Tech wreck broadens but US economic signals are mixed; RBNZ stays hawkish and Gold and consumer staples back in focus

What’s happening in markets?

Big picture themes? Of the Equity Baskets we track across different sectors, Commodities were the best performers last night, followed by Energy Storage and Blue chips (Mega Caps). The US Futures are higher, suggesting the US market could potentially again see a short-term rally. But we think that the long-term risks remain, (rising long-term inflation, interest rates, tightening liquidity conditions) and this will likely continue to fuel commodities and commodity stocks up the most over 2022. We also see Gold and the USD dollar acting as a hedge in times of market turmoil, and urge clients to potentially consider what a balanced portfolio means to them.

Asia Pacific’s stocks are trading mixed following more Tech disappointment in the US. While the US tech rout may have more room to run, focus is squarely on the economic momentum for now. Japan’s Nikkei (NI225.I) was down 0.2% amid the Wall Street sell-off and the stronger yen with eyes now on the Fed minutes due later today. As for Australia’s ASX200, it is up 0.8%, and is now trading at its highest level since May 6. This has been fuelled by mining stocks getting a huge win after Australia’s new Prime Minister ushered in an Electric car policy for the first time in Australia’s history. As such this week, Chalice Mining (CHN) is up the most 25%, followed by Allkem (AKE) up 21% (Allkem is one of the world’s top lithium producers). Also in mining, we are also seeing iron ore stocks like Champion Iron (CIA) make monumental moves up this week, after China cut its interest rates. For a technical update on iron ore please read our Technical Analyst’s note. Singapore’s STI index (ES3) traded close to neutral as Singapore revised its Q1 GDP growth higher and maintained its full year GDP growth forecast at 2-5%.

China’s incremental stimulus measures once again fail to excite the equity markets. At the time of writing, Hang Seng Index (HSI.I), Hang Seng TECH Index (HSTECH.I) and CSI300 (000300.I) have been down three days in a row despite a cut in China’s 5-year Loan Prime Rate last Friday and a series of policy meetings and measures aiming at boosting the economy and confidence. This morning, early gains waned and turned into modest negative territory. Kuaishou Technology (01024) outperformed other Chinese internet stocks, rose as much as 6.8% after reporting results beating market expectations. 

In blue chips, consumer brands did well overnight; McDonalds (MCD) shares rose 2.7% and Coca-Cola (KO) rose almost 2%, along with Procter and Gamble (PG) who sells essentials like Oral-B tooth brushes and toothpaste, to Gillette razors, Vicks, Pantene Shampoo, Old Spice etc. Of these stocks, what’s interesting is, in the GFC when the market fell almost 50%, McDonalds shares went up by 11%, showing people still want a Big Mac in a recession. That’s food for thought.

Snap (SNAP) shares fell 43%, marking their biggest ever drop upon guiding for a weaker outlook, dragging down social media peers. Snap’s CEO highlighted it’s continuing to “face rising inflation, interest rates, supply chains issues and labor disruptions”. This reflects the dark cloud we have been talking about hanging over tech and social media stocks for some time. And our preference in long term Tech exposure is in the Blue chips like  - Apple, Microsoft, Google who are growing their earnings and forecasting brighter outlooks through innovation and pricing power. However, that being said, we do see further downside is ahead for these names too.

Reopening economy stocks beat expectations. America’s Car Mart (CRMT) shares surged 31% - it’s the biggest one-day-gain since 2008. It comes as used car sales grew far more than expected to a record $352 million in the fourth quarter. This reflects what’s going on globally, the second hand car market is continuing to see rising sales.

What to consider?

RBNZ stays hawkish, supporting NZD. Another 50bps rate hike by the RBNZ along with no signs of parting with its ahead-of-curve tightening path put in a bid for the kiwi. NZDUSD shot up to 0.6500 from intraday lows of 0.6423 while AUDNZD gave up the key 1.1000 level to plunge to 1.0928. Even though RBA is catching up now, RBNZ remains ahead of other central banks and will likely be the fastest to reach neutral rates. The central bank raised its projection for peak cash rates to 3.95% from 3.35% earlier.

US eco data giving mixed signals. While the Flash manufacturing PMI came in as expected, the Flash services PMI missed expectations, coming in at 53.5 versus a 55.1 forecast. New home sales was a bigger disappointment, coming in at 591K versus an estimate of 748K. Richmond Fed manufacturing index also slid to negative territory at -9 from 14 in April. While concerns around the US economic momentum are rising, overall the economy is still showing signs of above-trend growth and may likely be able to sustain the tighter liquidity conditions.

China’s banking regulators called on banks to make more lending. The People’s Bank of China (PBoC) held an internal meeting to call on ranks and files at the central bank to step up efforts to encourage banks to lend to SMEs. In addition, the PBoC jointly with the China Banking and Insurance Regulatory Commission to meet with 24 financial institutions to and to call on the latter to support SMEs, home buyers, truck drivers and household consumption. 

EUR looking at exiting negative rates. EURUSD extended its recovery to 1.0750, supported by ECB’s hawkish comments that the negative rates regime could come to an end by September. The results of the S&P flash PMI indicators for the eurozone also showed activity continued to rise in both the services and the manufacturing sectors. GBPUSD saw a run lower to 1.2472 on weak PMI numbers which saw UK bond yields falling sharply.

Food protectionism increases the odds of inflation being sticky. India will limit sugar exports as a precautionary measure to safeguard its own supplies, after banning wheat sales just over a week ago. While the overall impact of this move is smaller than the wheat ban, it is more a concern in terms of the rising food protectionism trend at a time when the weather conditions are weighing on output and Russia is hoarding its food exports. Fitch said in a report that around 30 countries have now taken steps to limit their food exports since the start of the Ukraine/Russia war.

That’s almost a wrap for earnings season. What did we learn? 479 of the S&P500 companies reported results slightly better than expected. However, although average earnings growth came in a 9.4% for the quarter, and sales growth came in at just 13%, if you removed where the most growth came from, Energy stocks, with 273% average earnings growth and 59% sales growth, then overall S&P500 sales and earnings would be negative. That being said, the Material sector (Miners) also did well, producing average earnings growth of 42% (the second highest earnings out of the S&P500 sectors). We continue to see commodities; energy, mining companies and agricultural companies outperforming in 2022 and offering inflation and downside protection.

Potential trading ideas to consider?

Fed meeting minutes from the May meeting are due today. While the hunt for any mention of a possible 75bps rate hike may be futile, the base case stays at a series of 50bps rate hikes to follow. But investors are also increasingly parsing Fed talk to look for signs of stagflation or economic slowdown and that really is driving the market sentiment for now. Fed minutes will especially be key for the FX markets, and focus will be on EUR and JPY, but also the commodity currencies. USD bulls may be back in action but lower long-term yields may mean more gains for the yen too. AUDJPY remains a key risk sentiment play.

Gold is reversing back lower in Asia. Gold traded to its highest levels since May 9 overnight as falling Treasury yields helped pressure the USD. Gold tends to benefit from a drop in yields because it reduces the opportunity cost of holding the non-yielding asset, and a weaker USD drives foreign demand. The big challenge is still at the 38.2% retracement level of $1868 to signal a firmer uptrend in play.

Consumer staples back in focus. BestBuy (BBY) – like most consumer companies last week – has missed profit expectations. More consumer earnings due this week from Macy’s (M), Dick's Sporting Goods (DKS), and Ulta Beauty (ULTA), the Wall Street may be bracing for more bad news.

Key earnings release this week:

• 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