Bank of Japan, ECB, Russian gas and Italy are markets’ focus

What’s happening in markets?

US equities hit a 6 week high but momentum begins to slow as the USD rises with Italy’s government on brink of collapse

The NASDAQ100 (USNAS100.I) gained 1.6%, rising 5% in two days, and the S&P 500 (US500.I) rose 0.6%, taking its two-day rally to 3.4%. Risk sentiment remains fragile/skittish for several major reasons; the ECB is set to rise rate for the first time since 2011, maybe by 50ps (0.5%), ushering in rate hikes that we think will continue for six months. While demand destruction in the property segment continued with US home sales falling for the 5^th straight month. While Europe holds its breath Russia’s Nord Stream pipeline to reopen, assuming flows will return to 40% capacity.  While for equities earnings season; the rubber hasn’t hit the road; we know 13% of the S&P500 companies have reported and average earnings growth is down 7%, while the majority of the companies are guiding for an earnings slowdown; we expect this to continue, which is why we remain bearish, expecting a pull back as fundamentals will be reassessed.

Tesla Truths. Producing a record number of EVS, but selling less, yet pledging to grow production 50%, while dumping 75% of Bitcoin to shore up cash. 

Tesla (TSLA) sold 254,695 EVs in the quarter ending June 30. That’s a 27% jump from same quarter last year, but a 18% drop from the prior quarter, meaning EV sales are slowing as demand destruction is kicking in from higher interest rates. That also means, less revenue is coming through than expected ($16.93b in Q2, vs $17.1b expected (by Refinitiv). Higher costs are also a factor and that aren’t going away either. The new factories are “gigantic money furnaces”. Although commodity prices have come down, Musk hinted you can take that with “a grain of salt” that inflation is trending lower. Meanwhile, despite Musk saying he had “diamond hands” and wasn’t selling Bitcoin, in the quarter Tesla sold $936 million worth, (75% of Tesla’s holding) to support business cashflow. Ending on a bright note;  Quarterly Earnings per share (EPS) came in a $2.27 vs $1.81 expected. Tesla shares were initially 4% higher in afterhours trade but those gains evaporated and Tesla ended up 1.5% . Although TSLA shares are in technical uptrend off their May 2022 lows, the market will need to see commodity costs come down further and revenue to rise before this rally can be validated.

Australia’s ASX200 trades flat, weighed by losses in mining and energy

The ASX cautiously holds at its highest level since June 14 as investors are parsing through weaker outlooks from Australian quarterly earnings season, while awaiting the Fed’s move on interest rates next week. There are also many holding their breath for Apple’s outlook/result next week (critically important as it’s a bell weather for consumer electronics spending, and this is the life blood to many Australia’s tech stocks, with the sector down 36% from November).Seeing downward pressure today; Rio Tinto (RIO) and Fortescue (FMG) shares fell 3%, because firstly - the iron ore (SCOA) price lost 3% falling to $97.15 with China’s steel output now expected to drop 4% in 2022, while China again stepped up efforts to import less iron ore after it formed a state backed iron ore company. This means Iron ore price volatility could continue for some time, and this will flow through to BHP, Rio and other iron ore majors shares. In other news, Woodside (WDS) shares fell 4.1% after the oil price fell back under $100. This is the world 10^th biggest oil company after it took over BHP’s oil and gas assets. Woodside is still one of this years best performers on the ASX, up over 40% YTD. Today Woodside reported quarterly results; revenue rose 44% and sales up 51%, while production grew 60% thanks to taking over BHP’s assets. All beat expectations. As for what’s ahead, Woodside implied a softer second half. 

EURUSD now faces political headwinds

EURUSD retreated from 1.0273 highs printed on Wednesday as the Italian political crisis unfolded, further adding to the energy supply worries. Italian Prime Minister Mario Draghi’s government fractured as three parties boycotted a confidence vote. Draghi is expected to resign on Thursday, and if that gets accepted, that will prompt fresh elections and mean weak policy credibility until a new government comes in. This comes on the heels of an expected rate hike from the European Central Bank, which is likely to be a worry for Italian bonds as well. A test of 1.0350 resistance therefore seems unlikely now, unless the gas supply surprises on the upside. Even if we do get there, EURUSD will likely start to get worried about further recession fears sooner rather than later.

What to consider?

Bank of Japan remains committed to easy policy

The Bank of Japan (BOJ) announced its policy decision today, and there were no tweaks to its yield curve control policy as expected. Hedge funds seem to have backed down from big bets about a BOJ’s hawkish turn, while the yen stays close to its record lows. For now, the only material update was on the inflation and growth forecasts. BOJ reiterated no limit on JGB purchases. FY2022 GDP growth forecast was lowered to 2.4% from 2.9 while FY2023 was raised to 2.0% from 1.9%. It also raised FY2022 core CPI forecast to over 2%, while also raising core CPI forecasts for FY2023 and FY2024. National CPI is due tomorrow and is likely to remain above the central bank’s 2% target, and will be key as a weaker yen and high inflation is hurting consumers and may be the only trigger for Kuroda to consider a tweak during his remaining term, if at all.        

The big Russian gas supply question

Putin has signaled that gas flows on the Nord Stream 1 pipeline will be restored once the maintenance works are complete. However he has also warned that flows will remain curbed unless sanctions spat is resolved. This comes at a time when Europe is facing its worst summer. With Moscow using gas as a weapon in the war, it is unlikely that the uncertainty will go away anytime, and pressure on Europe is only going to increase into the winter.

More job cuts are coming 

Ford (F) is preparing to axe about 8,000 jobs in the weeks ahead, in an attempt to boost profits, so it can shore up its funds to move into EVs. The job cuts are will be in the unit responsible for producing internal combustion engine vehicles, as well as other salaried employees. Google (GOOGL) will pause hiring for two weeks and review its headcount, meaning job cuts could be made soon. And Lyft said it’s cut 2% of its workforce and will stop renting cars to riders.

US senate votes to approve the CHIPs Act

Shipping costs are pulling back; supporting consumer spending linked companies reduce costs

Alcoa kicked of metal earnings in the US, and its share surge

Alcoa (AA) was the best performer afterhours in NY, up 6% after growing earnings more than expected, up 48%, while sales rose 29% in Q2. Although it produced less production than expected, which is a major theme for commodity companies this year, due to a labour shortage, Alcoa expects higher profitability for its Bauxite business as it sees demand rising. Alumina and aluminum shipments are also expected to rise. Although that will not fully offset higher costs for energy and raw materials, Alcoa committed to making an extra $500 million of share buy backs to support its share price.

Macao plans to reopen casinos

After being shut down for two weeks, Macao announces that it will reopen casinos this Saturday if conditions allow. 

China’s Emerging Industries PMI fell

China’s Emerging Industries PMI, which tracks activities of the technology industries declined to 48.2 in July from 52.5 in June. 

Sri Lanka at risk of fresh protests

Sri Lanka’s new president Ranil Wickremesinghe was voted by a majority of lawmakers from ousted leader Gotabaya Rajapaksa’s party, but that could spark further street protests and thwart any hopes of an IMF bailout given that the public discontent re-emerged. The new president, like his predecessor, is also deeply unpopular among the protesters and it is feared that democracy will not be fully restored.

Potential trading and investing ideas to consider?

Private-owned entity (POE) developers continue to face headwinds

Over the past two weeks, a large number of presale homebuyers of uncompleted projects across China collectively informed their banks of unilateral suspension of mortgage repayments until the resumption of construction of the relevant projects.  The problem highlights the dire situation of many Chinese property developers, in particular the non-state-owned ones.  For investors who want to position for any potential recovery of the Chinese housing markets, it would be advisable to stick to leading state-owned developers, such as Hong Kong listed China Overseas Land & Investment (00688:xhkg) and China Resources Land (01109:xhkg) and Shanghai listed Poly Developments (600048:xssc). For more details, please refer to this article that we sent out yesterday.

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