A dry July for markets, floods for Australia, likely US recession, commodity metals face more pressure, July 4 travel to wane, & AUD on notice

What’s happening in markets?

APAC equities mixed as July ushers in a new half year

With short-term pocket bounces in US equities, APAC equities started trading on mixed ground on Monday ahead of the US independence day holiday. Our three key indices – Australia’s ASX 200, Japan’s Nikkei and Singapore’s STI – were all in green even as others like Indonesia’s JCI were down over 2%. The star performers on the ASX are fossil fuel coal stocks like New Hope (NHC) and Whitehaven Coal (WHC) setting higher levels as the coal futures price looks supported at record levels, while building stocks are higher like James Hardie (JHX) and Brickworks (BKW) in anticipation that repatriation work will be needed ahead of flooding likely to worsen on the east coast. Elsewhere, the Tech sector across APAC remains sluggish especially as key warnings from Micron (MU) and Meta (META) came last week, suggesting cuts in capital expenditure could be ahead after marketing cuts and layoffs started earlier in the year. And investors await a look at numbers from Samsung this week which will likely be dark.

Chinese equities consolidate

After another week of notable outperformance versus other markets, CSI300 (000300.I) and Hang Seng Index (HSI.I) were treading water this morning. Heightened U.S. recession fears dampened market sentiment.  New locally transmitted local Covid-19 cases bounced to 380 in mainland China. Shares of auto makers traded down 1% to 4% and Macau gaming stocks declined 2% to 5%. Chinese developer, Shimao failed to repay a US$1 billion bonds maturing yesterday. Property names traded weak.  Gangfeng (01772) fell 4% after saying that the Company was being put under investigation by the Chinese regulator CSRC for alleged insider trading of an A-share company

USDJPY on its way to test the 134 support

As US Treasury yields remain pressured lower heading into July, that has spelled some relief for the Japanese yen which is off its 24-year lows printed last week. USDJPY is now trading close to 135, with recession fears helping to bring the yen’s safe haven appeal back. Still, Japan’s inflation threat is rising and the wage negotiation results due this week. Any signs of an uptick may mean further test of the Bank of Japan’s resolve to keep its accommodative yield curve control policy. Key level to watch for the yen is 134, and a break below could threaten the support at 131.50.

AUDUSD off 2-year lows, but next catalyst to come from RBA decision on Tuesday

The US dollar and FX haven have been bid up last week and the USD was close to YTD highs despite yields moving lower. This pressures the high-beta/activity currencies and AUD slid to 2-year lows of 0.6764 as Australian bonds rallied. The market expects a 0.5% Reserve Bank of Australia (RBA) hike, but the room of a 0.75% jump may turn the AUD higher on a knee-jerk/ larger than expected move. AUDUSD is off lows, but still remains below 0.6850 on Monday APAC morning. If the RBA is more dovish, the AUD’s could be pressured and move lower to the next level support 0.6500.

What to consider?

Equities kick off HY not ready for earnings disappointment and more likely downturns.

After the worst sell off in half a century the market pain for equities is probably not over. Company quarterly earnings estimates are still too high, and market is not conditioned for weaker than expected results, and guidance level to come through for US Q2 and for full financial year in Australia, with reporting season kicking off in August. With both events will likely reprice equities lower so we advocate for clients to remain defensive, and consider favoring companies deemed quality-  with high repeatable cashflow and earnings growth; likely in commodities (agriculture, and energy).

Commodities mixed bad divides; Agriculture commodities and industrial metals face headwinds. Energy looks up

Bloomberg Commodity Index (BCOM) has now fallen 14% from its record high and faces further selling, crushed by recessionary fears plus we are seeing the situation in China worsen with cases climbing, which effectively kills any hope of commodity metals picking up in demand. As such in APAC time today, the Iron Ore (SCOA, SCOQ2) price fell 4.4% to $109.60 which with further dent earnings in iron ore stocks like BHP (BHP) and Rio Tinto (RIO) and Vale (VALE). Across the board; wheat, Copper, Cotton, Iron ore and oil are lower… yet Coal prices remain in record territory. Weather conditions in the US have worsened, while Australia’s east coast is experiencing partial flooding, which means although the wheat price could head lower for now, it's likely to pick up again as supply issues grip the market.

US data is pointing to a sharper slowdown

Headline ISM Manufacturing fell to a two-year low of 53.0 in June from 56.1 in May, coming in below expectations. Atlanta FED GDP now model is predicting Q2 contraction of 2.1% after disappointment from ISM manufacturing survey last week. So there is a greater chance that the U.S. will be in a technical recession, or two quarters of negative GDP growth. Jobs data for June is out later this week, and will be key to watch as well to look for any indication on challenge to the ‘robust labor market rhetoric’.

Holiday spending may be squeezed on July 4 US holiday weekend

US travelers were warned of flight chaos for the July 4th holiday weekend with a spate of summer cancellations and delays. As we wrote last week, US credit card spending data from Barclays showed US households slowed travel spending over the last 4-6 weeks. So, a slowdown in consumer spending/curtailed holiday spending, suggests the strength of the services sector may not be enough to offset the weakness in US manufacturing as reported by the ISM survey index last week. The ISM services index for June is due this Wednesday and will be the next key to watch as recession concerns continue to pick up.

Potential trading and investing ideas to consider?

Gold tested key support on India’s import tax

Gold (XAUUSD) broke below the psychologically important $1800 level on Friday for the first time in six weeks amid faster Fed tightening concerns and India announcing import tax on gold to protect its ballooning trade deficit. Still, the yellow metal bounced off its key support at 1780 and is now back above 1800. With US yields remaining capped, more bid can be expected in H2 for gold – which serves as a safe haven. But India is the world’s second biggest consumer of Gold, and unless China demand is seen improving to offset the decline from India, Gold may need to clear more tests before embarking on a clear upward path.

Insurance companies in Australia to be flooded with claims  

Australia’s Defense Force (ADF) has been called upon to help NSW with their flood crisis, while no end is in sight for the weather, with the Bureau of Metrology warning flooding could continue for a week as Australia grapples with one of wettest winters we’ve seen.  Australia faces another winter of flooding rains which means Australia’s insurance companies claims face upward pressure. Companies like Suncorp (SUN), Insurance Australia (IAG) will be on watch, as well as Johns Lyng Group (JLG) who delivers emergency building works to flood affected areas.

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