply higher.

 

Potential trading and investing ideas to consider?

 

Risk of further pain in bank stocks ahead


We alluded to banks being susceptible for further selling in Australia and American too, with lending continuing to fall, savings rates falling and foreclosure rates being questioned given the average mortgage could increase by $800 per month if central bank rates rise to over 3%. Looking at the S&P Bank ETF (KBE) as an example, it fell to its lowest level since Feb 2021 after losing 27% from Jan 18 to now. Meanwhile, insurance companies in that time, have remained somewhat steady. UnitedHealth (NHH) for example rose 3% over the same period. By and large, we remain bearish on banks while inflation is punitively high.

Risk of a galloping food crisis

Food prices continue to face upside risks due to the rising cost of fertilizer and energy, as well as protectionist measures from some countries like India (wheat, sugar) and Indonesia (palm oil). Our colleague Peter has warned in a piece yesterday that Russia is using the war in Ukraine to stage a food crisis, and market participants are increasingly preparing for an energy and food crisis that will extend well into 2023 and put upward pressure on inflation and cause an economic recession in many emerging market countries. While that appears gloomy, it also suggests that the commodities sector still have scope for further gains. For exposure to agriculture commodities, you could consider ETFs like Invesco DB Agriculture Fund (DBA) or iShares MSCI Global Agricultural Producers ETF (VEGI).





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

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)
Full disclaimer (https://www.home.saxo/legal/saxoselect-disclaimer/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.