Video: Equity markets look past slowing economic growth and slowing Tesla auto margins

Video: Equity markets look past slowing economic growth and slowing Tesla auto margins

Jessica Amir
Market Strategist

Summary:  VIDEO: US economic growth in Q4 GDP indicates the US could make a soft landing, yet recession risks still remain alive. The next test for the S&P500 and Nasdaq will be if PCE doesn’t continue to fall as expected, then equity markets may sell off and the US dollar could knee-jerk up. Tesla’s shares extend their three-week rally to 35% with investors looking past quarterly EV sales missing expectations and margins falling to their lowest level in five quarters. Tesla shareholders buy into Musk's positivity as he aims to produce 2 million vehicles this year. Copper extends its rally but could correct. And why China flows could buoy the Australian share market.

Equity markets look past slowing economic growth and slowing Tesla auto margins

Major indices: The major US indices had a choppy-day of trade with S&P500(US500.I) rebounding and ending up 1.1% up, while the Nasdaq 100 (NAS100.I) ending up 2% higher. Investors digested slower US economic growth data from the fourth quarter, showing Q4 GDP expanded 2.9% year on year, but fell from 3.2%. Still the data beat forecasts, while it also suggests the US economy could make a soft landing, while recession risk still remains alive. After hours on Thursday, markets quicky trimmed profits though, suggesting caution is in the air ahead of the Fed’s preferred inflation gauge, the Core Personal Consumption Expenditures (PCE) price index for December being released Friday. If PCE, doesn’t continue to fall as expected, from 4.7% QoQ to 3.9%, then we could see a selloff in equity markets. The US dollar would be bought as well given the Fed could keep rates higher for longer.

Tesla shares charge, investors look past falling auto margins

Tesla’s shares jumped 11% on Thursday, extending its three week rally to 35%, with earnings and revenue beating expectations, continuing the rebound from last year, while investors looked past automotive gross margins grinding to its lowest figure in five quarters, 25.9%. Also, despite a streak of quarterly sales (deliveries) coming up short of expectations, Musk teased potential to produce 2 million vehicles this year, and minimise the effects of drastic price cuts to its EVs. Tesla Earnings hit $1.19 vs $1.13 per share expected, and revenue hit $24.32 billion vs $24.16 billion expected (Refinitiv).

In other company news; American Airlines Group expects profit this year to exceed estimates following a slow start, as steady demand for air travel keeps an industry recovery going into 2023. And Mastercard warned revenue growth would slow even faster than expected this quarter, stoking fears that inflation has put a damper on consumer spending.

Commodities charge ahead but shorter term correction risk remains

Oil (WTI) gained 1.1% to $81.00 with the EU ban on Russian oil products kicking on February 5, with the market once again leaning into restricted supply, which should unpin prices. Copper lifted 0.5% to $4.27, and is now up 32% from its low. The wiring and industry metal outlook remains bright amid the clean energy transition, while mines will need to produce more than needed over the next two years to meet demand. However there is a risk Latin America will ramp up output, which could see prices correct.

In Australia, the ASX200(ASXSP200.I) seems supported by China reopening

Consider Australia is often considered an investment proxy for China and Aussie exchange-traded funds (ETFs) could draw flows as China's economy reopens from Covid. The Australian equity market is frequently a dividend and commodity play, tilting heavily to financial and materials sectors. Mining company BHP Group expects dividend growth of 17% while the top iron ore miners are expected to ramp up shipments, underpinning higher earnings. Insurers, banks and financials could benefit most from RBA rate hikes with QBE and Westpac most sensitive to rising interest rates, with 60% and 40% profit boosts expected for them this year amid higher earnings on assets. The ASX200 is up 16%  from its low and total aggregate earnings growth of over 30% is likely to unpin further growth for the market.

AUDUSD holds higher despite Australian producer prices slowing. US PCE today & RBA decision Tuesday next test 

Australian producer inflation (as measured by the Producer Price Index), has been trending higher, however today’s data from Q4 suggests producer prices are easing. However we believe that this is not an accurate reflection of reality. Not only is the data quarterly, but raw material prices (oil, electricity, fuel, copper, rents) are trending higher. As such the Australian dollar holds at 0.7127, after rising up 0.2%. The next test for the Aussie dollar will be Friday’s PCE data from the US and Tuesday’s RBA commentary with an expected 0.25% (25bps) hike on the cards. All in all, we believe the AUD is supported higher over the medium term, following a series of hotter than expected CPI prints, while China’s reopening is supporting the AUD with commodity demand rising. Still we continue to watch if the 50 day simple moving average crosses above the 200 day, marking a ‘golden cross’, which could lead to another quick run up.

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