Equities: New extremes and a challenging opportunity set
Discover insights on the future of equity markets in Q1 2024 and navigate the potential recession with strategic investment choices.
Summary: Markets are at tug of war point to kick off the second half of the year. On the downside we await more bad news from US Q2 earnings, while investors increase their FX exposure pre-empting broad indices to react poorly to Quantitative tightening in June and July. Meanwhile, on the positive flip side, traders and investors bid up reopening stocks and currencies across the Asia Pacific today with China’s largest city emerging from its two-month lockdown. Meanwhile energy stocks outperform global equities for the second month. Can this momentum continue? Meanwhile, we also reflect on stocks and sectors garnering the most attention amid the market tug of war.
What’s happening in markets that you need to know
US & European markets close mostly lower for the last day of May ahead of QT and Shanghai reopening, while energy stocks outperform reflecting where money is flowing. The Nasdaq lost 0.4% S&P500 0.6% on Tuesday, while for the month of May, the Nasdaq fell for the 2nd straight month, while the S&P500 and Dow Jones, closed slightly higher by the skin of their teeth - up 0.01% and 0.04% suggesting investors are searching for direction and are cautious. Outperforming stocks were in energy; lithium giant Albemarle (ALB) surged 35% in May, followed by oil and gas companies like Devon Energy (DVN), NRG Energy (NRG) and Marathon Oil (MRO) and Occidental (OXY) all up over 25% each in May. In Europe the benchmark the Euro Stoxx 50 fell 1.4% on Tuesday, closing lower across the month as well, marking the 5th straight month of falls. Outperforming stocks in Europe in May were led by online gambling company Flutter Entertainment (FLTR), and gas and oil companies like TotalEnergies (TTE) as well as global banks and bond issuers like ING Groep (INGA) rising 15-18% each.
Asia Pacific equities are having a mostly negative day of trade – weighting up QT starting and China’s reopening plans.
Australia’s ASX200 weights up the good with the bad but rises slightly to kick off June. The ASX200 fell 3% in May following April’s 0.9% fall, but if today’s news is something to go by, June could be another saggy month. Reopening stocks are getting bought up like Auckland International Airport (AIZ) and toll road operator Transurban (TCL), while stocks with large exposure to China like Fortescue Metals (FMG) are charging up 2.3% benefiting from China’s reopening plans. Meanwhile, on the economic news front, Australian GPD grew more than expected last quarter and YOY, which gives the RBA more room to rise rates. And second, Australian house prices dropped for the first time since September 2020. Australia’s property sector has been showing signs of cracks for some time with lending falling continuously off its peak ahead of larger rate rises. But we can see the property sector playing tug of war with this and the reopening theme. The Australian property sector index (XPJ) is down 17%, but property stocks are attempting to claw off their lows. One of Australia’s biggest shopping center owners Vicinity Centres (VCX) rose 11% in May benefiting from issuing bonds, and expanding its rent roll. So let’s see if this momentum continues and what carnage rates rises have. Separately, and on the downside today, lithium stocks are being mauled; Pilbara Minerals (PLS) shares down 19%, and Allkem (AKE) lost 13% after Argentina set a reference price for lithium, noting ‘irregularities’ in prices over the last two years. Separately, Credit Suisse downgraded PLS and AKE.
Japan’s Nikkei led the gains in Asia, up 0.6% despite a selloff in US equities overnight. The reopening of China is sparking hopes of supply chain pressures to ease, and Daikin (6367) comprised the largest portion of the index gains. Toyota (7203) and Sony (6758) also gained. Singapore’s STI index (ES3) was up close to 0.5% and remains a safe haven amid the storm in global equities amid stable macro conditions and gains from border reopening.
Chinese auto makers stocks gained following the passenger car purchase tax rate being halved. China’s Ministry of Finance cut passenger car purchase tax from 10% to 5% starting today and through the end of 2022. As electric vehicles are exempted from purchase tax, the beneficiaries from the cut tend to be auto makers that focusing on internal-combustion-engine cars. Geely (00175), Great Wall Motor (02333) and Guangzhou Auto (02238) gained about 3%. The well anticipated reopening of Shanghai today did not generate much excitements in the equity markets as the latter’s attention having shifted back towards the beginning of quantitative tightening in the U.S. and the coming back of hawkish Fed speaks and the perceived pressure from President Biden on the Fed to contain inflation, as well as the fact that China is facing a steep climb to recovery. Hang Seng Index(HSI.I) and Hang Seng TECH Index(HSTECH.I) were down 1% and 0.8% respectively as of writing. CSI300(00300.I) was little changed. KE Holdings (BEKE) jumped 16% overnight in U.S. trading after reporting in-line revenues but better than expected earnings due to margin improvements in Q1.
USD remains bid in Asia. Even as the risk sentiment was more upbeat in Asia following the China reopening, USD was bid higher. The yen weakened with USDJPY rising above 129 as the US yields rose higher with Fed kicking off QT today. EURUSD slid below 1.0720, mainly hit due to the Russian oil ban sparking growth concerns. Still, higher than expected inflation prints in the Euro-area will garner some reaction from the ECB ahead of their meeting next Thursday.
What to consider?
Caixin China manufacturing PMI came at 48.1, weaker than market expectations. Broadly in line with the contractionary but improving trend shown in the official PMI data yesterday, today’s Caixin China manufacturing PMI, which focuses on private enterprises and has a larger weight for the Eastern coastal areas, increases to 48.1 in May from 46.0 in April. Supply chain and logistics disruptions were cited in the survey as key factors in dampening manufacturing activities.
US data upbeat but consumer confidence getting hit by higher prices. Chicago PMI saw an upside surprise after rising to 60.3 from 56.4, against expectations for a decline to 55.0. Consumer confidence, although still upbeat and higher than expectations, declined to 106.4 from a revised higher 108.6. Higher prices are hitting consumer sentiment, but not enough to materially impact economic momentum for now. Bank of Canada is likely to hike rates by 50bps at its meeting later today but CAD remains hit by the fall in oil prices.
Biden meets Powell. President Biden met Fed Chair Powell yesterday and said he respects central bank independence – the obvious statement to make in a public setting. He made Powell in charge of fighting inflation, kind of laying the ground for putting the blame of economic slowdown on him a few months down the line.
Euro PMI at record highs. The Euro-wide CPI rose to all-time highs of 8.1% y/y in May, higher than last month's 7.5% and the consensus estimate of 7.8%. The print is likely to make the ECB policymakers open to more aggressive tightening moves after a move to exit negative rates in Q3.
Australian GDP grew more than expected. Australian GPD grew more than expected last quarter which gives the RBA more ammunition to rise rates. GPD grew at 0.8% in Q1, vs 0.5% consensus expected, and 3.3% annually, vs the 2.9% expected. All in all, growth is slowing, as recall, the last GPD read showed Australian GPD grew at 4.2% YOY. But the takeaway is, growth is not slowing as much as the RBA expected. Thus, expect more aggressive rate rises, particularly as wages are expected to grow following Labor’s new childcare policy and unemployment is tipped to fall again (according to censuses).
Vietnam outperforms Asia’s manufacturing PMIs. Vietnam’s manufacturing PMI rose to the highest since April 2021 at 54.7 in May from 51.7 earlier, with both output and new order rising. Other regional PMIs were marginally lower but remained broadly in expansion. Australia’s manufacturing PMI fell to a four-month low of 55.7 in May from 58.8 in June, while Japan’s fell to a seasonally adjusted 53.3 in May, a three-month low, from previous month's 53.5. Factory activity in the Philippines also slowed to 54.1 in May from 54.3 in April, while that for Malaysia fell to 50.1 from 51.6 in April. Taiwan's manufacturing activity stood at 50.0 in May, down from 51.7 from April.
Potential trading and investing ideas?
AUDEUR and AUDUSD; Australian GPD grew more than expected, which gives the RBA more room to rise rates. This means the AUD could extend its uptrend from May 13 low. The next catalyst for the AUD is Australia's trade surplus data due tomorrow. Australia’s surplus income is poise to increase – vs the US’s and EU’s deficits expected to widen. This is perhaps why some traders are going long the AUDEUR. Also supporting the AUD is that Chinese manufacturing in Shanghai resumed today.
Short-term downside pressures in wheat. Chicago wheat futures fell by their exchange limit on improved prospects for Ukraine grain shipments as Russia has opened up the possibility of removing the blockade on Black sea. Meanwhile, a good monsoon is India is also erasing output concerns due to the heatwave earlier, and US June weather forecast also looks favorable for much of the farm belt. Wheat planting has picked up from 49% in the prior week to 73% but still remains below the 5-year average of 92% which suggests that the respite in prices may be short-lived unless we continue to see further progress on weather and planting.
Auto and auto part makers, semiconductors, restaurants, beverage and specialty retails, leisure facilities and travelling stocks may be among those most benefit from the reopening of Shanghai and nationwide improvements in COVID outbreaks. ICE auto makers also benefit from the passenger vehicle purchase tax mentioned above.
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