Oil & coal remain on investor's radar. Defense, banks, ASX200, INR & AUD in focus

What’s happening in equites that you need to know?

• US stocks on a bumpy road ahead, but enjoy a green day after sliding for two. On Thursday the S&P 500 (US500.I) rose 0.4%, moving above it 200 day average hurdle, indicating the market will could attempt to rally higher, as long as more good news comes in. But markets are weary, especially those that trade the Nasdaq 100 (USNAS100.I), as its P/E ratio is cripplingly high. So exercise caution, as we mentioned yesterday. There is a 20% chance of a recession, amid tighter financial conditions, with interest rates expected to rise more aggressively, at a time when wages are rising and US consumer sentiment is at a 10-year low. This will likely hurting consumer spending, the property sector and tech stocks shed. However, now the S&P500 futures are just slightly positive, on reports that international energy agency (EIA) will release emergency oil stocks available over the next 6 months.

• Mixed Asian markets are cautious on Friday after the S&P turned an early loss to close with a gain of 0.4%. The Nasdaq Golden Dragon China index was however down over 4%, weighing on sentiment. MSCI Asia Pacific has also been in the red for three consecutive days, and was seen extending the decline on Friday morning.

• HK & China equity markets continued to consolidate. Hang Seng Index (HSI.I) was down 0.5% and Hang Sang TECH Index (HSTECH.I) was more than 1% lower.  Markets are lacking direction and are trading weak overall amid heightened uncertainties from higher U.S. interest rates, Shanghai’s continuous lockdown, and tension in Sino-American relationship. Chinese internet and EV autos stocks were down while oil and gas, coal mining, gold mining and fertilizer stocks gained.  In A shares, CSI300 (000300.I) was flat.  Infrastructure names gained.

• Crude oil (OILUKJUN22 & OILUSMAY22) is at its lowest level in 6 weeks, $96.62. The technical indicators, (RSI & MACD) are signaling additional short-term weakness amid worsening covid outbreaks in China (impacting mobility and demand for fuel), while stock piles continue to be released. However, you could expect the oil pullback to be short term, as indicated by our head of commodity strategy and technical analyst both think this could be short term.

• The great bullish market, the Australian ASX200 takes a breather, trading lower for the 1^st time in 4 weeks, giving investor a chance to buy in. The technical indicators suggest the Aussie market could be slowing down in the short term, echoing as lockdowns persist in China. BUT, the longer uptrend for the ASX200 is intact. The Australian market is tipped to be one of best performing markets this year, with 23% earnings growth per share expected, with is better than the S&P500’s expected 20% earnings growth.

What you need to consider

• Oil companies dividends to deliver the goods this earnings season. Even as Brent crude falls below $100 a barrel, Bloomberg indicates the World Energy Index is set to deliver a yield of 3.7%, which is higher than the world index average dividend of 2.9%. Exxon Mobile also looks interesting,  set to declare its dividend April 27, and has a current dividend yield of 4.2%, but is set to increase that and buybacks, which support share price growth.

• The persistent Covid lockdowns and disruption in China came at a most inconvenient time for the Chinese authorities, approaching the all-important 20^th Party Congress of the Communist Party of China. The recent loosening of local governments’ policies towards the property sector has boosted sentiment but the resurgence of Covid related full or partial lockdowns in 23 cities which accounted for 13.6% of China’s population and 22% of China’s GDP, according to Nomura’s estimates, has significantly impacted sales activities in the housing sectors. The call for monetary easing has further heightened and the People’s Bank of China is widely expected to cut policy rates by 10 bps in the April 18 week and then the Reserve Requirement Ratio by 0.5% in the 2^nd quarter. 

• EU bans Russian coal imports, Asian coal shares in focus. The European Union agreed to ban coal imports from Russia. The sanctions package also includes a ban on most Russian trucks and ships from entering the EU. Meanwhile, Japan is also said to be considering measures to curb imports of Russian coal, signaling a key shift of energy policy. Coal stocks in Asia such as Whitehaven (WHC) and Shaanxi Coal surged, and eyes are on Coal India. Indonesia miners may be looking to add capacity.

• Geopolitical tensions may just be about to get worse. The WHO is preparing for potential chemical attacks in the war in Ukraine as NATO officials have warned that Putin may resort to weapons of mass destruction. Over in Asia, North Korea may be considering a test of a nuclear device to coincide with celebrations next week to mark the birthday of its state founder. While the test could be another missile launch, it could also be a nuclear test which can spook global markets.

• Tensions are mounting in France’s presidential election race. President Emmanuel Macron is still leading the polls for the first round of France's presidential election, with 26-27% of voting intentions. The situation has become far more interesting for the second-round run-off scenarios (set for April 24) because these have tightened significantly as the polls have shown a surge in favour of Le Pen. EUR is likely to be volatile ahead of these. It is worth noting that for April 25, the Monday following the second run-off elections, EUR/USD volatility is priced at about two and a half times normal levels.

• Australia is set to send combat vehicles to Ukraine, following Ukraine’s plea. This highlights our house view, that defense related companies will be supported given the war. Australia is sending 20 combat vehicles to Ukraine on Friday and pledged over 2% of its GPD to defense, joining many developed economies who have increased their defense spending to over 2% of GPD, highlighting the case for looking at defense ETFs like iShares U.S. Aerospace & Defense ETF (ITA), SPDR S&P Aerospace & Defense ETF (XAR). For a look at stocks in the Defense theme, refer to our basket.

• The commodity boom has sent the Aussie dollar (AUDUSD) and the Australian share market’s (ASX200) marriage (or correlation) to a decade high. Meaning, when we see positive commodity price movements, we see higher prices for Australian stocks and vise versa. Energy, Utilities, and Materials stocks are the best performers this year in the ASX200, surging, 30%, 16% and 12% respectively. With supply constraints in commodities remaining, the ASX200 is supporting higher this year (for more, read our Australian strategists note here). For the AUD itself, the pair the AUDUSD is one to watch that will likely see higher levels. Read our head of FX Strategy’s note, here.

Trading ideas to consider

• Chinese Banks. With the PBoC being most likely to gear the loosening of monetary policy towards encouraging banks to lend, it is fair to expect that the magnitude of rate cuts is limited and is not going to pressure banks’ net interest margins too much.  On the other hand, banks may benefit from higher loan growth.  It may be interesting to look at.

• Reserve Bank of India meets today, putting Indian rupee in focus. While inflation has been running above the central bank’s target of 6% for a couple of months, there is still a chance that the RBI will stand pat. Downside risks to growth continue to be the biggest concern, but maintaining the accommodative stance will mean divergence to the increasingly hawkish Fed. Still, pressure on the Indian rupee (IUK2) may remain limited due to a massive foreign reserve chest, the possible IPO of LIC and the likely inclusion on Indian bonds in the government bond index.

Key economic releases this week:

Apr 8: RBI Meeting

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