December 12 2022
The Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) are on edge for higher inflation
The major US indices fell on Friday with the S&P500 down 0.7%, the Nasdaq 100 losing 0.6%, capping off a sour week with the S&P500 down 3.4% and the Nasdaq 100 down 3.6%. After oil prices posted their biggest weekly drop since April, Energy stocks were some of the biggest laggards last week; with Halliburton down 15% and Marathon Oil down 12%. Consumer spending stocks that may falter if US a recession occurs also fell the most, with stocks like Lululemon down 15% last week after downgrading holiday trade guidance. While EV giant Tesla fell 8%. The other theme that’s driving markets is that China is easing restrictions, so stocks exposed to China consumers are rallying; with Chinese internet stocks like Baidu up 5.4% and Pinduoduo rising 4% last week
Why volatility in equites could pick up this week and what we learnt from prior inflationary read outs
Will the inflation read show CPI fell to 7.3%YoY in November as the market expects, down from 7.7% YoY? The risk is that inflation doesn’t fall as forecast, and that may likely push up bond yields and pressure equites lower. We saw this set-up play out on Friday. November’s producer price index showed wholesale prices rose more than expected, which spooked markets that this week’s CPI could be bleak. As such bonds were sold off on Friday, pushing yields up; with the 10-year bond yield rising 10 bps to 3.58%, while equities were pressure lower. Consider over the past six months, the S&P 500 has seen an average move of about 3% in either direction on the day US CPI has been released according to Bloomberg. We haven’t seen these moves since 2009. Also consider, the S&P 500 has fallen on seven of the 11 CPI reporting days this year.
The world holds its breath for the Fed Reserve’s final interest rates decision of 2022. What do you need to know?
And it could also be one of the biggest final catalyst for equites for 2022. On December 15, the Fed is expected to hike interest rates; by 50 bps (0.5%) with a similar move early next year. Forward commentary will be looked at, as consensus predicts rapid cutting of interest rates to begin after they peak in May 2023, because US unemployment is expected to rise and US GPD is expected to grind lower. But at Saxo, we think rates won’t be cut next year. So that could cause volatility, as markets may have gotten ahead of themselves. Meaning, if forward commentary is hawkish we could see further pull backs in equites.
In Australia; this week the focus will be consumer confidence and employment data
There are a couple of economic read outs that could move the market needle, the ASX200 (ASXSP200.1) this week. Weakening confidence is expected; starting with Consumer Confidence for December (released on Tuesday), followed by Business Confidence for November. Employment reports are due on Thursday for November, and likely to show employment fell; 17,000 jobs are expected to be added, down from the 32,200 that were added in October. So focus will be on the AUD and a potential pull back if the data is weaker than expected.
Iron ore equites to see volatility; China reopening talk vs shut downs pre lunar new year
The iron ore (SCOA) trading at four month highs $110.80 rallying as China has been easing restrictions, plus there are whispers Chinese property developers could get more support, which would support demand for iron ore rising. However we mentioned on Friday, why iron ore could pull back, as buying volume appears slowing. So be mindful of potential pull back in iron ore pricing and mining equities. Secondly, consider seasonable halts of Chinese steel plants ahead of the Lunar New year holiday could occur. That said, restocking typically occurs 5-8 weeks before the holiday, but we think plants could be closed earlier, due to poor profits and weaker demand. This could cause volatility in iron ore and iron ore equities. So, keep an eye on iron ore majors, Vale, Fortescue Metals, Champion Iron, BHP and Rio as they could see profit taking after rallying ~25-55% from October.
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