The rally in equites loses momentum as bond yields rise

Co-written by Market Strategists Jessica Amir in Australia, Redmond Wong in Hong Kong, Charu Chanana in Singapore.

What’s happening in markets that you need to know?

S&P 500 (US500.I) tested support levels and managed to close above its 200-day average while the Nasdaq Composite (NASCOMP.I) briefly pushed below 50-day moving average and closed above it.   A reason for traders’ hesitation to follow through with selling may be that they are mindful of upside risks in the incoming Q1 earnings releases. 

10 year bond yield hitting highest level since March 2019, 2.73% on Friday.  From a technical perspective, each time the 10 year bond yield hit a cycle high since 1985, equites market corrected, falling 10-20%.

USD/JPY back higher at the critical 125 level. USD/JPY rose to 125 amid a surge in US yields but could not break above. Both Governor Kuroda and the official who heads up the monetary policy unit of the Bank of Japan (BOJ) reitereated today, in separate sets of comments, that the BOJ remains committed to its ultra-loose monetary policy and will ease even further if it sees fit. Eyes on any unscheduled bond purchases by the BOJ.

Gold (XAUUSD) is slowly gaining momentum and is up 0.3% on Monday in Australia to US$1947. Gold is potentially starting off technical a bull trend. Keep in mind gold has outperformed equities every time the Fed increased interest rates with a suite of hikes.

Crude oil (OILUKJUN22 & OILUSMAY22) holds 6 weeks lows at $96.58, and remains in a technical short term downtrend.

French elections will continue to drive volatility in the next two weeks. French President Emmanuel Macron is finally reasonably ahead in the first round, at 28.3%. Far right leader Marine Le Pen is at 23.6%.  There was some relief from the victory of Macron over Le Pen in the early Asian hours. EUR/USD rallied to 1.0954 at the open, but gains were reversed quickly over concerns whether Macron can consolidate his lead or not. Next two weeks may be choppy for the EUR, as both Macron and Le Pen seek to build a broader coalition. While there is some reassurance, the risk is also quite significant.

The Australian share market’s ASX200 is extending its bullish run, rising 0.1% with grain and gold stocks outperforming. GrainCorp (GNC) shares, rose 6%, to $9.87 (that’s a new record high), and trading volume quadrupled in the stock after wet weather lifted GNC’s profit outlook, with the war in Ukraine highlighting the company is seeing “strong supply chain margins”. On the downside on the ASX today, tech stocks like Tyro (TYR) and PointsBet (PBH) continue to look lackluster. Why? With Australia’s bond yields topping 3% for the first time since 2015, it highlights that Australian tech companies with high debt, will increasingly find it tough, especially as official interest rates are set to rise. More broadly, as we mentioned last week, The ASX200 is tipped to outperform the US market this year, as its made up of over 30% commodity stocks. The ASX200 is tipped to see 23% earnings growth per share, vs S&P500’s 20% earnings growth.

HK & China equity markets’ rally lost steam. Hang Seng Index (HSI.I) and CSI300 (000300.I) fell almost 3% in morning trading.  Hang Sang TECH Index (HSTECH.I) was more than 4% lower.  The covid-related lockdowns in China persisted. While Tangshan, China’s steel production hub lifts lockdown, Shanghai continues to be under lockdown and Guangzhou is at risk being the next large city to get hit.   EV maker NIO(09866) halted production due to delays in getting parts from suppliers in Jilin, Shanghai and Jiangsu which are under Covid related full or partial lockdowns.  In China, retail passenger vehicle sales fell 10.5% YoY in March. Shares of auto makers fell 3% to 12%.  Leading lithium producer, Ganfeng Lithium (01772) was down 11% and EV batter maker CATL (300750) declined 8%, after report that Elon Musk planned to have Tesla (TSLA) started its own lithium mining and production.  Alibaba (09988), Meituan (03690) and Tencent (00700) fell 2% to 4% and Bilibili (09626) was down more than 11%.

RBI begins policy normalization, Indian bonds slip. India’s 10-year government bond yields rose 15 basis points and touched 7%, the highest levels since 2019, as the Reserve Bank of India hinted at removing accommodation and revised inflation projections higher due to the surge in oil prices. The repo rate was kept unchanged at 4% while the width of the band was restored to 50 basis points, suggesting that the reverse repo rate has been hiked from 3.35% to 3.50%. FY23 inflation projection was adjusted higher to 5.7% from 4.5% earlier, given that the crude oil assumption was increased to $100/barrel for FY23 (year ending March 2023). Meanwhile, the growth estimate for FY23 was also lowered to 7.2%. A new tool, called the standing deposit facility, was also deployed to soak up excess cash without offering any collateral as part of the central bank’s policy normalization efforts. The Indian rupee (INR) will continue to be supported by high level of FX reserves, and likely inflows from large IPOs and inclusion of Indian bonds in global bond indices.

What you need to consider

Further escalation in risk off sentiment is likely. It is reported that Russian forces are now looking set to conduct a major attack on eastern Ukraine's Donbas region. There are reports that an 8-mile long Russian military convoy has amassed the region. We may see a further risk off at any time. Last week, North Korea also hinted at a nuclear test this week and any such moves may spark off a depreciation of risky assets, including Asian equities and emerging Asian currencies.

Elon Musk tweeted that he is considering getting into lithium mining; if the lithium price doesn’t improve. This highlights that EV makers are doing it tough, paying record prices for lithium, and that is capping Tesla’s share price growth, with the market now excepting Tesla’s revenue growth to slow from 71% growth to 57.3%  revenue growth.

Lithium stocks in focus again. Today, ASX300 new entrant, Lake Resources (LKE) shares rose 16% after it signed a deal to sell lithium to Ford Motor Company (F). This highlights the global push to electric vehicles, that will requires car producers to buy more lithium, to achieve the Energy Information Administration’s (EIA) target of only selling lithium powered vehicles by 2030.

Food prices hit fresh records and are likely to hit higher levels given the food production shortfall. The Food Price index, hit a record high, up 13% from February to March, with wheat and grains and vegetable oil rising the most in the month. And now Merrill is proposing an new strategy called FAANG 2.0 which includes fuels, aerospace, defense, agricultural, nuclear and renewables. A FAANG 2.0 ETF has not been born, but there are plenty of agriculture ETFs that are benefiting from inadequate supply and steady increase in demand. such as iShares MSCI Global Agriculture ETF (VEGI) and the Betashares Global Agriculture ETF (FOOD).

US inflation (CPI) reading will be watched like a hawk on Tuesday; with inflation tipped to hit 8.5% year on year (in March), which will the highest reading since 1970s. If the reading is higher than that; we could see selling in high valuation stocks, namely tech stocks that are trading at high valuations. The Nasdaq is trading at price to earnings ratio of 53 times earnings. Meanwhile, you will probably see agricultural and energy stocks be supported.

Japanese electric power companies on watch. Meanwhile, Japan has also announced ban on Russian coal, and fresh sanctions may be on the way. Japanese electric power companies in focus. Tokyo Electric Power up over 10%, Chebu Electric up 6%.

Food price gains are coming to bite the Asian consumer. The UN FAO Global Food price index jumped to 159.3 from 140.7, a 33.6% y/y increase. The latest increase reflected new all-time highs for vegetable oils (23.2% MoM, 56.1% YoY), cereals (17.1%, 37.3%) and meat sub-indices, while those of sugar (6.7%, 22.6%) and dairy products also rose significantly. Food prices will continue to see some upside pressures, and this is especially important for Asia where food (and oil) make up a large component of the CPI baskets.

China reported PPI and CPI, slightly higher than expectation.  China’s March PPI came at 8.3% YoY (vs consensus 8.1%, Feb 8.8%) and CPI was 1.5% YoY (vs consensus 1.3%, Feb 0.9%).  Despite the rise, the CPI is overly still benign and will not be a hindrance to the People’s Bank of China in cutting rates. 

China’s passenger vehicle sales fell 10.5% in March. Retail passenger vehicle sales disappointed.   It came at 1.579 million units in March, a decrease of 10.5% YoY.  Sales of new energy passenger vehicles fared better, reaching 445,000 units in March, up 137.6% from last year.

Trading ideas to consider

Earnings season kicks off, mostly with US financials this week. This week, some of the biggest banks in the world report earnings (details refer to the earnings calendar below), so keep an eye on US banks and ETFs like XLF and VFH. Fast Retailing (which owns the brand Uniqlo) is due out on Thursday. In an advance report, Taiwan Semiconductor Manufacturing Co (TSM) reported record revenue (NT$491b vs est NT$469b or S17b, +36% yoy) for Q1 on the back of strong demand for chips in smartphones, computers & cars on top of the ongoing supply shortages.

Key economic releases this week:

Mon, Apr 11: China March PPI & CPI

Tue, Apr 12: US March CPI, Japan March PPI, India March CPI, OPEC monthly oil market report

Wed, Apr 13: US March PPI, Reserve Bank of New Zealand rate decision

Thu, Apr 14:  US Initial Jobless Claims, Singapore Q1 GDP and MAS policy decision

Earnings releases to watch:

Monday: Yunnan Energy New Material (002812), Zijin Mining Group (02899)

Wednesday: Tesco (TSCO), JPMorgan Chase & Co (JPM), BlackRock (BLK), Fastenal (FAST)

Thursday: China Northern Rare Earth Group (600111), Fast Retailing (9983), Ericsson (ERICB), UnitedHealth (UNH), Wells Fargo (WFC), Morgan Stanley (MS), Goldman Sachs (GS), Citigroup (C), US Bancorp (USB), PNC Financial Services (PNC), Coinbase (COIN), State Street (STT)

Friday: Hangzhou Hikvision Digital (002415)

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