Oil Oil Oil

Oil price rallies back to $120. Better than expected jobs report supports a more prolonged rate hike cycle.

Equities 8 minutes to read
APAC Strategy Team

Summary:  Strong job data from the U.S. last Friday leaves the Fed on track to pursue a higher for longer rate hike cycle and aggressive quantitative tightening in its drive to fight inflation as well as to reestablish its institutional credibility. The speculation for a September pause has probably faded away. After a lukewarm response to the positive news of Shanghai reopening, investors are cautiously assessing the efficacy of stimulus measures announced and the direction and pace of the Chinese economy.


What’s happening in markets?

The mood is risk off again; with the Nasdaq and the S&P500 closing lower last week (down 1%) on stronger than expected US hiring data, which paves the way for aggressive Fed rate rises. The market managed to hold onto most the week prior gains of 7% for the Nasdaq and 6.5% for the S&P500, but on the weekly and monthly charts; with the RSI and MACD show buying is slowing and the market is overbought territory; with earnings tipped to slow in Q2. On top of that, the Fed starts reducing its balance sheet next week (June 15). Although there could be some more up-days, the technical indicators suggest another indices pull back is likely as market conditions weaken.

S&P500 sectors show commodities rise to the top. There’s a lot to be said about looking at the best/worst performers, as the market can tell you where it thinks the best performers will likely be for the next 6,9,12 months. Although the S&P500 is down 13% YTD, The Oil and Gas sector is up 65% with stocks like Occidental Petroleum (OXY) up 143%. Another top performing sector is Fertilizers up 32% with Mosaic (MOS) shares up 53%, while the Agri product sector up 31% as well YTD with Archer-Daniels (ADM) up 31%. The reason for this is commodity companies are seeing the most earnings growth and are guiding for a bright 2022.

Dollar resumed its incline. The USD had a run higher again late on Friday as upbeat non-farm payroll (NFP) data reporting a higher than expected jobs number in the US buoyed Fed tightening expectations. The Japanese yen was the biggest loser last week as USDJPY touched 131 levels on Friday following the NFP report bumping up US yields. Meanwhile, CAD and AUD have been the biggest winners, with CAD certainly supported by higher oil prices and BOC's hawkish tilt last week. AUDUSD could not sustain a bounce above 0.7250 with RBA on the horizon this week. EUR remains critical this week after being unable to find a direction last week, with the ECB meeting eyed.

Crude oil extends its bounce. Crude oil jumped last week after OPEC+ decided to raise their monthly production output by around 50%, thereby making a futile attempt to soothe worries about a summer price spike as demand picks up. WTI and Brent are now back above $120/barrel where the last rejection was seen, as Saudi Arabia announced increases in prices to Asia to $6.50 premium above the Oman-Dubai benchmarks from a $4.40 premium for June. US inventories of crude oil fell more than 5 million barrels last week while gasoline stockpiles hit a five-year low. In addition, refinery margins hit a fresh multiyear high, all signs of tightness, pointing to the need for demand to be curbed and only higher prices or a global economic slowdown can make that happen.

Copper at 6-week highs. HG Copper (COPPERUSJUL22) jumped 5% last week, breaking resistance at $4.35 to surge higher to $4.55, the 61.8% retracement of the April to May correction, with a break signaling a fresh push towards $4.86. The fundamental driver being the reopening of China raising demand expectations, thereby driving a sharp improvement in the technical outlook forcing speculators to reverse positions from a short back to a net long. In addition, a potential supply disruption in Peru, due to protests, also adding some tailwinds to price.

Asia Pacific Equities tipped to start week lower, after rising for 3 straight weeks, bolstered by reopening trade.

Australia’s ASX200 started the trading week down 0.5% on Monday, after rising for three straight weeks. Over the last three week, the Mining sector gained 10%, with shares in iron ore giants Champion Iron (CIA), BHP (BHP) rising 15%, and smaller diversified miners like Sandfire (SFR), South32 (S32) up over 15% as well, on hopes that earnings will grow with Shanghai reopening.

China and Hong Kong equity markets’ reactions to the long-awaited Shanghai’s reopening from lockdown are cautious as investors are assessing the pace of economic recovery and the risk of re-introduction of lockdown as long as the Zero-COVID policy remains intact.  Technology and growth stocks however managed too outperformed last week and this morning. Regarding the series of implemental stimulus measures and pledges from the Chinese authorities, investors who have somewhat been disappointed by the magnitude of stimulus measures since the hype in mid-March upon Vice-Premier Liu He’s remarks and not entirely convinced of their efficacy and sufficiency.  This morning’s much-weaker-than-expectation Caixin Services PMI data re-confirmed their concerns.  As of writing, Hang Seng Index (HSI.I) and CSI300(000300.I) gained about 1% while Hang Seng TECH Index(HSTECH.I) rallied almost 2%.  Meituan(03690) surged over 6% after last week’s better than expected Q1 results.   Bilibili (09626) surged 5% ahead of reporting earnings on Thursday.

What to consider?

US jobs data signals tight labor market. US non-farm payrolls (NFP) printed headline gains of 390k, above the expected 325k. While this was a drop from last month’s 436k, the gains have been expected to moderate as 21.2mn of the 22mn jobs that were lost in March/April 2020 have been restored. Further slowdown is inevitable as most companies are guiding for margins being under pressure, but a somewhat softer wage figure (5.2% y/y in May from 5.5% prev.) reduces the wage-price spiral concerns and supports a more prolonged rate hike cycle.

Fed’s Mester opens the doors for a third 50bps rate hike. We had one of the last Fed speakers on Saturday before the quiet period in the run up to the FOMC meeting on June 15. Loretta Mester did not just remove the September pause possibility, but in fact opened the doors to a third 50bps rate hike. She said September meeting could see a 50bps hike, or a 25bps hike if the inflation in on a downward trajectory. That may be the start of the Fed calling a third 50bps rate hike.

China’s May Caixin Services PMI came this morning at 41.4, much weaker than expectation (Bloomberg consensus 46; April 36.2) and staying firmly in the contractionary zone and being the second lowest since March 2020.  Service employment sub-index fell further to 48.5 (vs 49.3 in April), the fifth consecutive monthly decline and the lowest level since March 2021.

RBA tipped get more hawkish at their interest rate meeting tomorrow. Market expects rates to rise from 0.35% to 0.6% after stronger than expected GPD data came out last week, plus Australia’s export income surged to a record high.  And that will improve with Shanghai emerging from lockdown last week. So Aussie economy is in a good spot. Plus Labor Government’s childcare policy encourage more parent back to the workforce, and add to Australian ‘full employment’, meaning wages will likely rise, and give the RBA even more fire to hike rates. Investors think rates will be just shy of 3% in 2022.

APAC client activity in June:
Most clients are buying shares to start the moth June with 71% of orders beings buys.

Tesla (TSLA) was the most bought and sold share. Followed by Apple (AAPL). Regarding Tesla 53% of transactions were shorting Tesla expecting 2022 margins to be flat compared to 2021 (according to consensus). However with Tesla considering cutting 10% of workforce and dangling the carrot of potentially buying a lithium mine; such potential measures may paint Tesla differently

Most conviction across stocks/CFDs ETFs; the second most bought is iShares MSCI USA ESG Enhanced UCITS ETF

In Bonds, transactions in bonds were mainly buys, with investors looking for yields and shifting away from equities.

Potential trading and investing ideas to consider?

US May CPI due this week. The May CPI data from the US is due this week, and the return of inflation peaking vs. higher for longer debate is set to return more forcefully. We remain of the camp that underlying pressures on inflation will likely keep it higher for longer, and a beat in CPI print this week could increase the Fed tightening expectations. That will mean more gains for the USD and more pressure on the Japanese yen which suffers at the hands of yield differentials. A weaker print, on the contrary, could bring focus back on recession concerns and boost risk assets.

Key earnings release this week:

  • Tuesday: Sinobiopharma(01177)
  • Wednesday:  Kingsoft Cloud(KC)
  • Thursday: Bilibili(09626/BILI), NIO(09866/NIO)

For a weekly look at what’s on the radar for investors, and traders this week;  read, watch or listen to our Monday Saxo Spotlight.

For a global look at markets – tune into our Podcast. 

Disclaimer

The Saxo Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-sg/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Capital Markets or its affiliates.

Saxo Markets
88 Market Street
CapitaSpring #31-01
Singapore 048948

Contact Saxo

Select region

Singapore
Singapore

Saxo Capital Markets Pte Ltd ('Saxo Markets') is a company authorised and regulated by the Monetary Authority of Singapore (MAS) [Co. Reg. No.: 200601141M ] and is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms & Risk Warning to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products such as Margin FX products may result in your losses exceeding your initial deposits. Saxo Markets does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Markets does not take into account an individual’s needs, objectives or financial situation.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-sg/about-us/awards.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website are not intended for residents of the United States, Malaysia and Japan. Please click here to view our full disclaimer.

This advertisement has not been reviewed by the Monetary Authority of Singapore.