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: US equites move above key levels with reopening stocks charging, pushing the S&P500 back above its 50-day moving average and ready for another rally . Broad Asian stocks remain on the backfoot, but reopening stocks spread their wings further. The Australian share market hit its highest level in history as we predicted, and will likely set higher levels. US treasury yields peak, so tech investors remain selective. As global lithium prices surge, we cover the lithium stocks to watch ahead of Tesla's result, with the company likely to takeover a lithium mine.
What’s happening in equites that you need to know?
US equites charged above key levels on Tuesday. The key theme driving the market is that the reopening theme is being bought the most, and the stay home economy stocks are losing love. Ammunition was added to this after Biden plans to rid mask wearing on US planes. As for the sectors, Leisure and Hotel REITs rose over 5%, while the safe haven Gold sector closed down, after gold fell 1.4%. The S&P 500 (US500.I) rose 1.6%, moving above its 50-day moving average, flagging a new short term bullish run could start (as indicated by MACD, RSI). While the Nasdaq 100 (USNAS100.I) rose 2.1%, but traders are hesitate to go all in as the index is still under its 50-day average, pressured by rates rising.
Hong Kong and China equities in lackluster trading. Hang Seng Index (HSI.I) and CSI 300 Index (000300.I) hovered around the low end of their recent ranges in lackluster trading. Coal, gold and other mineral mining stocks fell, losing 3% to 9%. China’s largest EV battery maker, CATL (300750) fell almost 7%, despite the gradual resumption of production at Tesla’s Shanghai factory from yesterday. CATL is reporting results tomorrow. Everbright Securities (06178) fell 3% following its announcement of a management reshuffle. The market continues to be disappointed by the moderate patchwork kind of stimulus initiatives from the Chinese authorities. China’s National Interbank Funding Centre announced that banks’ Loan Prime Rates (LPR) remain unchanged at 3.7% for 1-year loans and 4.6% for 5-year loans.
Rest of the Asian stocks remain on the backfoot. MSCI Asia Pacific (FMEAM2) was down for a third consecutive day. Singapore’s Straits Times Index STI (ES3) was in gains at the open as Genting Singapore (G13) continued to push higher. The reopening gains are spreading across Asia with Thailand now removing mandatory Covid-19 testing for international visitors. Japan’s Nikkei (NI225.I) was also up 0.5%, with automakers Suzuki (7269), Mazda (7261), Nissan (7201) and Toyota (7203) in gains and Fast Retailing (9983) also making a comeback.
The Australian share market trades at Its highest level in history and will likely hit higher levels supported by the commodity super cycle push. Today, the ASX200 is up 0.3%, extending its uptrend for the 4th day. The theme of the day? Covid restrictions are easing again, with VIC and NSW ending isolation periods for close contacts, this is helping CTD, FLT and WEB shares rise 2%, while their also supported by Biden’s de-mask on US planes push. Elsewhere, Private hospital company Ramsay Health (RHC) shares surged 26% after KKR offered A$20 billion to takeover the company, for A$88 a share. RHC shares have been out of favour since COVID elective surgery restriction were in place. And today that changed with RHC shares hitting an all-time high. Whitehaven Coal (WHC) shares also continued their uptrend, rising 1.8% after the coal miner upgraded its outlook, seeing higher thermal and metallurgical coal prices in CY22 and CY23. We continue to think WHC is a key coal stock to watch that will likely see further share price growth.
US Treasury yields surged across the curve. Short-end rates leading the way higher with 2-year rates up 15-basis points to 2.6% and 30-year benchmark cracking above the key psychological level of 3%. 10-year yields have pushed to 2.96%. Markets (based on Fed funds futures) have priced in an increasing odd of 3 consecutive 50-basis points hike each during the next Fed FOMC meetings on 4 May, 15 June & 27 July. Still watching Fed Chair Powell’s comments due on Thursday.
Headline risk from the war can increase as Donbas region is now in focus. Russia seems to be in a stronger position now, and this could mean more risk aversion and possibly more sanctions. Crude oil (OILUKJUN22 & OILUSMAY22) prices steady in the Asian session with WTI above $103/barrel and Brent near $108.
What you need to consider
Global lithium stocks are in focus. The Lithium Price Index (a measure of the lithium prices) is at its highest level in history, supporting lithium stocks share price growth. We believe the lithium price is likely to set higher prices this year, given the supply deficit. Morgan Stanley is of the same view too, however Morgan Stanley sees a return to surplus lithium in 2023. However we think although the lithium price is likely to set higher levels this year, it’s likely to continue to rise over the longer term as the International Energy Agency (IEA) wants to ban fuel consumption engine sales by 2050.
Yen risks are surging again as BoJ defends the yield target. USDJPY is in close sight of 130 and the Bank of Japan’s fresh round of unlimited bond buying to cap yields in 10-year Japanese government bonds (JGBs) is likely to further weigh on the yen. As verbal interventions from the Bank of Japan and Ministry of Finance fail to be heard, we are looking at a subtle policy shift with the aim to manage volatility, or a real physical intervention. But both of these will only be a temporary fix at best, and any relief rally will likely be short-lived.
Trading ideas to consider
Lithium stocks to watch: With Elon Musk putting the spotlight on the lack of lithium supply, and rising demand, which is pressuring lithium prices to all time highs, you should keep lithium stocks on your radar. Elon Musk, previously hinted Tesla (TSLA) could move into lithium mining to offset some of these costs. So you’d expect Telsa to potentially takeover a lithium company, that is based in the USA. Potentially takeover targets in the US might include Piedmont Lithium (PLL), Jindalee Resources (JRL) and Lithium Corporation (LTUM).
Earnings to watch. Key earnings to watch today will be ASML (ASML), which will give us an insight into the state of the semiconductor sector where supply chains are still stretched due to excess demand. Focus is also on Tesla (TSLA) where a lot is at stake. Production is being constrained in China due to lockdowns and globally by component shortages for cars. Soaring lithium and aluminum prices have forced Tesla to hike prices multiple times recently and the question is to what extent it has impacted demand.
Key APAC economic releases to watch;
Wed, Apr 20: Japan March trade, China 1-year and 5-year loan prime rates
Thu, Apr 21: HK March unemployment rate
Fri, Apr 22: HK March CPI, RBI meeting minutes
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