Global markets have repriced and got ready for the Fed’s verdict
APAC Strategy Team
Summary: After the inflation scare from the US CPI last Friday and massive selloffs in equities, bonds and currencies against the dollar since then, global asset markets have repriced and got ready for the verdict from the FOMC on Wednesday at 2p.m. NYT and signals from Chain Powel on the press conference afterward. The market is pricing in a 75bp hike this meeting and another 75bps on the July FOMC and 50bps in September, with a terminal rate of 4% by mid-2023.
What’s happening in markets that you need to know
On edge ahead of Fed hike - The big picture in equites remains bearish (as we reiterated yesterday). The market is not only awaiting to see how much the Fed spikes rates by, but the market will be looking for clues as to what the Fed guides for 2022. The Fed Fund futures suggests rates will be at 3.8% by February 2023, but we think the Fed will go higher, given food and oil price inflation will get worse, once China reopens and as Euro and US travel picks up for their holiday period.
Overnight FedEx (FDX) Oracle (ORCL) CF Industries (FC) outperformed the market, with FedEX shares giving off short term bullish signals after FedEx guided for a reduction in capital spending and a 53% jump in its quarterly dividend (far above estimates). Oracle (ORCL) also showed further signs it shares could continue to rally up after it successfully gained more customers in the highly lucrative cloud market.
Boeing (BA) may resume 787 deliveries in the coming weeks. We think this could give a clear a runway for a substantial amount of cashflow growth. Goldman for instance estimates 15 787s would be worth $6 billion. BA is in our defence equity basket that we track. And its shares are down 66% since the covid crash. We do see other opportunity in Défense, with companies like Lockheed (LMT) and Raytheon (RTX) looking more attractive based on locking in forward, reoccurring contracts with the US government.
Asia Pacific markets remain mixed ahead of Fed, China data supports. The likelihood of a 75bps rate hike from the Fed is gaining traction and keeping the markets nervous, especially after a WSJ report which is said to be the Fed's way of communicating with the markets during the quiet period. Still, slightly better than expected China activity data for May supported sentiment and helped Singapore’s STI (ES3) to chalk out some gains along with Chinese equities. Japan’s Nikkei 225 (JP225.I) was down 0.6% led by department stores like Isetan (3099) and Takashimaya (8233) suggesting that inflation concerns are biting.
Australia’s ASX200 is searching for lower ground falling for the 4th day with consumer confidence levels falling like a knife, following yesterday’s ugly business confidence for May. The market is increasingly on uneven ground, with the fundamentals looking stretched and businesses costs to surge more than expected. All while the technical indicators suggesting the market is in oversold territory. Firstly, today in Australia, the Fair Work Commission unveiled a 5.2% rise in minimum wages, which will dent companies forward earnings and profits, at a time when from July 1, companies costs for employees will already be rising with superannuation guarantee payments rising to 10.5%. All this comes on the eve of Australian stronger jobs data being released tomorrow. Australia bond yields today cracked an 8-year high of 4.1%, meaning a safe haven assets offers a more lucrative return than most stocks on the global market, and bonds are almost more attractive than the ASX200’s average yield of 4.9%.
Hong Kong and mainland China’s equity markets continue to outperform the U.S market despite the COVID-19 outbreak in Beijing is yet to be contained. The gradual relaxation of pandemic control measures since mid-May has enabled a series of economic data showing better-than-expected improvements in May, in particular exports and credit numbers released last week as well as industrial production and retail sales released today. Hang Seng Index (HSI.I) and Hang Seng TECH (HSTECH.I) surged 1.4% and 2.6% respectively. CSI300 (000300.I) climbed 1.8%. Renewed speculation about Ant Group IPO also contributed to the sentiment towards Chinese internet stocks. Alibaba (09988) surged more than 4%. According to the WSJ, President Biden “is closing in on a decision to lift some tariffs on Chinese imports”.
GBPUSD takes a dip below 1.2000. Sterling is making big moves with GBPUSD dipping to fresh lows since the pandemic at 1.1934 while EURGBP rose to 0.87+ levels ahead of the Bank of England meeting on Thursday. While this is mainly driven by a massive repricing of the Fed, it is still unlikely to nudge the BOE at this point.
US natural gas slump, Europe gas higher. A key natural gas export terminal in Texas, Freeport LNG, said a partial resumption of activities was targeted for 90 days, but “a return to full plant operations is not expected until late 2022” following a fire this month that shuttered the facility. US natural gas (NGN2) dropped by over 15% to lows of $7.20/MMBtu with more gas staying at home despite soaring international demand, hence negating the upside pressure on domestic US gas prices. EU gas (TTFMN2) traded up 20% to above €100/Mwh ($31/MMBtu)
OPEC+ expects world oil demand will slow in 2023. OPEC+ expects world demand growth of 2 million barrels per day or less vs. growth of 3.36 million bpd expected in 2022. OPEC is expected to publish its oil demand forecast for 2023 on 12 July 2022. Meanwhile the IEA will give its 2023 oil demand forecast in a monthly report today. With the Democrats also considering some sort of excess profit tax legislation on oil companies to curb inflation ahead of the mid-term elections, crude oil (OILUKAUG22 & OILUSJUL22) slumped overnight with WTI dipping to 117 and Brent down to 119, but some recovery to 120-levels is seen in the Asian session.
What to consider?
U.S. May Producer Price Index (PPI) still uncomfortably high. The first estimate is out at 10.8% year-over-year from 10.9% in April. This is a tad below expectations (10.9%). Core PPI (excluding food and energy) is also out below expectations, at 8.3% year-over-year against 8.6%. U.S. PPI matters for financial markets and policymakers because it is leading the U.S. Consumer Price Index. This is too early to assess whether or not inflation has peaked in the United States. One data point does not make a trend, especially when the month-over-month change is so small. We tend to believe that inflationary pressures will stay higher-for-longer.
The US Government has noticed the star performers of 2022 are oil companies, with record high profits and overnight put them on notice; with a potential new profit tax. US Senate Chair Ron Wyden plans to introduce legislation setting a 21% surtax on oil company profits that are excessive (profits of over 10% would be excessive under the bill). And the bill also plans to attack companies with over $1 billion in yearly revenue. The 21% tax is on top of regular company tax due. Companies to watch that could see some pressure include Occidental (OXY), Halliburton (HAL), Marathon (MAR), Devon Energy (DVN)and Exxon Mobil (XOM), which are all some of this year best performers in the S&P500 up 57%-114%.
China’s economic activities showed better-than-expected recovery in May. Industrial production grew 0.7% YoY (vs consensus: -0.9%, April: -2.9%) and 5.6% MoM, led by mining. The services sector was down 5.1% YoY. Retail sales fell 6.7% YoY in May (vs consensus: -7.1%, April: -11.1%). On a MoM basis, retail sales marginally improved by 0.05%. Fixed asset investment for the first five months of the year grew 6.2% YoY but property investment fell 4%. Surveyed jobless rate fell to 5.9% in May from 6.1% in April. However, the jobless rate for young people aged 16 to 24-year old rose to 18.4% from April’s 18.2%.
Potential trading and investing ideas to consider?
How to play the FOMC? A knee-jerk reaction to the Fed announcement is almost always big, but it will also be key to watch the Fed’s dot plot and Chair Powell’s press conference today. With 200bps of rate hikes priced in for the next three meetings, it may be hard for the Fed to surprise on the hawkish side, but they need to chase market expectations to ensure credibility. USDJPY and USDCNH remain the key instruments to play policy divergence, especially if we see a 75bps coming through along with a hawkish commentary. However, trading the JPY faces a big BOJ risk coming on Friday. In a less likely scenario of Powell & co sticking with a 50bps, there is likely room for a bounce back in equities, yields to go lower and USD to sell off slightly. Long EURUSD or also AUDJPY has room to run higher in that situation.
USDJPY Put Spreads to play potential surprises from the BOJ after the conclusion of its monetary policy meeting this Friday. With popular opinions and political pressure building up questioning the BOJ’s stance of allowing inflation to run, any hints about changes in the BOJ’s assessment of growth and inflation outlook may trigger huge volatility in the JPY. John Hardy, Saxo’s Head of FX Strategy published an insightful article on this subject and a potential trading idea of buying a USDJPY 128-124 put spread.
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