Jessica Amir
Market Strategist
Summary: There is a lot to be said about stepping back and reflecting on what’s driving markets. The most selling over the last few sessions has been stocks and sectors that will likely come under pressure from rates staying higher for longer, combined with a slowdown in US GPD. As such a Tech names like Atlassian, to EV makers including Lucid are down 10% this week. While the most upside in stocks and sectors are in those that will likely benefit from increased consumption in China and increased commodity demand with the nation continuing to map out further easing of restrictions. Here is what you need to watch in markets, in this seven minute video
December 7 2022
The S&P500 continued to fall below its 200-day average, slipping 1.4% on Tuesday, taking the four-day loss to 3.4%, with the next level of support at perhaps 3900. The Nasdaq 100 fell 2%, taking its three-day fall to 4%. The most selling over the last few sessions has been stocks that will likely come under pressure from rates staying higher for longer, combined with a slowdown in consumption. Luxury EV maker- Lucid Group, team software company-Atlassian, and online dating company Match, have fallen over 10% this week. While stocks exposed to China, such as Baidu and JD.com have rallied over 3%. For more inspiration of other stocks doing well this month, likely to benefit from China easing restrictions; see Saxo’s China Consumer and Technology basket.
Firstly – what's pressuring stocks is the hotter than expected US service sector, showing the US economy is strong enough for the Fed to keep hiking interest rates to slow inflation. While major investment banks are saying 2023 will be a downbeat year. Goldman’s David Solomon says a US recession is possible, with smaller bonuses and job cuts expected. Morgan Stanley says it will reduce its global workforce by about 2,000, (2% of the total), while BofA’s chief Brian Moynihan says his bank slowed hiring and JPMorgan’s Jamie Dimon warned of a "mild to hard recession" in 2023, saying the economic clouds "could be a hurricane." So damp sentiment is causing bond yields to move higher again, the US 10-year yield hit 3.53%, while the US dollar is rising again - on track to make its biggest weekly gain in almost 12 weeks. Secondly, what’s driving upside in markets is the easing of restrictions in China, with the country preparing to ease further. This is benefiting forward looking Chinese consumption and commodities, as there is expectations demand will pick up. Refer to Saxo’s China Consumer and Technology basket and Saxo’s Australian Resource basket for stock inspiration.
Oil pulled fell 3.5% to $74.25 with hedge funds continuing to sell oil amid nervousness about the Fed’s interest rate decision next week, and its path ahead. Recessionary fears and a higher US dollar are also causing selling in oil. The next level of support is perhaps around $71.74. There is talk in Europe the market has shifted toward supply not being as tight. Engie said Europe may pull through this winter and next as it replaces dwindling Russian natural gas flows, with European refiners making more gasoline than the continent needs. Read our head of commodity strategy’s latest update. The precious metal, gold, rose 0.3% to $1769. While the big news of the day, is that Iron Ore (SCOA) price advanced as China is preparing to ease restrictions further, moving iron ore’s price up 0.7% to $108.95 (its highest level since August).
The Australian benchmark index, the ASX200 (ASXSP200.1) lost 0.6% on Wednesday, taking its week to date loss to 1%. However, after the iron ore price advanced, iron ore players tested six-month highs; Fortescue Metals, Champion Iron, BHP and RIO shares are all higher. In other parts of the market, insurance companies continued to shine, as they traditionally do when interest rates are rising. QBE and IAG rose almost 2% today taking their YTD gains to over 14% each. In terms of economic news out today; Australian economic growth showed an improvement in in the third quarter of 2022, but the growth was weaker than expected. GDP grew from 3.6% YoY in the 2nd quarter to 5.9% YoY. But more growth was expected (6.3% YoY). The Aussie dollar rose slightly, gaining 0.2% to 67.02 US cents. Also remember services are the biggest drivers of GDP in Australia; and as GDP is expected to slowly grind higher over current quarter, watch travel stocks, such a Flight Centre, Corporate Travel Management, Webjet, Auckland International Airport and Qantas. Also keep an eye on stocks affiliated with dining out such as Endeavour Group, Treasury Wine, and Metcash which owns Celebrations, IGA Liquor and Bottle-O.
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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.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.