US stocks snap 7-day downtrend. Commodity stocks in wheat, energy and lithium brighten | Saxo Bank

The AUD/USD Currency Pair Trading At Its Lowest Level Since Two Years, Hang Seng Index Was Flat

Summary:  A technical rally occurred overnight, seeing the S&P500 gain after 7 days of declines, while Agriculture and Energy stocks shone the most, gaining even more momentum proving they are an inflation hedge. In quality tech, Apple shares rose 4% with long-term investors dripping in buy orders. Meanwhile, in big banks JPMorgan gained 6% upon forecasting net interest income to rise, which supported gains in Bank of America, Citigroup. We don’t think the market is at breaking point yet. However see Commodity gains intensifying and offering further upside, as the world worries global wheat supplies could run out in 10 weeks, while demand for lithium batteries rises seeing lithium companies upgrade their earnings and rally.

What’s happening in markets that you need to know

Big picture themes? Of the Equity Baskets we track across different sectors, we can see select risk appetite is starting to come back in to the market; China’s little giants are up the most month-to-date, supported by China’s fresh interest rate cut. Meanwhile, Cybersecurity stocks were up overnight (but are still down 24% YTD). Year-to-date though, our high conviction asset class, Commodities continues to see the most growth, followed by Defence.

In the S&P500 oversold Ag and Bank stocks shine; Agri and Farm Tech stocks were up the most overnight, followed by Diversified Banks. In terms of standout stocks; Ross Stores and Deere (DE) rose the most (9%, 7%), after being two of the most oversold stocks last week. In S&P500 Deer was THE most oversold member. Deer makes 65% of its revenue from Agricultural equipment and selling turf. Earnings are expected to grind higher in 2022 and Deer pays a small dividend yield (1.25%).

Asia Pacific’s stocks are trading mixed following more Tech disappointment in the US. While risk sentiment was upbeat overnight on Wall Street, Asia Pac’s markets turned most lower following Snap’s warning that it is unlikely to meet revenue and profit forecasts. Tech sentiment eroded again and further consumer staples earnings results this week are keeping investors cautious. Australia’s ASX200 trades flat, weight by tech falling,  with Block (SQ) down 6% after Bitcoin trades under $30k (Block makes most of its money from BTC transactions). Meanwhile, ASX lithium stocks continue to surge, supported by the new Australian government’s EV stimulus, seeing Liontown (LTR), Allkem (AKE), MinRes (MIN), Pilbara (PLS) dominate the leaderboard and rise 3-4%. Japan’s Nikkei (NI225.I) is down 0.3% led by Recruit (6098) which operates the popular HR engine “Indeed” and company information website “Glassdoor”. Singapore’s STI index (ES3) was however up 0.2% despite a record high inflation and a potential chicken-price shock.

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Chinese and Hong Kong equites see lackluster trading despite incremental stimulus measures from the State Council and Biden’s remarks on reviewing tariffs on goods from China.   The attempt to rally in the opening hour in response to positive news of 33 stimulus measures from China’s State Council failed.  Overnight news that Biden will discuss with Treasury Secretary Yellen about reviewing tariffs on goods from China as part of the Biden administration’s effort to ease U.S. inflationary pressures did not incur much excitement. Hang Seng Index (HSI.I) fell 0.8% and CSI300(000300.I) was 0.3% lower. Among the 33 measures was a reduction of RMB60 billion in the purchase tax on passenger cars Great Wall.  Great Wall Motor (02333), Geely (00175) and Guangzhou Automobile (02238) rose 3% to 10% while shares of EV makers fell 3%-9%.  Although reporting a larger than expected 159% YoY increase in revenues and a 30bp improvement of gross margins to 10.4% in Q1, XPeng’s (09868) share fell almost 9% on cautious Q2 guidance. 

What to consider?

Fed speakers remaining flexible. Fed’s Bostic backed a series of 50bps rate hike moves overnight but hinted at a pause in September if inflation comes down but also opened doors to more aggressive moves if inflation doesn’t cool. Fed’s George said she expects the central bank to raise interest rates to 2% by August (which also means about 100-125bps of rate hikes from the current 0.75-1% rates or 2-3 50bps rate hikes). While the base effects may make headline inflation appear to be softening into the summer, real price pressures aren’t going anywhere and Fed’s hiking pace is likely to continue to prove to be slow.

AUD and NZD unable to sustain gains. A fresh slide was seen in NZD this morning following the unexpected decline in retail spending reported today. RBNZ decision is due tomorrow  (in early Asian hours) and it is still a close call between 25 and 50bps rate hike. But it’s more important to note that RBNZ is way ahead of other central banks and getting close to neutral faster than others, which means room for further upside in NZD is limited. AUDUSD is also back below 0.7100 and remains prone to a reversal in risk sentiment more than any domestic developments. While the AUDUSD rose to a 3-week high yesterday, supported by the Australian Labor Government being sworn in after winning the election and bringing in an EV policy ($2k tax incentives), vowing to keep Defense Spending at over 2% of GPD and pledging to offer more childcare support to keep employment high. The USD will likely remain favored for now as risk aversion returns and cut the rally of the AUD. 

ECB getting ready to move to exit negative rates. ECB President Lagarde’s comment that the central bank is likely to exit negative rates by the end of the third quarter put a massive bid into the EUR overnight but the pair turned lower from 1.0700 with focus on Fed Chair Powell and PMIs due today. With Fed comments getting repetitive, there is room for ECB’s hawkishness to support the EUR even as Lagarde continues to downplay the possibility of a 50bps rate hike.

Germany’s economy shows signs of unexpectedly strengthening in May. Germany’s IFO reading was out at 93.0 versus prior 91.9 in April. The increase is mostly explained by an improved current assessment. The expectations component is almost unchanged and close to levels last seen at the start of the pandemic. Several factors are pushing respondents to be careful regarding the future: supply chain frictions, the Shanghai lockdown, persistent inflationary pressures and lower real disposable incomes of households etc. The German economy will not plunge as it did at the start of the pandemic, of course. But we think that risks of a stagflation are clearly titled on the upside. We will watch closely the first estimate of the May PMIs this morning to have a better assessment of the economic situation in Germany and in the rest of the eurozone. 

Potential trading ideas to consider?

Singapore’s inflation pain is rising. Core CPI was at a decade high in April at 3.3%, and this is still not a peak. Singapore’s national lunch meal chicken rice is set to get expensive as Malaysia is halting exports of chicken. About 34% of Singapore's chicken imports come from Malaysia. While alternate sources of fresh chicken and options such as frozen chicken may be possible, this is not the last inflation shock to hit the island economy. Vegetable prices are also on the rise due to shortages of supply and the high fertilizer prices. In times like this, we would reiterate the possible inflation hedges remain gold, REITs and commodities. In summary, it is important to look for value investments or stocks that have a solid cash flow generation ability and pricing power but still priced below their fair value.

The plot for investing in Lithium thickens.Lithium remains one of our preferred metal exposures for 2022 for upside. Albemarle Corp, the world’s largest lithium producer upgraded its outlook for the second time this month expecting higher lithium prices and demand to further boost their sales. We’ve seen many EV companies sell out of some of their electric vehicles, and this highlights the lack of supply in battery metals, which is also pushing up the lithium price. Albemarle Corp, expects sales to now be as high as $6.2 billion this year, up from its previous estimate of up to $5.6 billion.

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If have a long time horizon for investing, you could consider dripping money into the market (this is called dollar cost averaging). Remember Shelby Davis said you can make most of your money in a bear market, you just don’t realize it at the time. But the key is to look at quality names that are in a position to return cash to shareholders. So if you want to be in tech for example, you could look at names like AppleMicrosoft and Google, who lead the S&P500 and Nasdaq indices and are growing their earnings and this is likely to continue over the next several years and longer term. The idea is that names like these, will likely lead a secular bull market, once the Market eventually begins to recover. And you ideally want to be in names with growing earnings, rather than throwing darts at some of those names with patchy results that are akin to Ark innovation ETF for example.

China’s State Council announced 33 stimulus measures.  An additional VAT credit refund of RMB140 billion brings the overall target of tax refunds, tax cuts and fee reductions to RMB2.64 trillion in 2022.  China is also introducing a reduction of RMB60 billion (equivalent to about 17% of auto purchase tax last year) in tax on passenger car purchases.  The Government is increasing its supports to the aviation industry and railway construction via special bond issuance and loans and is rolling out a series of energy projects.  It is doubling the lending quota for banks to lend to SMEs and allow certain borrowers to postpone repayments.  The State Council also reiterates its support to promote legal and compliant listings of platform companies in domestic as well as overseas markets.

Key company earnings to watch this week:

  • Tuesday: Kuaishou Technology, Intuit, NetEase, AutoZone, Agilent Technologies
  • Wednesday: Bank of Nova Scotia, Bank of Montreal, SSE, Acciona Energias Renovables, Nvidia, Snowflake, Splunk
  • Thursday: Royal Bank of Canada, Canadian Imperial Bank of Commerce, Lenovo, Alibaba, Costco, Medtronic, Marvell Technology, Baidu, Autodesk, Workday, VMware, Dell Technologies, Dollar Tree, Zscaler, Farfetch
  • Friday: Singapore Telecommunications


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Source: Saxo Bank

The AUD/USD Currency Pair Trading At Its Lowest Level Since Two Years, Hang Seng Index Was Flat

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