What is happening in markets?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) are in bull markets, but warning signs of a pullback remain
U.S. equities had an uneventful but choppy session yesterday ahead of the employment reports scheduled to release on Friday. Nasdaq 100 gained 0.4% and S&P 500 ended flat with the homebuilding, and steel sectors rising up the most. On the flip side, the auto and oil and gas sectors saw the most selling. Over the week the market both the key indices are up, with the Nasdaq up 2.7% and the S&P500 up 0.5%. After the market close, shares in Yelp (YELP:xnys), DoorDash (DASH:xnys), Carvanva (CVNA:xnys) and Cloudfare (NET:xnys) soared more than 10% in extended trading after reporting better-than-expected earnings.
Tesla shareholders approve a stock spilt to attract more investors
Tesla (TSLA) shares extended their bullish run and now trade up 50% from the May low. Tesla nudged up in the regular session and after the market close, after shareholders approved a 3-for-1 stock split, in a bid to attract more retail investors. The split will bring down Tesla’s spun-off new shares, down to the $300 range. This is compared to Tesla’s shares which are trading at $925.00. Stock splits don’t impact the business model of a company, but are aimed at bringing a sense of affordability to mum-and-dad investors. Overnight at the Tesla AGM Musk assured investors that inflation is not affecting the business as much as it did six months ago, as commodity prices have come down. Meanwhile Musk is also pushing ahead with making in-house battery cells, to control costs where possible. And in terms of new revenue streams, Musk affirmed the Cybertruck is on track to kicking off production mid-next year. From a technical point of view, Tesla shares are in oversold territory, meaning they could be due for a pull back.
Trading in U.S. treasuries was mixed
On Thursday, the yields for tenors ranging from 2-year to 10-year declined 2 basis points to 5 basis points, with the 5-year segment rising the most (+5bps to 2.78%), after the continuing jobless claims having risen to an eight-month high and the U.K. gilts and German bunds rallying (falls in yields) after the Bank of England emphasizing a recession in the U.K. The yield of 30-year bonds, however, climbed 1bp to 2.96%. The 5-30 year segment of the steepened by 6bps. The reiteration from Cleveland Fed President Loretta Mester of the Fed’s commitment to “getting inflation down” and her “pencil[ling] in going slightly above 4% on rates” comment had little market impact. 10-year notes are trading at 2.67% this morning in Asia.
Selling emerged overnight on the dollar ahead of today’s employment report
The DXY retraced 0.8% to 105.69 on Thursday, driven some selling of the dollar against the EUR and JPY in positioning ahead of the U.S. employment report scheduled to released today. Weaker job growth would likely to lower the dollar in anticipation of a less hawkish Fed.
Hong Kong’s Hang Seng (HSIQ2) and China’s CSI300 (03188:xhkg)
Market sentiments improved after the anxiety about the tension over the Taiwan Strait temporarily receded and optimism returned following the China Securities Journal reported that industry experts were expecting infrastructure investment to be sharply higher in Q3 and to grow by 11% YoY for the full year in 2022. In A-shares, pharmaceuticals, utilities, catering, ultra-high voltage power, contract research organization (CRO), and silicones outperformed while defence, autos and beauty cares declined. CSI300 gained 0.85%.
In Hong Kong, China internet stocks climbed, Bilibili (09626:xhkg) +6%, Alibaba (09988:xhkg) +5.2%, JD.COM (09618:xhkg) +5.5%, Baidu (09888:xhkg) +4.2%, Meituan (03690:xhkg) +3.8%, and Tencent (00700:xhkg)+3.1%. Hang Seng Tech Index (HSTECH.i) surged 3.2%. Semiconductor names continued to rise as investors expecting more supports from the government to push ahead the development of this strategic industry in the midst of acceleration of tension over the Taiwan Strait, SMIC (00981:xhkg) +3.3%, and Hua Hong (01347) +5%.
Crude oil prices (CLU2 & LCOV2)
Crude oil prices have now dipped to its lowest levels since the Russia-Ukraine conflict began, due to weaker demand and improving supply seen in the short term. WTI futures dipped below $90/barrel to $88/barrel, breaking a key support level. Brent futures were also seen below $95/barrel in early Asian hours. While demand destruction fears have been creating downside pressures, clear guidance for a recession by the Bank of England as well as ECB’s downbeat outlook has amplified concerns. Meanwhile, a ramp-up in Libya’s supply as well as optimism on the Kazakhstan terminal have eased concerns for a near-term supply shortage.
GBPUSD reversed its slide
GBPUSD saw a knee-jerk move higher with the BOE’s 50bps rate hike, but downside pressures strengthened following a gloomy growth picture. A weaker dollar, however, in the US session saw cable recovering back to 1.2160-levels. EURGBP however remained above 0.8400 handle throughout, despite the ECB survey also pointing to shrinking economic growth and higher inflation.
Gold (XAUUSD) broke above the resistance level
With rising geopolitical tensions following Pelosi’s visit to Taiwan, the demand for safe haven Gold has picked up. While some military response has been seen, it still remains measured for now. Strategic response will be key to watch on a medium-term basis. Gold has cleared the key $1780 resistance and the next test will be at the psychologically important 1800 level. A softer USD and lower yields this week have also helped support investor appetite.
What to consider?
Will markets pull back from here? And what sector could outperform?
From a technical analysis perspective, the Nasdaq 100 in overbought territory with the technical indicator, the RSI at a level of 70. The last time that read was that high was in October 2021. And then the market rallied 15% but then fell into a bear market. Backing this up, our technical analyst thinks the market could rally into next week before hitting a key level. We will be watching to see if the Nasdaq 100 can hit and push above the next key level of resistance, 14,249. We think if the market hits that level of resistance, it will likely pull back given the Fed is rising rates, and earnings have been declining (excluding energy). That means, the rally off the June low could be unwound. The stocks that will likely continue to move up though will likely be those energy companies that are able to sustain higher interest rates while growing free cash flow. A sector to look at would be coal, which is benefiting from record demand and prices.
Bank of England hikes 50 basis points, provides gloomy outlook
The Bank of England hiked rates by 50bps to 1.75%, as the majority expected, with one dissenting voter. More importantly, they forecast an outright recession to start beginning in Q4 as inflation is set to peak at 13% later this year and falling below target in three years. The recession is forecast to last five quarters after starting in Q4 2022, suggesting the tightening from BOE may slow down from here. At the same time, BoE plans to reduce balance sheet by £80 billion over 12 months (range of 50-100 billion had previously been aired) starting in late September.
US July nonfarm payrolls to re-confirm a tight labor marketInitial jobless claims rose to 260k last week, coming in at an 8-month high. Continuing claims were also the highest since April. The steady increase of the four-week moving average of initial and continuous claims may be pointing to somewhat moderation in job growth but the increases in claims are still below the levels that are generally associated with job losses or a rise in the unemployment rate. The labor market remains tight. Bloomberg survey forecasts a 250,000 gain in non-farm payrolls for July, unemployment rate unchanged at 3.6%, and average earnings rising at 0.3% MoM or 4.9% YoY. The other key thing to note from the NFP data would be the composition of the labor market, especially to understand if the gains in payrolls will be durable. Labor market growth is currently concentrated in the leisure and hospitality business, which remains exposed to a cyclical slowdown in discretionary spending. Hiring in the construction sector is likely to be slower due to the higher mortgage rates impeding housing sector growth.
Alibaba earnings beat market expecations
Alibaba (09988:xhkg/BABA:xnys) reported better-than-expected June quarter (Q1FY233) results. Revenues came in at RMB205.6 billion, flat from a year ago but 1% above Bloomberg consensus. Non-GAAP EPS declined to RMB11.73 but 14% above consensus. Adjusted EBITA and Non-GAAP net profit were RMB34.4 billion (-18% YoY) and RMB31.4 billion (-31% YoY) but both beating expectations (by 25% and 14% respectively vs Bloomberg consensus). The better-than-expected results came primarily from cost cutting. The losses in the companies’ new ecommerce initiatives, such as Taobao Deals, narrowed. The company’s business was badly affected by the lockdowns in April and May but it began to recover from late May. The management said that the recovery continued and had become more apparent in July but customer demand was still weak overall and it would take time to fully recover. During the quarter, Alibaba repurchased a total of USD3.5 billion worth of shares and still has an outstanding authorization to repurchase USD12 billion more of shares until March 2024.
The State Grid Corporation of China has RMB 1.3 trillion worth of projects under construction
The China Securities Journal reported that the State Grid Corporation of China has a total of RMB 1.3 trillion projects under construction in the areas of high-voltage AC, grid interconnection, power transmission, and ultra-high voltage. The company expects that their projects will bring about additional RMB2.6 trillion of related upstream and downstream investments.
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