Equities: New extremes and a challenging opportunity set
Discover insights on the future of equity markets in Q1 2024 and navigate the potential recession with strategic investment choices.
Summary: Why selling in tech stocks will likely ramp up after both the Fed and RBA rise rates, which will likely further drag down the US benchmark, the Nasdaq and Australia’s tech sector. Inversely, China cut interest rates for the 2nd time this month, so its market could roar back as this years tiger king. Chinas property stocks charge, along with the iron ore price and shares in iron ore heavyweights. Oil also surges to a new 7-year high. Here is what you need to know, what is happening in APAC, what to watch and trading ideas.
Here’s what you need to know right now; with what's happening, what to watch and trading ideas
What is happening...
US equities: fell in the red in the final hours of trade on Wednesday; on expectation The Fed will heavily reduce bond buying and rise official interest rates sooner than expected. The benchmark S&P500 (SP500.I) fell 1%, the Nasdaq (USNAS100.I) lost 1.2% after the US 10-year bond yields hit 1.9% and could soon rise over 2%. As for stand out performers; Procter and Gamble, the company behind Gillette and Braun shavers, Oral B, Olay, Vicks, Metamucil, was one of the best performers; its shares rose 3.3% on reporting stronger than expected quarterly earnings. Meanwhile, banking giant, Morgan Stanley rose 1.8% and insurance group UnitedHealthcare rose modestly after reporting better than expected earnings- note here- this speaks to a broad theme at hand; banks and insurers stand to benefit from rising interest rates too. So keep that in mind.
The biggest takeaway right now, is selling in tech stocks will ramp up; Overnight, the Nasdaq (the biggest 100 tech stocks) fell into a correction, meaning its lost over 10% from its high; as professional investors continue to sell out of high valuation names and stocks that make little to no profits, ahead of the Fed rising interest rates. (Also note, retail investors continue to buy the daily dips into those more profitable tech names). Now, the technical indicators suggest the Nasdaq could go lower again. PLUS, the fundamentals are saying tech stocks could go lower too; historically the S&P500 has fallen 6% on average in the three months following the first interest rate hike in the cycle (remember markets expecting 4-5 rate hikes in the US). So beware of further pull backs in the S&P500 and the Nasdaq – as it’s heavy in tech names.
Aussie share market (ASXSP200.I) - is trading lower for the third day (down 0.1%) on Thursday, as investors rebalance their portfolios; reducing positions in Tech stocks, ahead of the RBA and the Fed increase rates (Chip company Altium that works with Microsoft, Altium is down 3%, while software Logistics giant, WiseTech (that works with FedEx) rises). Meanwhile investors continue to plough into mining stocks (with gold giants like Northern Star and Evolution Mining up over 10%). and oil as iron ore and oil prices both hit fresh highs.
Hang Seng (HK50.I) – Hong Kong’s market rose for the first time in four days, waking up the sleeping tiger. On Thursday Hong Kong’s market lifted 0.9% at the open. Zooming out, it looks like the sleeping tiger king market could roar in 2022. Last year, HK’s market underperformed (falling 14%). This year, it’s one of best performers, up 3.7%, supported by China cutting rates. Today, China’s central bank cut interest rates for the 2nd time in a month. The PBOC cut its 1-year loan prime rate by 0.1% (from 3.8% to 3.7%). The five-year loan prime rate was reduced by 0.05% (from 4.65% to 4.6%) . Why is this important? The loan prime rates affects lending rates for corporates and households; with most loans in China being taken on the one-year loan prime rate. While the five-year rate influences the price of mortgages.
This second rate cut, is expected to stoke further fire into China’s property and infrastructure sector and the iron ore sector globally; China’s Property stocks are up 4% this week and that rally is likely to continue. China’s biggest property developer (based on sales contracts), Country Garden Holdings has seen its shares rise off five-year lows, surging 9.1% this week (on the news Monday to Thursday intraday). The company is also said to have a healthier credit rating compared to many of its highly leveraged property peers.
What to watch today...
Australia eco news: Australia’s unemployment rate fell more than expected, falling from 4.6% to 4.2% (the market expected 4.5%). So that’s a win. It comes as 65,000 Aussies gained jobs in December, more than the 30,000 expected. So more people are in jobs, ahead of interest rates rising, so banks and insurance stocks are supported (given they make more money when yields rise).
Iron ore price surged 1.1% on Thursday (up 6.3% in three days) to US$132.60 supported by China’s second interest rate cut this week. The iron ore price has been rallying off its two year low from November last year. Recall, China announced or started 3 trillion yuan of new infrastructure projects this year too (it will need iron ore for that). But beware in the short term- China will likely slow down on orders due to lunar new year, and then the Beijing Olympics kicking off. However, afterwards, in March, expect iron ore orders to pick up. From a technical perspective, if iron ore closes above $133, it could then next rise to $150. Guess who that benefits? Australia’s biggest iron ore stocks BHP (BHP), Rio Tinto (RIO), Fortescue (FMG) and Champion Iron (CIA).
Oil (WTI); surged 1.8% to US$86.74, new 7-year highs. Why? There are 14 out of the 18 OPEC member struggling to meet their production quotas, (they either don’t have funding or materials to beef up production – so the market is left short on daily basis). For more on oil, follow our head of commodity strategy.
Woodside Petroleum (WPL): Australia’s biggest oil stock rose slightly, 0.2% to a new 3-month high after the oil price surged. But don’t forget WPL is about to get bigger for two reasons; firstly, Woodside’s merger with BHP’s Petroleum business is on track and tabled to occur in the June 2022 quarter, which will make Woodside the world’s 10th biggest oil producer. And secondly Woodside beefed up its supply, by bagging a new US LNG purchase deal. Woodside will buy 2 million tonnes a year from a US Gulf Coast LNG export project in Louisiana for 20 years from 2026. The US LNG purchase deal simply means Woodside can build market scale, and access low-cost supply, that it can on sell.
Trading ideas to consider...
If you believe the oil price will rise from $86 to $100 you could look at BUYING WTI or Brent
If you believe the Nasdaq, the S&P500 and the ASX200 will continue to fall, then you could hedge with;
To trade the theme of China’s bank cutting interest rates;
For a global look at markets – tune into our PodcastStay safe and happy trading.
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