Markets are assessing the global growth outlook and the pace of Fed tightening

What’s happening in markets?

U.S. equities’ attempt to rally tempered by Fedspeak.  S&P gapped up more than 1% at the U.S open but the rally faded and closed only 0.25% higher as investors tried to read the tea leaves in comments from Fed officials.  Fed speakers are back on the wires backing multiple 50 basis point rate hikes, even as that might mean a bumpy ride for the economy and the markets. Cleveland Fed President Loretta Mester, in fact, also brought 75bps rate hike also back on the table but for H2 if inflation doesn’t go down. Tech was the best performer in the S&P 500, followed by communications.  NASDAQ 100 closed 1.3% higher.  U.S. Treasury yield curve twisted to slightly flatter with 2-year yield 2bp higher and 10-year yield 3bp lower.

Japan earnings taking center stage. Japan’s Nikkei (NI225.I) opened in the red on Wednesday morning but turned higher as it awaited earnings from Toyota (7203) with focus on the impact from China’s lockdowns. Sony (6758) reported solid earnings but supply chain pressures led to lower target from the current year. Nintendo (7974) announced a 10-for-1 stock split and the share traded higher after in-line earnings and conservative guidance but still seeing strength in online subscription and 12-month game pipeline. Food maker Calbee (2229) climbed 9% on earnings beat and the ability to pass higher costs to consumer. Singapore’s STI Index (ES3) was down 0.5% despite a calmer overnight US session but dip buying and bargain hunting is set to continue.

Crude oil making a recovery in Asia. While the bearish moves in crude oil continued overnight amid demand concerns and a stronger dollar, some turnaround was visible in early Asian hours after a drop below $100 per barrel. Commodity markets continue to whipsaw between demand and supply concerns. EIA lowered its crude petroleum forecast for 2022 and 2023 and Saudi Arabia and the UAE oil ministers warned that spare capacity is decreasing in all energy sectors.

Chinese A shares surged with ChiNext rising 4.3% and CSI300 up 2%.  Electric equipment, semiconductor, EV battery, consumer electronics, wind and solar names led the charge higher.  EV battery maker, CATL (300750) rose 7.7%. Hong Kong’s Hang Seng Index rose 1.7% and Hang Seng TECH Index gained 4.6% by mid-day.  After reporting better than market expected earnings and margin expansion, Li Auto (2015) surged 11%. 

What to consider?

Consider firstly; a short term relief rally is coming? Secondly; longer term, we’ll probably observe a L-shape recovery, not the V shape bounce back in markets that younger generation are used to. What does this mean? Firstly; that we could have another short term relief rally. Why? The Nasdaq has 16% of companies that are trading above their 200 days moving averages, meaning they are likely to see short term upside triggered from technical quant traders buying in. This occurred in 2008-2009 and typically resulted in a short term rally. Longer term, and importantly, we must consider we probably won’t see a V shape recovery. Markets will take longer to recover so investors need to be patient as the recovery could take 4 years for the market to come back. Reflect on the bear markets (1973, 2000 and 2007), they took 4 years to recover. Generally a ‘correction’, or a 20% drop takes about 4-6 months to hit a bottom, then a recapture period is another 4-6 months (reeling some investors back in) – arguably that could happen soon, but as above, the rally will likely be short lived. What’s key to outperforming long term; is identifying the right asset classes and companies that can outpace the slow recovery. Those companies will likely be in energy and other companies that pay dividends, as they have strong earnings and cash flow growth, and are able to sustain the pressure of higher rates, wages and other inflationary pressures (i.e. logistics issues).

Earnings disappointment continues. Roblox (RBLX) bookings were down 3.2% y/y and it expects losses for the foreseeable future as pandemic demand wanes, sending the stock to record lows and reaffirming that the ecommerce space is in for an overhaul. Coinbase (COIN) earnings also fell short of expectations, pressured by weaker volatility and a rout in crypto prices including bitcoin. A downbeat Q2 also likely in the cards suggesting threats to risk sentiment. 

China’s PPI and CPI in April were higher than market expectations.  April PPI came at +8.0% YoY (Bloomberg consensus +7.8%, March +8.3%).  CPI in April rose 2.1% YoY (Bloomberg consensus +1.8%, March +1.5%).  The COVID related disruption to logistics and production, plus food and daily necessities stockpiling by households seems making their impact felt on general price levels.

New Zealand ready for border reopening. New Zealand is ready to fully reopen its borders from August for tourists, students and migrants. This is earlier than previous timeline of October, and will provide a further boost to the recovery of regional tourism. Air New Zealand (AIR) rose over 3%, also boosting other regional airline stocks like Cathay (293), Japan Airlines (9201) and Singapore Airlines (SIA). Rising fuel prices may temper gains after pent up demand is released.

Trading ideas to consider

US inflation may provide a short-term respite. Consensus expects US CPI due on Wednesday to come in at 8.1% y/y, below 8.5% y/y seen in March. Still, inflation is likely to stay top of mind for central banks and investors. As we noted in a previous piece, there are signs that headline inflation may be peaking. But there are new concerns from food prices, services inflation and deglobalization, suggesting the pace of moderation will be extremely slow. This suggest hawkish Fed pivot is here to stay.

Bank Negara Malaysia (BNM) meeting today. Given a narrowing rate differential for the BNM to the Fed, and an upbeat growth outlook on the back of higher commodity prices as well as regional reopening, suggest scope for Bank Negara to start its hiking cycle. Headline inflation is restrained but that is primarily because of base effects and subsidies on food/fuel prices but underlying pressures are imminent.

Key economic releases this week:

• Wednesday: Malaysia BNM interest rate announcement, US April CPI
• Thursday: India April CPI, US April PPI
• Friday: US Univ of Michigan sentiment, US import price index

Key earnings release this week:

• Wednesday: Genmab, E.ON, Siemens Energy, Continental, Toyota, SoftBank, Takeda Pharmaceuticals, Delhaize, Mowi, Swedish Match, Walt Disney, Coupang
• Thursday: Verbund, KBC Group, Brookfield, Fortum, Siemens, Allianz, Merck, Hapag-Lloyd, RWE, Atlantia, Snam, NTT, SoftBank Group, Aegon, Naturgy Energy, Motorola Solutions
• Friday: Deutsche Telekom, KDDI, Honda Motor, Alibaba

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