US yields spike, Coal prices surge, Wheat in Focus, Asian eco data lags

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

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

Round the world in two sentences: Equity Markets took a breather and are having a bit of a reality check after Fed Governor Brainard indicated that rate rises could be more aggressive The S&P500 fell 1.2% the Nasdaq fell 2.3%. In Europe, the Euro Stoxx 50 fell 0.8%. Commodity screens are mixed: Oil fell back toward $102. Coal prices in Australia jumped 6.4% after Europe moved to ban Russian imports of fuel. Soft commodities also continued to get attention, Wheat, Cotton and Coffee extended their run up, while bond yields charged, with the US 10-year yield briefly hitting 2.62%. 

Twitter (TWTR) shares rose 2% on Tuesday after Elon Musk was appointed to the social media company’s board. The day before Twitter shares rose 27% after Musk announced he bought s 9.2% stake in the company after Jack Dorsey stepped down. However now he is on the board, Musk's ownership is capped at 14.9% of the company. We are cautious on Twitter, and don’t think an influencer can change the company’s fundamentals or outlook for the next 6-12 months, which is likely to keep its shares capped. For more on Twitter, see our note yesterday.

WTI for May delivery traded below $102 a barrel in Asia after slipping as much as 1.3% overnight. Oil erased early losses after the European Union eschewed sanctions on Russian oil. While the EU will press on with additional penalties against Moscow for the war in Ukraine, including a ban on coal, crude won’t yet be targeted, although the debate on tackling Russian oil is still ongoing. With the war stretching on and supply chain disruptions here to stay, wild swings in commodities from wheat to crude oil are likely to continue.

HK & China’s rally halted amid weak service PMI, Shanghai lockdowns & hawkish Fed speak. Hang Seng Index fell 1.5% and Hang Seng TECH Index (HSTECH.I) was down more than 3%.  The market opened lower following overnight comments from Fed Governor and nominee for Vice-chair, Lael Brainard, suggesting a faster and larger Fed balance sheet reduction starting from May. In addition, Shanghai announces that the city will do a second round of city-wide nucleic acid test today. Caixin China PMI Services came at 42.0, much weaker than expectation. Alibaba (09988), Tencent (00700) and Meituan (03690) declined 2% to 3%.  Upstream focused integrated oil, CNOOC (00833) rose more than 4%. MMG (01208), a base metal mining company, was up 3%. While state owned developers China Resources Land (01109) and COLI (00688) were up 1% to 2%, quite a number of weaker Chinese private developers fell more than 4%. In A shares, CSI300 was about 0.5% lower. Education, Chinese traditional medicine and fish farming names gained.

Whitehaven Coal (WHC), Australia’s biggest coal producer, is again front and center, rising 5% on the ASX today, after coal prices (Newcastle coal futures for April) jumped 6.4% to $281 a ton, the biggest jump in two weeks. Australian coal prices are again heading higher as European consumers hunt for alternatives to Russian coal. Russia is the third-largest supplier of thermal coal and dominates sales to European markets. Whitehaven (WHC) makes 44% of its money from Japan, 20% from Korea, 13% from Taiwan and 10% from Indian consumers. But the thinking is, that Whitehaven will gain a greater market share in these areas, and sales will rise, along with revenue. So its shares are likely to be upgraded by investment analysts. Plus the coal price is likely to elevated given rising demand and mounting lack of supply

The Australia share market (ASX200) took a step back from record highs on Wednesday, with profit taking in lithium stocks and selling in Block (SQ2) dragging down the market. On Wednesday, the ASX200 fell 0.5%. But there are still bright sparks, with coal mining and financials stocks up the most. Banks and insurance companies typically stand to make more money as rates rise, as their margins will likely rise, so banks like Bank of  Queensland (BOQ), Bendigo (BEN) are up 1.5%, as well as insurers.

USDJPY shot up above 124 in the Asian morning session, brace for more BOJ bond buying. The global surge in yields following hawkish comments from Fed Brainard suggest that the Bank of Japan may intervene again to buy government securities. Ten-year JGB yields are getting close to the BOJ’s limit of 0.25%. We noted yesterday that Japanese authorities remain concerned about the volatility in the Japanese yen, and verbal intervention is also likely to continue as USDJPY gets closer to 125.

What you need to consider

Fed Brainard goes beyond hinting a 0.5% rate hike in May, Quantitative Tightening (QT) on the table. Federal Reserve Governor Lael Brainard called the task of reducing inflation pressures “paramount” and said the central bank will raise interest rates steadily while starting balance sheet reduction as soon as next month. The US Treasury 2Y and 10Y yields surpassed 2.50% (the Fed’s estimated neutral rate) for the first time since March-May 2019. The Dow, S&P 500 and the Nasdaq Composite fell 0.8%, 1.3% and 2.3% respectively. Fed minutes from the March meeting are due today, and will be closely watched. Next FOMC meeting is scheduled for May 3-4. 

The service sector in China contracted.  March Caixin China PMI Services released this morning coming at 42.0, much weaker than expectation (survey 49.7, Feb 50.2).  It was the weakest in two years.  It was also much weaker than the official PMI’s service sector sub-index which had a 46.7 print in March.  This is probably due to the fact that the Caixin survey focuses more on private companies and SMEs than the official PMI survey. With the Shanghai lockdown and outbreaks of Covid cases in other cities, the outlook for April is even dimmer

Singapore retail sales disappointed, but policy tightening to continue. Retail sales declined by 3.4% y/y in February, partly due to the timing of Lunar New Year, as pre-festive season spending would have been recorded in January. The omicron wave was also seen at a peak in the month, and possibly weighed on consumption demand. This compared to January’s 12.0% y/y gains and the first decline since August 2021. Advance GDP for Q1 and the monetary policy decision from the Monetary Authority of Singapore (MAS) due in the coming days. While GDP growth in Q1 may be slower than Q4’s 6.1% y/y, MAS is likely to continue to tighten as inflationary pressures mount. This should benefit SGD. 

The Saudis have increased their official selling prices for all oil grades to all regions for May cargoes. Arab Light into Asia was increased by $4.40/bbl m/m to leave it at a record $9.35/bbl over the benchmark. All grades into the US were increased by $2.20/bbl MoM, whilst Arab Light into Europe was increased by $3/bbl. These increases in prices come at a time when OPEC+ continues to stick to its plan of gradual supply increases, despite the impact of self-sanctioning of Russian oil. What this means is that Asian oil buyers will likely purchase more U.S. and Middle Eastern crude on the spot market and may take less contracted supplies from Saudi Arabia.

The world needs more Australian wheat than ever before and Australian crops are set for another bumper year. Heavy rains in Australia boosted soil moisture and with another wet season around the corner, optimism is building for another record year for Australian crop sellers. Amid the war in Ukraine and exports from the Black Sea slashed, (from one of the world’s top growing areas), the wheat prices is up about 30% since the Friday before the Russian invasion. Australia is also coming off a record crop and is set to export 27.5 million tonnes of wheat in the 2021-2022 financial year, which means Australia is the 3^rd biggest wheat producer in the world, behind the EU (37.5 tonnes) and Russia (32m tonnes). And Russia’s supply is tipped to significantly reduce in 2022-2023. So that's a consideration. 

The tight grain market, especially for corn, due to the Russia-Ukraine conflict is sending food supply shocks to Asia and threat for higher inflation. There is a silver lining, however, at least for some countries. Countries fearing potential food shortages are scrambling to find alternative suppliers and new trades are emerging. This is key for India which has started to export wheat, and Brazil jumping into the corn exports market. These may not be enough for now, but it could be a beginning of some shifting of the balance.

Trading ideas to consider

Australian Balance of Trade is due tomorrow, tipped to show Australia’s surplus income (exports minus imports) bolted higher, supported by commodity prices. The trade balance data is watched closely, as it’s a line item in GDP. And we think the Feb data due tomorrow could be a record high, supporting the Australia dollar (AUSUSD). So consider watching the AUDUSD tomorrow which will likely extend its uptrend.

India is considering raising around 500 billion rupees ($6.6 billion) next month from the initial public offering (IPO) of state-owned Life Insurance Corp (LIC). The government is discussing selling as much as a 7% stake in LIC through the listing, and this will be important for the Modi government to raise funds to finance the widening budget deficit. If successful, the insurance firm would surpass digital payments startup Paytm as India’s biggest IPO of all time.

Other trading ideas? In commodities: you could trade Wheat if you believe demand will continue to rise, while supply remains constrained.  

In FX: you could go Long AUDJPY, USDJPY, AUDUSD. And you could SHORT EURUSD.  

In equities: You could consider backing Australian coal producers like Whitehaven (WHC). Meanwhile, to capitalize on higher wheat prices, and Australian producers gaining more market share, you could look at Elders (ELD) and GrainCorp (GNC). 

Elsewhere, you could consider Shorting/taking a short position in the Nasdaq. The Nasdaq pull back and reaction to to the Fed’s new hawkish tilt may not be over. Weekly and Monthly charts for the Nasdaq, also suggest a pull back could be on the cards.

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