APAC Market Digest: Why traders buy into Oil & Wheat, ASX tech rally to be short lived
Summary: Why APAC traders and investors are buying oil futures contracts and oil stocks. And why traders are buying wheat futures, given Ukraine and Russia supply more than 25% of the world’s supply. Australian economic growth grows hotter than expected, so expect interest rates to rise in August to cool the economy, meaning you could expect tech stocks to continue to rally up, before falling again. APAC considers and ideas below,
Co-written by Market Strategists Jessica Amir in Australia and Redmond Wong in Hong Kong.
What’s happening in equites markets?
- In the US on Tuesday sentiment soured on reports that 80% of Russian troops that massed on Ukraine’s border last month, have now entered the country. Nasdaq 100 (USNAS100.I) and the S&P 500 (US500.I) both fell 1.6%. However now the US futures are suggesting the market could see a rise at the open on their Wednesday, as the oil price surged 11% to US$106 a barrel (which is its highest level in seven years). So expect US oil stocks to rally on Wednesday in the US as they react to the news.
- The commodity rich Australian share market continued to rise, rallying up for the fourth day, up ASX200 (ASXSP200.I) up 0.2% at 2.30pm Sydney time. As for the best performers today, Australia’s largest oil stock Woodside (WPL) is in the mix, trading 5% up, other ASX oil giant, Santos (STO) follows. Meanwhile, investors continue to bunker into safe haven gold stocks like Ramelius Resources (RMS), Gold Road Resources (GOR) and Silver Lake Resources (SLR), which all trade up 5% each. Meanwhile, the iron ore heavy weight kings continue their rally into top performing spots, boosted by the price of iron ore rising 8.6% this week, with the iron ore price breathing down the neck of the $150 mark again and likely to head to $155. Which is much to the benefit of iron ore companies, like Fortescue Metals (FMG) and BHP (BHP) which trade 3% higher each.
- In Asia, Hong Kong’s Hang Seng (HSI.I) opened lower by 1% and China’s CSI300 (000300.I) fell 0.8%. Yesterday, NASDAQ Golden Dragon China Index was up 0.5%. Baidu (09888) and Alibaba (09988) ended 7.4% and 0.8% higher in ADR trading from their respective Hong Kong closings. Baidu’s Q4 revenues rose 12% YoY and EPS declined 42%, beating analyst estimates. In February, XPeng (09868), Nio (NIO), Li Auto (2015) delivered 6,225 (+180% YoY), 6,131 (+9.9% YoY) and 8,414 (+265.8% YoY) vehicles respectively. In Singapore, the Straits Times Index (STI) is set to be under renewed pressure amid what’s happening in global markets, despite gaining 1% yesterday. Following the selling in their global counterparts, banks may be among those stocks facing most headwinds.
What to consider
- The commodity rally is shifting up a gear: Wheat prices have seen their biggest monthly jump in six years, and oil is at its highest level since 2012. Collectively, buying in commodities and commodity stocks the highest its been in 10 years and stepped up a notch amid the Ukraine crisis. Across about 20 of the most traded commodities (from oil to wheat), futures traders are benefiting from ‘backwardation’, where the price of an underlying asset is higher than the prices trading in the futures market. This simply implies, futures traders expect higher demand and less supply. We know in oil for example, OPEC and its allies can’t meet their oil production quotas and the Russian situation makes its worse as Russia is the third biggest oil supplier. And as for wheat, traders are also expecting there to be a lack of supply as Russia and Ukraine supply 25% of the world’s supply, and now Ukraine export terminals are shut. And in oil and wheat, for years there’s been oversupply, but more recently, traders have been using futures to take advantage of tightening supply. These are just two examples. Many Saxo clients are using Futures contracts to benefit from this.
- Australian tech stock rally could be short lived. Australian tech stocks collectively rallied up 12% from their February low, with Block (SQ2) up the most in the ASX tech sector. Collectively, tech stocks trade at their highest levels in 9-days. But are still down 30% from their highs. So why the change? Well traders are preempting official interest rates to stay at 0.1% for least five months, given war in Ukraine was tabled as new source of major uncertainty (according to the Reserve Bank of Australia (RBA)). The RBA also implied the the war will likely cause higher energy prices (inflation) but this could be transitory. The technical indicators suggest ASX tech stocks could rally up, with bullish charting signals been seen in cloud businesses Megaport (MP1) and NEXTDC (NXT), which have already jumped 8% in five days. However, Australian economic growth is growing quicker than expected (4.2% year on year in Q4, vs 3.7% expected as per today’s read). So the RBA will most likely rise interest rates from August, which will cause companies in the tech sector to be squeezed, given they carry higher debt compared to earnings, than any other sector.
- As for the latest in Hong Kong and China: China’s The National Development and Reform Commission (NDRC) reiterated its policy of ensuring price stability of thermal coal. Measures will include strengthening the supervision of the cash and futures markets, investigation of irregular price movements and other anti-trust regulations and actions. Meanwhile, the Hong Kong SAR Government is reportedly considering restricting people from leaving their residence to stop the spread of COVID-19.
- Commodities and commodity stocks could be worth a look, as more upside is likely ahead. We also think the oil price could get to $130 if the Ukraine war escalates. For more considerations click here.
- In Equites, as mentioned yesterday in an update on Saxo’s Cybersecurity Stock Basket, we think Cybersecurity stocks will likely benefit and have additional tailwinds amid the Russian-Ukraine crisis. So consider taking a look at that.
Upcoming company earnings calendar
- Hong Kong & China A Shares: Mar 2: Techtronic (00669), GCL-Poly (03800), JD Logistics (02618), Smoore (06969). Mar 3: Bilibili (09626), Weibo (09898), Trip.com (09961), Wharf Real Estate Investment (01997)
- In Singapore: Mar 2: Netlink NBN (CJLU). Mar 3: Jardine Matheson (J36), Hongkongland (H78), Yangzijiang Shipbuilding (BS6)
For a global look at markets – tune into our Podcast
For prior Australian market and APAC updates - click here.
Latest Market Insights
Q4 Outlook 2022: Winter is coming
- Winter is coming to the financial markets as central banks are tightening their grip. How spring will look is still a question.
European energy crisis: it will get worse before it gets betterThe winter in Europe will be tough, but whether the result is political chaos or sustainable, innovative solutions is still undecided.
A difficult and volatile quarter awaitsAs the year draws to an end, commodities continue to be at centre stage of the world with growth pockets political uncertainty.
The bright side: crises drive innovationThe positive spin on crises is that they come with solutions. It is worrisome that deglobalisation may be a response to this crisis.
Green transformation in China: renewable energy and beyondGoing green, China needs to span numerous energy sources to ensure stability, as every source comes with a challenge.
Asia: Intermittent solutions, but a faster renewable adoption curveAsian energy supply is being squeezed. This and the adoption of renewables may change the investment sentiment in the region.
FX: A Fed thaw needed to deliver a sustained USD turn lowerThe US Dollar can keep momentum when the Federal Reserve continues to tighten, leaving the rest to play to their drum.
Autumn can become ugly for equities and bond holders. Comfort for Dollar longsTechnical analysis suggests that equities could face a tough Q4 as could fixed income. US Dollar positions could provide some upside.
The next stock market sector to watch, with stocks going nuclearAs the world scrambles to find affordable, sustainable energy, nuclear is getting attention from politicians and investors alike.
The crypto space is getting cold when the hype disappearsCryptocurrencies face a winter of their own as retail investors and governments are asking tough questions.