Macro: It’s all about elections and keeping status quo
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
Summary: Food price inflation looks likely to pick up again, while oil price inflation bubbles up too, with Bloomberg research now expecting a 72% chance of a recession. The EURO is the talk of the town ahead of the ECB likely to make a jumbo rate hike. In equities oil stocks see momentum trades pick up amid fresh oil supply concerns. BHP shares come out of a bear market as end of financial year buying picks up in Australia, also supported by iron ore's 4% rally this week. Yet we question if BHP's rally is short lived. And VW is poised to sell some assets to get quick access to cash.
Given the moves in oil overnight, oil companies shares came back with vengeance overnight, with shares in oil companies like Valero Energy (VLO), Devon Energy (DVN), Hess (HES), Marathon Oil (MRO), becoming the best performers on Monday rising 5-8% each. Year to date, these stocks have seen the most momentum and best share price performers year to date, up over 40%+. ,
Brakes are being put on the bear market bounces, for now with European summer holidays underway. This means quarter-end portfolio rebalancing could be over in some markets, while it continues in Australia. It’s also near option expiries, which means we could still continue to see some bounces until the very end of the month, but, Q2 earnings will be the next big catalyst for the move lower in equities as analyst estimates are still very high and that will mean earnings misses and also more downgrades. A weaker end to the Wall Street and higher oil prices means APAC equities will be under pressure, and China equities also reversed course today. Singapore’s STI (ES3) was down 0.2% while Japan’s Nikkei (NI225.I) was in losses of 0.15% at lunch as tech was lower.
Hang Seng Index (HSI.I) dropped about 1% and Hang Seng TECH Index (HSTECH.I) was off by 1.6%. Tencent (00700) lost about 5% as its largest shareholder, Prosus NV planned to continue to unload its stake in the company. Other mega cap Chinese tech stocks also declined by 2% to 4%. Property sales volume across top 30 cities in China recovered in June, rising 81% from May, though still 13% below last year’s level for the same period. China Overseas Land (00688) and CR Land (01109) climbed about 1%. CSI 300 (000300.I) was little changed.
US durable goods data reported last night was above expectations, with the headline rising +0.7% m/m (exp. 0.1%, prev. 0.4%) for May. This has helped to mitigate concerns that we may see a technical recession in Q2. Atlanta Fed's GDP now model for Q2 was also revised up to +0.3% after the data, from an initial estimate of flat growth which sounded alarm bells for an impending technical recession. This has meant that Fed could proceed with aggressive rate hikes, bringing rates above the estimated rate of neutral quickly. Still, it is important to consider that the durable goods data was backward looking as it was for the month of May, and focus is still on PCE and ISM manufacturing data due at the end of the week.
Volkswagen (VOW) is said to be nearing a deal to sell its minatory stake in Electrify America to Siemens that could be valued at $2 billion. The deal is expected to be announced as soon as Tuesday. VW is said to be cutting staff numbers in Europe as it overhauls its business as well and cuts costs. VW shares are heavily down this year and face further pressure as car sales are expected to grind lower. VW shares are already down over 30% this year. Meantime, Tesla (TSLA) is facing increasing competition from Kia Motors (who majority shareholder is Hyundai) with there cars seeing a huge jump in sales in Q1. However, Tesal remained the leader in the US, with Tesla EVs accounting for 72% of the market. It’s also worth noting Elon Musk has not tweeted in a week. Could Elon be getting ready to announce Tesla is going to buy a lithium company, given lithium stocks have fallen considerably in value?
USDA's crop progress report indicated that the weather forecast shows a drier trend but mild temperatures. This should help for good crop growth and is not really threatening to US crops. But the report noted a deterioration in crop quality, and that means any respite in food prices is likely to be short-lived. Trading needs to resume from the ports in the Black Sea which was damaged/disrupted by Russia's invasion, meanwhile, Ukraine’s production will likely remain below optimum levels in the coming years. That being said, weather changes continue to affect crop production in the US, which means the only way for the food prices is up in the medium-to-long term.
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