Money flows to lithium, coal, oil again. Tech sours as rate rises will be aggressive
Australian Market Strategist
Summary: Inflation too hot to hand, markets brace for 8 US rate hikes. The oil price rises 7% to $115. Japan faces a historic power crunch. While coal mines expand and lithium stocks take off in Australia. Why to expect volatility till the end of quarter, expect iron ore stocks to rise again, along with oil giants. Could the AUD to rally up and the Euro decline further?
Co-written by Market Strategists Jessica Amir in Australia, Redmond Wong in Hong Kong, Charu Chanana in Singapore.
What’s happening in equites that you need to know?
- The Australian share market (ASX200) punched 0.9% higher, (to 7,341 points), seeing the market close at highest level in since 19 January, above a key hurdle (a resistance level) its 200 day moving. Meaning, we could see the ASX200 hitting higher highs. Why? Well the Aussie share market is made up of 30% commodities stocks, many of which are thriving in this new cycle. The theme of the day was energy. All leaders in the ASX are either supplying clean energy (lithium) or are selling petroleum and or coal. Battery mineral suppliers lithium ASX200 newcomers AVZ (AVZ) rose 6% after entering the benchmark index yesterday. Another lithium star on the block, Liontown Resources (LTR) rose 6%. While the world’s biggest mining giant BHP (BHP) and the ASX’s biggest stock, BHP shares rose 5%, after China announced it would pledge more stimulus to support its economy. And BHP makes most of its money from China. Meanwhile coal company, New Hope (NHC) shares surged almost 10% after reporting its earnings surged 582% in the half year, and it will pay a special dividend as it can see thermal coal prices heading higher. The CEO says it’s forward sales book will support robust returns for the company, given supply remains constrained. Meanwhile the company announced it gained approval to expand its coal mine.
- In Asia Hong Kong’s Hang Seng (HSI.I) and China’s CSI300 (000300.I); Hang Seng Index and Hang Seng TECH Index (HSTECH.I) rose 1% while CSI300 was little changed. China Evergrande (03333), Evergrande Properties Services (06666) and China Evergrande New Energy Vehicle (00708) announced delays in reporting results. During audits, it was found that RMB13.4 billion of Evergrande Properties Services’ bank deposits had been sieged by banks as a result of the company’s guarantees to third parties. Evergrande group’s management holds an investment meeting this evening. Alibaba (09988) rallied over 4% following an increase of its share buyback $25 billion from $15 billion. Pinduoduo ADR (PDD) lost over 6% overnight in the U.S. after revenue miss. HK & China Gas (00003) fell as much 15% after earnings miss.
- Also in Asia, Japan has a historic power crunch. The Japanese government has issued a historic power supply warning in Tokyo, on the back of cold weather and several power plant outages after powerful earthquakes last week. Power reserves fell as low as 0% today in key cities of Tokyo and Tohoku. Tepco (JP: 9501) said it would receive electricity from other regional utilities to overcome the power crunch. Japan's biggest utilities may also be forced to boost output from gas-fired power plants and seek LNG supplies from the spot market. USD/JPY rose to a 6-year high, prompting gains in Nikkei 225 of 1.4% and 1.3% in the Topix with Powell’s hawkish comments from last night implying a 50bps hike is possible in May.
- In the US, equities could be headed for a sobering Tuesday. The S&P 500 (US500.I) and Nasdaq 100 (USNAS100.I), are tipped to open lower. But a bright spark will once again be oil stocks as the oil rise jet packed back up 7% to $115.
What you need to consider
- Tech stock rout is likely to get worse. Market are now pricing in the US Fed Reserve could rise interest rates 8 times this year, instead of 7, and rise interest rates as high as 2.5%. Simply, this means companies that companies with higher debt, will be doing it tough, as their debt repayments rise. Plus inflation is too hot to handle. The Fed doesn’t want 10% inflation. So if you have tech stock gains, consider taking profits and moving to where money is flowing.
- Extra volatility ahead till end of month and quarter. On top of markets bracing for triple Rs (record inflation, rising rates and a possible recession), there is extra volatility in markets right now, as it’s quarterly rebalance time, where investment managers adjust portfolios (take profits from stocks that are up this quarter (i.e. commodities) and are forced to buy into underperforming downward facing tech stocks). Plus you will likely see misleading gains in tech stocks, as traders close their short positions in tech stocks. So expect short lived gains in tech – before the sector likely falls again, while commodities rally up.
- Iron ore is a hot commodity again. With China putting state owned firms to buy minerals and metals, and with China ramping up stimulus iron ore stock are on fire and are hitting new highs. BHP, Rio, Champion Iron and Fortescue Metals, and Vale are setting highs and are worth watching or long term investing in.
- Oil is heading higher again. Not good for consumers, but good for oil investors and investors in oil equities. Woodside Petroleum (WPL) on the ASX is a key beneficiary, along with Occidental Petroleum (OXY) in the US, with both having secure US rigs and 30+ year resources to call on, at a time when banks won’t lend to new/junior explorers.
- Declining Euro. As the market turning its focus back to Fed tightening, the recent rallies in Chinese as well as global equity markets are at risk of losing momentum. The outlook of rising US interest rates outpacing those in Europe will pressure the Euro with the possibility of declining towards the March 7 low of 1.08.
- Further rise in Singapore’s core CPI on Wednesday will prompt more tightening moves from MAS. The hawkish Fed is likely to prompt more policy tightening from the Monetary Authority of Singapore (MAS) in April, even as most other central banks in Southeast Asia will still likely maintain their accommodative policies. Rising core inflation in Singapore means the curve will be steepened, and that should support the SGD. Wednesday’s CPI release from Singapore remains on a key watch ahead of the April policy meeting.
Earnings to watch
Hong Kong & mainland China
- Mar 22: Anta Sports (02020), Chow Sang Sang (00116), CSPC (01093), Minth (00425), Shimao Services (00873), Wuxi Bio (02269), Xiaomi (01810)
- Mar 23: AAC (02018), China Mobile (00941), CIMC Enric (03899), Fosun (00656), Geely (00175), Haidilao (06862), Kingsoft (03888), Tencent (00700), Trip.com (TCOM)
- Mar 24: BAIC Motor (01958), China Life (02628), China Overseas Property (02669), China Resources Beer (00291), NIO (09866)
- Mar 25: Greentown Service (02869), Longfor (00960), Meituan (03690)
Quarterly Outlook Q2 2022
Quarterly Outlook Q2 2022: The End Game has arrived
- Shocks from covid and the war in Ukraine have forced the global financial and political world to change, but what will the end game be?
Productivity and innovation have never been more importantAs the world economy hits physical limits and central banks tighten their belts, could equities be facing a 10-15% downside?
The great EUR recovery and the difficulty of trading itIf the terrible fog of war hopefully lifts soon, the conditions are promising for the euro to reprice significantly higher.
Tight commodity markets – turbocharged by war and sanctionsWith supply already tight, commodities keep powering on. But will it last for yet another quarter?
Between a rock and a hard placeGeopolitical concerns will add upward price pressures and fears of slower growth, while volatility will remain elevated.
The Great ErosionInflation is everywhere and central banks try to combat it. But will they get it under control in time?
Australian investing: Six considerations amid triple Rs: rising rates, record inflation and likely recessionWhile global financial markets are struggling in an uncertain world, the commodity-heavy Australian ASX index is poised to keep a positive momentum.
Cybersecurity – the rush to catch up with realityWith the invasion of Ukraine, governments and private companies are rushing to reinforce their cyber defenses.