Note Note Note

Markets get ready for Angelic April, but stronger case for 0.5% US rate hike, China restrictions on streaming

Macro
APAC Strategy Team

Summary:  There's optimism amid Russian and Ukraine talks, yet it's too soon to discount commodity markets. Equities to likely continue to rally for now, until reality bites that margins will be squeezed, as policy support vanished and interest rates will rise. The US economy strengthens, so there’s a case for a series of 0.5% rate hikes from the Fed. Micron posts better than expected earnings and outlook. Iron ore pushes up. BoJ is in the market again, but yen weakness may return. China may impose new restrictions on live-streaming. Crypto sentiment is bullish, we share the possible trades on the ASX and NYSE.


Co-written by Market Strategists Jessica Amir in Australia, Redmond Wong in Hong Kong, Charu Chanana in Singapore.

 

What’s happening in markets?

  • Equities are rallying into end of quarter, ahead of angelic-April, historically the best month for shares. Over the last 30 years, the S&P500 has rallied 2.4% on average in April. However we urge caution and traders should stay on their toes as market health is still fading. On Tuesday in the US; the S&P500 rose for the 4th day, moving above a key level of 4,600 for the first time since mid-January. It comes as Bond yields fell, following better than expected economic news, with the market now factoring in the US Fed will lift rates 8 times, with rates to peak at 2.5% at year-end. The S&P500 and Nasdaq are likely to run up in the short term ahead of better than expected Q1 earnings, but the indices are vulnerable of a whipsaw pull back if; inflation is hotter than expected, if the Fed lift rates more than expected, or ahead of May, and the market is also vulnerable if the war in Ukraine doesn’t scale back as talks imply. The biggest concern for stocks though, is the margin (profit) squeeze, with profits normalising from the pandemic rush, while also being squeezed as rates rise (with US rates expected to rise in May).
  • Asian stocks generally opened higher on Wednesday morning. Positive sentiment from the US markets, and headlines on Russia scaling back military presence in parts of Ukraine helped. But optimism is likely to be tempered as we are not going to see any ceasefire yet or a complete withdrawal of troops.
  • Hong Kong’s Hang Seng (HSI.I) and China’s CSI300 (000300.I) opened higher, both were up more than 1%.  Hang Seng TECH Index (HSTECH.I) was up 1.2%. Tencent (00700) and Meituan (03690) rose 2%.  BYD (01211) reported above-consensus 4Q revenues but earnings disappointed due to higher material costs.  Gross margins fell to 11.3% 3.7% lower from last year and 0.7% lower from last quarter. Great Wall Motor (02333) reported better than earnings (+25% YoY), its share price rose 4%. In A shares, CSI300 was 1.3% higher with property developers and securities brokerage outperforming. 
  • Australia’s share market (ASX200) charging up for the 7th day, up 0.7% on Wednesday after Australia handed down its budget last night. All sectors are higher, except oil and mining. And the Australian market now expect about 7 rate hikes, (the first in June), which will take the year-end cash rate to about 2% this year (up from 0.1% now). As for the best performers, family tracking back, backed by Michael Phelps and the Bryant family Life360 (360) is up 13%, while Block (SQ2) is up 7%, rising on no news, just perhaps amid end of quarter rebalance, and as ‘risk-on’ switch has been temporarily flicked on. 
  • US data strengthens the case for a series of 50bps moves, eyes on NFP. US consumer confidence came in stronger than expected at 107.2 this month from 105.7 in Feb. Labor market tightness was also reaffirmed by the job openings report in the US overnight which is closely watched by the Fed, still focus now is on the NFP report on Friday which if above expectations, may make the Fed even more hawkish.
  • Micron Technology (MU), the largest US maker of memory chips, reported rosier than expected forecast for the current quarter, and declared quarterly sales of $8.7 billion, beating the $8.2 billion expected. Micron also forecasts better than expected profits ahead, so all eyes will be on their shares when US trade kicks off. 
  • The iron ore futures price (SCOA) rallied up 1.3% to US$157, continuing its long term rebound. Shares in the world’s biggest miner, BHP (BHP) are holding above AU$50.00, for the third day in a row, with BHP shares also remaining in their long term uptrend, supported by China dropping interest rates and relaxing emissions targets. The market however thinks Champion Iron (CIA) has the most upside in share price growth. But balance sheet strength favours BHP (BHP), Rio (RIO), and Fortescue (FMG), which are tipped to pay above market dividend yields of 9.5% (BHP), 9.3% (RIO) and 15.3% (FMG) this year supported by the iron ore price rebounding out of a bear market.
  • Japan retail sales drop suggests GDP contraction is coming. Japan February retail sales fell -0.8% m/m, the third consecutive monthly decline, and worse than the market consensus of -0.3%. This is mostly due to the latest surge in Omicron cases, as operation hours of restaurants and other services were shortened. The weak monthly activity data, along with the high energy prices, suggest that Japan’s GDP may be heading for a contraction in this quarter.

What to consider?

  • Russia’s scaled back military presence is only a temporary relief. Ukraine had given a strong resistance to Russian forces in Kyiv, and Russia is potentially now focusing on capturing eastern Ukraine city of Donbas. Besides, some of their other demands like Ukraine's neutrality (which Ukraine has agreed to) and preservation of Russian military presence in certain areas will also stay. Even in the event of a peace deal (which remains unlikely in our view), there will be consequences of the war to deal with. Europe will continue to make efforts to reduce its dependence on Russian supplies over the next year, and this means we will continue to see sustained high commodity prices. The only possible tailwind for Asian markets could potentially be that food shortages may ease, but still any new sanctions will continue to hurt the supply chains.
  • Crypto bullish sentiment is back for now. Last week we saw the biggest institutional inflows into cryptos since December 2021. Since Feb 24, digital currencies (including Bitcoin and Ether) have been outperforming stock and bonds. Investors can trade/invest in cryptos with FX on Saxo’s platform or via ETFs like Global X Blockchain ETF (BKCH), or CRYP. Another way to get exposure, is by investing in companies who make money from BTC, like global payment giant, Block. Formerly Square, Block took over Afterpay. Block trades on ASX under SQ2, on NYSE as SQ.  Block company makes 74% of its money from Bitcoin transactions. So when BTC rallies, so does Block, and that supports the ASX200 rallying, given Block is now the 6th biggest company on the ASX (bigger than Westpac Bank). Block is a profitable tech business; profit growth of 32% expected in 2022 (Bloomberg), and revenue is tipped to grow 8% in 2022 to $19 billion. Macquarie rates SQ2, as an Outperform stock, with a $230 target (it’s currently trading at $194).
  • China may impose new restrictions on live-streaming.  The Wall Street Journal cites “people familiar with the matter” that China is planning new restrictive measures on the live-streaming sector. 
  • Another key part of the US curve inverted. US 2y/10y curve also inverted briefly yesterday. Still, given current financial conditions, we are less worried about a recession.
  • JPY is taking a breather, but it is unlikely to last. USD/JPY has now drifted below 123. But a sustained recovery in the yen is still unlikely unless we see a downturn in the US economy or a significant weakening of the US equities or a clear opposition from Japanese authorities. We may see some decline in 10Y Japanese government bonds, as the BoJ has set out its plans to buy bonds today, with an increased bid for 3-5Y bonds (JPY600bn up from JPY450bn), and for 5-10Y bonds (JPY725bn from JPY425bn) with JPY150bn for 10-25Y bonds, and JPY100bn for 20Y bonds.

Potential trading ideas

  • In a note this week, Peter Garnry, Saxo’s Head of Equity Strategy, highlights the success of Vietnam in benefiting from the reconfiguration of global trade and supply chain. Interested investors may look at some Vietnam equity ETF such as VanEck Vectors Vietnam EFT (VNM:bats) and Premia MSCI Vietnam ETF (02804:xhkg).
  • CBOT grain prices dropped amid progress in Russia-Ukraine talks, but gains likely ahead. Agricultural prices may be going higher again as Russia’s claims to scale back military presence in Ukraine are evaluated by the markets. It is too soon to price out a war premium in commodity markets. Also, continued strong demand and still weak stocks for wheat (ZWK2) mean prices are likely to push higher.

Economic releases to watch

  • Mar 30: US ADP employment report
  • Mar 31: US PCE price index, Japan Tankan Index, OPEC+ meeting, China PMIs, Japan year-end
  • Apr 1: Asia Markit PMIs, US NFP


Earnings to watch
:

In Hong Kong & mainland China

  • For the rest of the week, we will be getting results from more Chinese banks and securities companies, Chinese property developers, and the leading Chinese lithium supplier, Gangfeng. 
  • Mar 30: Agricultural Bank of China (01288), Beijing Enterprises Water (00371), Changjiang Electric (600584), China Galaxy Securities (06881), CICC(03908), China Vanke (02202), Hair Smart Home (06690), ICBC (01398), Jiangxi Ganfeng Lithium (01772), Postal Savings Bank of China (01658), SF Holding (002352)
  • Mar 31: China Overseas Land & Dev (00688), China Resources Land (01109), Shimao Services (00873).

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