Summary: Markets start the week on uneven ground, and brace for further volatility amid another busy earnings week With Walt Disney and Alibaba on watch. But could US inflation provide some short-term respite if the numbers aren't as bad as feared? Cathie Wood's ARK Innovation Fund (ARKK) likely to continue to fall, should you consider shorting ARKK? Commodity companies still offer the most earnings growth in this new market cycle, here are two ETFs to watch.
What’s happening in markets that you need to know?
US markets remain fragile; in a technical downtrend ahead of closely watched inflation (CPI) data out Wednesday; With the Fed rising rates and China tightening people movement, forward company earnings growth is looking grim, which is pressuring stocks lower, at a time when S&P500 companies earnings growth is the slowest pace in a year (7.8% Q1 vs 10% historical average). What’s also eating at markets is that S&P500 earnings growth is tipped to slow to 4% in Q2. Keeping gains in check are rising rates and spiking US bond yields, the 10-year treasury bond hit 3.14% for the first time since 2018. So what’s next? The Nasdaq and S&P500 futures are showing they will open the week lower (down ~1.1%) following last week’s falls of 1.5% and 0.2%, which took the indices down for the 5th straight week.
In the EV and lithium news: Albemarle (ALB) the lithium giant moves higher and outperforms the market, after upgrading its annual earnings forecasts (citing higher lithium prices for 2022 amid the supply shortage). Albemarle (ALB) shares on Friday rose 2.5%, taking their weekly gain to 26%, which also snapped their 4 week downtrend. It comes as the company upgraded annual earnings, seeing 100-140% earnings growth this year with earnings (EBITDA) to rise to $1.7-$2 billion in the year, with net sales to gain up to 70% to $5.6 billion. Meanwhile, Tesla (TSLA) confirmed it will buy nickel from mining giant Vale. On the flipside, BHP (BHP) has vowed to stay out of lithium, as it does not think the supply-demand imbalance will play out over the next 20 or 30 years, saying the lithium rally won’t last. BHP is also committed to minimising use of continental water in drought-hit Chile.
Equity markets brace for another tough week. The coordinated selloff in bonds and equities continued on Friday despite a better than expected NFP print. The sour mood is getting extended to Asia with Nikkei (NI225.I) down over 2% in the morning led by Fast Retailing (9983). Singapore’s STI Index (ES3) was also in minor losses although the bigger initial drop was somewhat reversed. Japan’s PM Kishida has joined G7 ministers to ban Russian oil imports, but over time. A likely push for nuclear power is set to continue in Japan.
The Australian share market’s ASX200 is pressured lower. On Monday the ASX200 started the trading week down 1.3%, marking the second day of losses, and the ASX200 is now 6% off its recent high. The Aussie share market like the US, is in a technical downtrend. For investors holding long-term positions, they can look at shorting the ASX200 or ASX300, or buying puts on the Index, if they believe the market will continue to fall. The MACD and RSI reflect that the ASX200 has further legs to fall. For a full technical update on ASX200 click here. However, as always, remember, should better than expected news comes out, markets could quickly changes. On watch this week is; NAB business confidence tomorrow, as well as, consumer confidence for May due out on Wednesday. In earnings, commodity businesses, GrainCorp (GNC) results are out Wednesday, Orica (ORI) out Thursday, along with CommBank (CBA) Quarterly sales. Today, we are seeing heavy losses in the real estate (-3.3%) , and tech sectors (-3%), which will be hurt by higher interest rates. While the material (mining) sector is down 2% after the iron ore price fell 5.7% to US$130 with China’s lockdowns stunting expectations for a pickup in iron ore now.
Dollar strength weighs on AUD, NZD, CNY. AUDUSD moved towards the key psychological 0.7000 handle in the Asian morning as dollar strength extended further. USDCNY rose to fresh 18-month highs of 6.7085 as Chinese Premier comments on the job market underpinning concerns. NZDUSD also moved below 0.6400 as AUDNZD tested the 1.1000 support. EURUSD heading for another test of the 1.0500 support while GBPUSD still attempting a firm break below 1.2300 after last week’s gloomy BOE outlook. USDJPY is on course to test 131 but unlikely to jolt BOJ as the move remains orderly.
What to consider?
US jobs outperformance provided little comfort. US nonfarm payrolls was better than expected, rising by 428k against expectations of 391K in April, but there was a downward revision for February and March. The broad increase in hiring was led by the leisure and hospitality sector, which added 78,000 jobs. Manufacturing payrolls rose by 55,000 jobs after increasing by 43,000 in March, indicating that demand for goods remains strong, which should help to underpin consumer spending. Wage growth however slowed with average hourly earnings increasing 0.3% after advancing 0.5% in March, but still that did nothing to ease fears of a wage price spiral. The unemployment rate held at 3.6%.
Earnings focus for this week. Some key earnings due this week include Infineon Technologies (IFX), the biggest supplier of semiconductors to the car industry, Coinbase Global (COIN) which is a gauge on crypto appetite, and Walt Disney (DIS) mainly for the outlook into the summer. Alibaba (BABA) on Friday is also an important yardstick for China’s economic woes due to recent lockdowns.
US inflation may provide a short-term respite. Consensus expects US CPI due on Wednesday to come in at 8.1% y/y, below 8.5% y/y seen in March. Still, inflation is likely to stay top of mind for central banks and investors. As we noted in a previous piece, there are signs that headline inflation may be peaking. But there are new concerns from food prices, services inflation and deglobalization, suggesting the pace of moderation will be extremely slow
Bank of Japan meeting minutes show little inflation concern. The Bank of Japan minutes from the March meeting came out this morning. Several members said that the chance of the recent import price rises leading to a sustained increase in consumer inflation was low. Members agreed Japan's economy is likely to recover on rising external demand, suggesting accommodative monetary policy is set to stay.
Chinese Premier is concerned about the job situation. Chinese Premier Li Keqiang warned of a “complicated and grave” employment situation as Beijing and Shanghai tightened curbs. The surveyed jobless rate climbed to 5.8% in March, the highest since May 2020. This means there will be some focus on restarting production. Li has instructed all government departments and regions to prioritize measures aimed at helping businesses retain jobs and weather the current difficulties.
Saudi Arabia’s oil price cut helps cap energy prices. Oil prices were lower at the start of the week as Saudi Arabia announced a cut to oil prices for buyers in Asia and Europe, amid coronavirus lockdowns in China weighing on demand and G7 leaders banning imports of Russian oil. The pullback may however remain short-lived as the war drags on and more and more countries join the ban on Russian crude.
Potential trading ides?
Consider that commodity companies offer the most earnings growth in this new market cycle. Long term investors can be rewarded with growing earnings and share buy backs in commodities companies (gas and oil), with many of these companies holding the key to return money to shareholders and pay out record dividends. The Energy Select Sector ETF (XLE) is the largest energy ETF and trades up 45% this year. Its technical indicators suggest it has further upside. Its largest positions are in the largest energy companies including Exxon, Chevron, ConocoPhillips, Occidental Petroleum. Vanguard Energy ETF (VDE) is the second largest energy ETF. It has similar holdings and trades up 44% this year, and also in a technical uptrend. Click for our take on other commodities and commodity stocks.
Cathie Wood's ARK Innovation Fund (ARKK) likely to continue to fall; so you could consider Shorting ARKK? The ARKK ETF trades 70% lower than its Feb 2021 high, and its nearing a 52-week low, and the technical indicators (MACD & RSI) suggest further downside could be ahead as the Fed embarks on its big suite of rate hikes. An increase in bond yields pressures technology and growth stocks, with the 10-year yield now at its highest level since 2018 and is likely to go higher. ARKK’s biggest holding is Tesla and Tesla’s earnings growth is pressured lower this year. Other top holdings include Roku (ROKU), Zoom (ZM) and Coinbase (COIN) and Block (SQ). ARKK’s recent downtrend was confirmed on April 6, with support around 42.97
Key economic releases this week:
Key earnings release this week:
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Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Head of Fixed Income Strategy
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Head of Commodity Strategy
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Head of Fixed Income Strategy
Quarterly Outlook
Head of Commodity Strategy