Summary: Oil pressured lower for now despite OPEC warning of short supply in 2023. Could airlines continue to climb off their lows moving inversely to oil? History tells us markets are likely fall after Wednesday’s inflation data if CPI is above 8.8% YOY. New Zealand’s central bank rose rates for the third time - pledging to tighten till inflation is contained. Former RBA deputy Governor, Guy Debelle says Australia needs to get aggressive on climate goals, while the Newcastle coal futures price surged back to record highs with parts of Australia recording the cold temperatures in history. While China exports rose in double digits fueled by semiconductor demand rising.
S&P 500 (US500.I) stepped lower for the third day, down 0.9%, while the Nasdaq 100 (USNAS100.I) fell for the second session, shedding 0.95%. Traders and investors are positioning themselves defensively and reducing risk ahead of Wednesday’s US inflation update and ahead of company earnings being released for Q2. We think estimates for Q2 are too high, The markets are awaiting clarity before re-entering. But we don’t believe clarity will come until forward margins are able to rise, and we don’t potentially seeing this happening until maybe next year. Also keep in mind, the technical indicators suggest both key indices (S&P500 and Nasdaq) could continue to fall facing selling pressures on the day and weekly charts.
Japan’s Nikkei (225) trades slightly higher, up 0.33% but remains APAC’s worst performing market this year, down 17%. Australia’s ASX200 trades steady ahead of Australia’s key employment data being released tomorrow and nurses a loss of 11% YTD, almost mirroring China’s benchmark index, the CSI 300’s YTD fall of 11%. New Zealand’s market trades 0.4% higher despite the RBNZ hiking rates today as expected. Australia and NZ’s KMB Brands (KMB) shares rose 3.6%, as its clocked record sales from its pin-up brand, Kathmandu amid its key winter period. But the owner of Rip Curl and Oboz flagged the business was affected by covid restrictions at football games, and some stores had to close due to staff illness from covid. And like much of the corporate world, KMB flagged it’s feeling the pinch from rising input costs (rising raw materials to make wetsuits, and surging freight costs).
Hang Seng Index (HSI.I) and CSI300 (000300.I) took a pause in their recent down moves, gaining modestly this morning. Hang Seng TECH Index (HSTECH.I) rallied 2%. Bilibili (09626:xhkg) and iDreamSky (01119:xhkg) surged more than 3% after getting licenses (Banhao) for new games. After commodity prices plunging further overnight, oil and gas, and mining stocks fell. New energy stocks, such as Longi Green Energy (601012:xssc) and Xinjiang Goldwind (02208:xhkg) gained over 5% and 7% respectively.
Oil’s outlook is getting dimmer for consumers and business. OPEC suggested global crude demand will exceed supply by 1 million barrels a day next day next year, meaning they see no relief for consumers. This is something at Saxo we’ve been warning markets of for some time and guided to in our Q3 Outlook. Despite that, Oil WTI tumbled 8% to $95 and is now in a bear market (down 20% from the June high). This daily fall comes as firstly - weekly US oil inventories rose last week (showing short term supply rose), while demand is likely to remain slow as recessionary concerns linger, with China, the world’s biggest oil importer and commodity consumer getting stricter on mass testing and lockdowns. One single covid case shut down one of China’s steel hubs for three days and Macau, the gambling hub is shut for a week. For as long as there is cases, a zero covid stance, oil might remain pressured. This is something we are watching closely, given oil is a proxy for growth.
The last time CPI data came out hotter than expected, the market took a haircut, falling 8% to new trough after inflation in May grew to 8.6%YOY. If June's US CPI (released Wednesday 8.30am US time) is above 8.8% YOY (consensus expectation) then markets face selling pressure again, as the Fed will be forced to 'fight’ it.
China’s National Press and Publication Administration (NPPA) announced the approval of 67 online game licenses (Banhao) yesterday evening, the 3rd batch this year. Bilibili (09626:xhkg) got 2 licenses but Tencent (000700:xhkg) and Netease (09999:xhkg) got none. Tencent did not get any of the 172 licenses in the three batches of approval in 2022, which seem favoring smaller players. iDreamSky (01119:xhkg) in which Tencent has an equity stake got one license in this round.
In the first six months of 2022, China’s exports climbed 13.2% YoY and imports rose 4.8% YoY on RMB basis. Electric equipment, semiconductor, auto, textiles, plastic goods, and footwear are among those exports registered double-digit growth.
Airliners outperformed US markets overnight setting the tone for APAC today. But can this continue? American Air (AAL) said its upcoming results will show revenue soared 12% in Q2, compared to the same time last year. While costs per seat will rise 12%. The positive news saw traders excited. Its stock jumped 10% to a month high, above its 30 day moving average. What’s important is what airlines guides for in 2022, with American Air scheduled to report July 21. At Saxo we’ve observed Airlines stocks moving inversely to the oil price, and catching bids from US/EU summer travel. If these trends continue, it support airlines moving above their 50 day averages, which could trigger investors and traders entering positions. All in all, US carriers are likely to see sustained profit growth kick up again, for the first time since 2020. We think guidance levels for 2022 may be rosy, given airlines biggest costs, oil, is down 20% from June and this could see guidance levels upgraded. Other travel related stock moving see renewed interest include UnitedAir (UAL) rising 8% and Boeing (BA) up 7% in the US. In APAC, Australia’s biggest airline Qantas (QAN) shares trade up 4.5%, Air New Zealand (AIZ) is up 1.6% in NZ, and Singapore Airlines is up slightly.
In our latest China Update, we reiterate our constructive view on Chinese infrastructure-related companies. We note that we are expanding our previous focus on upstream oil and gas and mining companies to include more mid-to-downstream manufacturing industries that are benefiting from more infrastructure construction in China. It is a tactical idea for Q3 in response to the probability that these mid-to-downstream manufacturing industries, which have had their operating margins under pressure due to high input costs, may get a relief from the recent plunges in industrial metals and energy prices. For longer-term beyond Q3, however, we believe that commodities are in a prolonged secular bull market so we are inclined to resume our focus on upstream industries later this year.
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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.
Uncover the shifting focus in 2024's FX markets towards growth resilience and relativity, away from bond yields and inflation stories.
Embrace the metal revolution on the commodity market in the coming year, with a focus on gold, silver, platinum, copper, and aluminum.
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The disheartening cycle of unresolved geopolitical conflicts, the rise of polarizing political parties, and the stagnation of productivity.
Understand China's political landscape in Q4 2023 and the impact on counter-cyclical initiatives, with a focus on the pivotal Q1 2024.
