Oil stocks charge again, are US equities on the brink of a huge disappointment and BHP attempts to rise out of bear market

What’s happening in markets?

 

US markets take a breather ahead of end of quarter, or is this the eye of the storm?

US equites took a trim with Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) falling slightly on Monday, ahead of the end of quarter/half year end on June 30. Markets were spooked by inflationary indicators creeping up again with the oil price back over US$110 after Libya said it may suspend exports from the Gulf of Sirte in the next three days. So investors bunkered into bonds again, which pushed up the US 10 year yield to 3.2%. Despite Monday’s pull back, the S&P500 is up 6.2% and the Nasdaq is up 7.2% from June 17. At Saxo we think equities are likely to get spooked and will probably head sharply lower once the market sees the reality, that company earnings will likely be dimmer than anticipated. New Bloomberg data showed that S&P strategist haven’t been this bullish on quarterly earnings in 20 years! As we’ve highlighted, and discussed yesterday as well, we think the market is likely to get bitterly disappointed, spooked and fall when company results and outlooks come through – which could hurt investors and add to a much larger pull back. Bloomberg Economics probability model projects there being a 72% chance of recession before 2024. If that occurs, history tells us, the market may fall 49-56%.

Best 2022 performers - oil company stocks- rise back up proving inflation is higher for longer

Given the moves in oil overnight, oil companies shares came back with vengeance overnight, with shares in oil companies like Valero Energy (VLO), Devon Energy (DVN), Hess (HES), Marathon Oil (MRO), becoming the best performers on Monday rising 5-8% each. Year to date, these stocks have seen the most momentum and best share price performers year to date, up over 40%+. ,

APAC markets are mostly lower after starting the day all in the green

Brakes are being put on the bear market bounces, for now with European summer holidays underway. This means quarter-end portfolio rebalancing could be over in some markets, while it continues in Australia. It’s also near option expiries, which means we could still continue to see some bounces until the very end of the month, but, Q2 earnings will be the next big catalyst for the move lower in equities as analyst estimates are still very high and that will mean earnings misses and also more downgrades. A weaker end to the Wall Street and higher oil prices means APAC equities will be under pressure, and China equities also reversed course today. Singapore’s STI (ES3) was down 0.2% while Japan’s Nikkei (NI225.I) was in losses of 0.15% at lunch as tech was lower.

End of financial year sales in Australia?

It’s nearing end of financial year in Australia with the ASX200 up for the fourth day, up 0.7% on Tuesday buoyed by rebalancing, while Oil and Iron ore commodity stocks lead the charge. However we think broad gains will be in check after July, for three reasons – firstly Australian bond yields are rising again and the Aussie 10-year yield is at 3.81%. Secondly, local reporting season numbers are due, and we think more earnings disappointments will be released and this will spook ASX investors causing broad pull backs as companies grapple with lack of resources (staff), higher wages, less demand and rising costs with the situation to get tougher as the RBA rises rates. And thirdly, we still don’t have notice from China when they are officially ending lockdown, so we see the commodity metal rally potentially being short lived until we have solid reopening reports.

Chinese equity markets rally takes a pause

Hang Seng Index (HSI.I) dropped about 1% and Hang Seng TECH Index (HSTECH.I) was off by 1.6%.  Tencent (00700) lost about 5% as its largest shareholder, Prosus NV planned to continue to unload its stake in the company.  Other mega cap Chinese tech stocks also declined by 2% to 4%.  Property sales volume across top 30 cities in China recovered in June, rising 81% from May, though still 13% below last year’s level for the same period.  China Overseas Land (00688) and CR Land (01109) climbed about 1%.  CSI 300 (000300.I) was little changed.

EURUSD downside may remain limited

As long as US Treasury yields and the US dollar remain range-bound, the scope for a significant downside in EURUSD is limited. Pair broke above 1.06 last night and the ECB-hosted central bank conference in Sintra, Portugal has a host of ECB speakers lined up who could take this chance to hint at jumbo rate hikes. Eurozone inflation is also due this week, which means the EUR will possibly remain supported for now.

Crude oil (OILUKAUG22 & OILUSJUL22) back in gains

While the demand destruction fears have taken out a lot of froth from the commodity markets last week, we are now seeing gains return as the focus shifts back to supply constraints. WTI crude was back above a $110/barrel while Brent was at $116. Libya is sending a warning on oil exports again, which it may suspend due to political crisis. Meanwhile, EIA continues to delay its weekly oil report due to hardware failure, and the prospect of additional supply from OPEC's key oil producing nations is pretty limited.

What to consider? 

Some respite in the U.S. recession scenario?

US durable goods data reported last night was above expectations, with the headline rising +0.7% m/m (exp. 0.1%, prev. 0.4%) for May. This has helped to mitigate concerns that we may see a technical recession in Q2. Atlanta Fed's GDP now model for Q2 was also revised up to +0.3% after the data, from an initial estimate of flat growth which sounded alarm bells for an impending technical recession. This has meant that Fed could proceed with aggressive rate hikes, bringing rates above the estimated rate of neutral quickly. Still, it is important to consider that the durable goods data was backward looking as it was for the month of May, and focus is still on PCE and ISM manufacturing data due at the end of the week.

US consumer confidence will provide hints on the US labor market

The US consumer confidence from the Conference Board survey is due in the US today. This metric has held up even as University of Michigan recorded declines. The University of Michigan arguably focuses more on the inflation/cost of living dynamics, which is hitting the consumer now especially due to the increase in gasoline prices. But the Conference Board survey phrases questions more on the job market. More details on the two surveys and other activity indicators for the US economy are here. Once we start seeing declines in Consumer Confidence, it will be an indication that slowdown is being felt in the labor market and may start to bother the Fed.

EV makers on watch; VW selling assets to get cash? Tesla has a new rival?

Volkswagen (VOW) is said to be nearing a deal to sell its minatory stake in Electrify America to Siemens that could be valued at $2 billion. The deal is expected to be announced as soon as Tuesday. VW is said to be cutting staff numbers in Europe as it overhauls its business as well and cuts costs. VW shares are heavily down this year and face further pressure as car sales are expected to grind lower. VW shares are already down over 30% this year. Meantime, Tesla (TSLA) is facing increasing competition from Kia Motors (who majority shareholder is Hyundai) with there cars seeing a huge jump in sales in Q1. However, Tesal remained the leader in the US, with Tesla EVs accounting for 72% of the market. It’s also worth noting Elon Musk has not tweeted in a week. Could Elon be getting ready to announce Tesla is going to buy a lithium company, given lithium stocks have fallen considerably in value?

Potential trading and investing ideas to consider?

World’s biggest mining company, BHP comes out of bear market. For how long? 

Shares in the world’s biggest mining company, BHP (BHP) are making green tracks for the first time in four weeks, which has officially taken BHP shares out of bear market territory, now down 19.8% from its April high. BHP shares could see buying pick up for three reasons; firstly its EOFY in Australia and BHP shares are down 12% YOY; so we may likely to see fund managers top up BHP positions as it’s the largest commodity stock in the world and the biggest stock on the ASX. Secondly, the technical indicators suggest BHP shares could rally on a daily charts as it's in oversold territory. And thirdly, sentiment picked up in China after it declared victory over Shanghai’s covid outbreak yesterday. This resulted in the iron ore price jumping 5% yesterday while the Copper price rose for the first time in five days. Big picture on BHP? caution remains over the medium term in BHP as the industrial metal commodity rally could be short lived, until we have consistent news from China that restrictions are easing. BHP’s financial year ends this week. An operational review is due July 19, which will probably give a dimmer outlook on commodity demand and we could likely see a drop in output given covid restrictions. BHP’s financial results are due August 16.

Relief in food prices may be short lived

USDA's crop progress report indicated that the weather forecast shows a drier trend but mild temperatures. This should help for good crop growth and is not really threatening to US crops. But the report noted a deterioration in crop quality, and that means any respite in food prices is likely to be short-lived. Trading needs to resume from the ports in the Black Sea which was damaged/disrupted by Russia's invasion, meanwhile, Ukraine’s production will likely remain below optimum levels in the coming years. That being said, weather changes continue to affect crop production in the US, which means the only way for the food prices is up in the medium-to-long term.

 

_____________________________________________________

For a weekly outlook – tune in to our Saxo Spotlight.

For a global look at markets – tune into our Podcast.