Watch Watch Watch

Watch commodities for signals, Chinese tech selloff, Earnings Watch

Equities 10 minutes to read
PG
Peter Garnry

Head of Equity Strategy

Summary:  The honey moon in equities since the lows in 2020 is over. Equities have gone from a regime of extreme stimulus and very loose financial conditions with profits and equity valuations exploding higher. The current regime is a minefield of downside risks with inflation hitting profit growth, geopolitical risks which could worsen the ongoing energy crisis, higher interest rates compressing equity valuations, and growing questions marks over China's economic activity this year. It all points to a defensive stance on equities and the coming months could be rough.


Equities are navigating a minefield of risks

It all started on a positive note early Monday morning following a nervous ending to last week amid escalating rhetoric in the Russia-Ukraine conflict as a potential summit between Biden and Putin had in principle been agreed to according to the White House. However, Kremlin was quickly out saying that there were no concrete plans, and now fast forward Nasdaq 100 equity futures are flirting with levels seen during the lows in January. The 13,831 level is a key level to watch on the downside and a close below today could mark the beginnings of a new leg down in US technology stocks.

Equities are generally negatively impacted from higher inflation eating into profit margins, higher interest rates impacting valuations through a higher discount rate on future cash flows, a potential war in Ukraine which could jolt energy and commodity markets around the world, and fiscal stimulus subsiding substantially this year. Following 20 months of very strong equity returns the market is beginning to reflect very different forces in our economy. Nasdaq 100 futures are down 17.2% from the highest in November and that’s even before a significant tightening of financial conditions in the US relative to the economic backdrop.

Equities were too quick this morning to buy the rumour on a summit between Biden and Putin, but the reaction was much more muted in commodities and especially the oil market. The physical commodity markets have much better information gathering on the ground and our view is that commodity markets will by far be the best signal on the geopolitical risks out of Ukraine and thus equity investors should use commodity markets as the go-to indicator to filter out the noise.

Source: Saxo Group
Source: Bloomberg

Another way to look at equity market risk is by observing spread between US inflation and the US earnings yield (inverse P/E ratio). The current P/E ratio has reached its biggest negative spread to the historical relationship between inflation and equity valuation. There are several ways to read this chart. One is that investors are believing inflation will quickly come down to 2-3% and stay there thus quickly pushing equity valuations back into the “safety zone”. Second, equity valuations are significantly out of line with the underlying inflation and as soon as the market gets its eureka moment that inflation is more structural then equities could easily decline another 15% without it being outrageous. The middle ground interpretation is that we will move in a 45-degree angle from the orange dot towards the regression line, which would reflect a combination of lower realized inflation but higher long-term inflation expectations and thus a repricing of US equities towards lower P/E ratios.

Source: Bloomberg and Saxo Group

Chinese technology stocks are difficult this year

Chinese technology stocks had an ugly Friday session as new policy on Friday is aimed to curb fees of delivery companies hitting stocks of Meituan. The leading Chinese technology index, Hang Seng Tech, was trading lower again today down 49.5% from the weekly peak back in February 2021. Chinese equities have generally been hit by a slowdown in economic activity, a brewing housing crisis related to the country’s big real estate developers, and an energy crisis impacting industrial profits. But technology companies have in addition been hit by technology regulation aimed to tame the market power and anticompetitive behaviour of large technology companies. This has lead to a severe growth slowdown for Chinese technology companies and the worry is that regulation of the industry is not over yet. Our view is that Chinese technology stocks might look cheap but that it is likely a trap for investors as a lot of negative sentiment could hit Chinese technology stocks until we get on the other side of the CCP Party Congress in October.

Source: Bloomberg

Earnings this week and the profit margin squeeze

This week will see another roughly 200 earnings releases out the 2,500 earnings releases we track during the earnings season. The US earnings season is mostly done leaving the stage for European and Chinese equities, and this week will see several important earnings releases across many different industries. We will be closely watching earnings from HSBC, Home Depot, MercadoLibre, Rio Tinto, Danone, Booking, eBay, Saint-Gobain, Alibaba, Block, Moderna, Coinbase, BASF, Amadeus IT, and Li Auto.

Home Depot is a key earnings release related to the US housing market which is currently on fire despite mortgage rates have increased 100 basis points this year. MercadoLibre is South America’s largest e-commerce company and is part of our e-commerce theme basket which has been under pressure this year and thus there is a lot of attention on e-commerce companies. Rio Tinto has a large footprint in the global mining industry and can give us new insights into the supply and demand imbalances. Danone is a large food company and thus can provide colour in inflationary pressures in consumer foods. Saint-Gobain is typically not a company we watch but with galloping prices on construction materials this earnings release will be more interest to watch than normal. This week’s most important earnings release will come from Alibaba on Thursday which will set the tone for Chinese technology stocks in the weeks to come. On Thursday several US technology companies such as Block, VMware, Autodesk, Dell Technologies and Coinbase will report earnings.

The most important take away from the Q4 earnings season is the contracting net profit margin which is declining for the second straight quarter in the MSCI World Index to 10.8% in Q4, which is the fourth highest reading since early 2003. We expect the net profit margin to continue to mean-revert towards the long-term mean at 7.5% suggesting a whopping 3.3%-points headwinds for global companies adding to the downward pressures in equities.

The most important earnings releases next week:

Monday: Williams Cos

Tuesday: Hang Seng Bank, HSBC, ASM International, Norsk Hydro, Home Depot, Medtronic, MercadoLibre, Palo Alto Networks, Agilent Technologies, Mosaic

Wednesday: Rio Tinto, Danone, Munich Reinsurance, Barclays, JDE Peet’s, Iberdrola, Oversea-Chinese Banking, Lowe’s, Booking, TJX, Stellantis, eBay

Thursday: Anheuser-Busch InBev, Royal Bank of Canada, Canadian Imperial Bank of Commerce, AXA, Safran, Saint-Gobain, Deutsche Telekom, Sun Hung Kai Properties, Hong Kong Exchanges & Clearing, Anglo American, Lloyds Banking Group, BAE Systems, Alibaba Group, Intuit, NetEase, EOG Resources, Block (formerly Square), Moderna, Newmont, Keurig, VMware, Autodesk, Dell Technologies, Monster Beverage, Coinbase, Zscaler

Friday: BASF, Amadeus IT, Holcim, Swiss Re, Sempra Energy, Li Auto

Saturday: Berkshire Hathaway
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.