Macro: Sandcastle economics
Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.
Summary: Semiconductors stocks follow their tech peers down but market remains broadly steady as minutes from the May Fed meeting fail to surprise or add any guidance beyond the few 50bps rate hikes priced in. Next to watch will be the beginning of Fed’s quantitative tightening next week which will suck liquidity out of the system. Risks of a negative Q2 GDP print from China are increasing, and policy support is likely to ramp up further.
What’s happening in markets that you need to know
Big picture themes? On Wednesday Bubble Stocks and Payments companies rose the most out of the Equity Basket we track globally, but these sectors remain very bearish still are down 49% and 28% respectively so far this year. At S&P500 sector level on Wednesday, Computer Electronics and AgTech rose the most.
Nvida (NVDA) the largest chip maker in the world (by market size) reported better than expected results and rose 5.1% in normal hours trading, but its shares fell 6.9% after hours when the market began to price in their weakening guidance. Revenue rose 46% to $8.29 billion (that's a record and beat the $8.1b expected). The reason the stock is down after hours is because its Q2 revenue is expected to fall to about $7.9 to $8.2 billion, and diluted earnings per shares is predicted to fall from $0.76 Q1 FY22 to $0.64 Q1 FY23. This reiterates why we advocate for backing companies with growing earnings. These tech stocks, the down-and-outs and big tech firm, will have their day in the sun again, but not soon. Maybe consider letting the QT dust settle, before considering buying 'the dip'
Asia Pacific’s stocks are having a mixed day after Fed minutes fail to add anything new. Taking a bid from the higher close in the overnight markets, APAC markets opened in the green today. Australia’s ASX200, opened higher but fell into the red, and is trading down 0.4%. However, the market still seems to be in a very short uptrend from the May 12 low, supported by commodity stocks rebounding. Today Takeover talk beefed up the tech sector 1.4% after co-creator of Siri, Appen (APX) rose 28% upon receiving a takeover offer. Codan (CDA) Metal detection and tech company is also doing well, but more the major theme is that tech stocks are being led high as M&A talks are heating up, given Aussie tech is down 40%, with some names like Tyro (TYR) down 75% from their highs. Singapore’s STI index (ES3) was up about 0.8% led by 6% gains in Jardine Matheson. Japan’s Nikkei (NI225.I) lost 0.1% as Fast Retailing and SoftBank shares jumped higher but Tokyo electron remains under pressure following the dismal guidance from Nvidia (NVDA) amid the supply issues.
In Greater China, the massive scale video conference of Premier Li Keqiang and four Vice Premiers with over 100,000 local government officials to boost confidence and mobilize ranks and files to carry out the State Council’s stimulus measures does not stir up much excitement in the equity markets. In his speech, Premier Li pledges to do more to ensure “reasonable” rate of growth in Q2 and to push down unemployment rate. The last time that such a large scale conference was held was Feb 2020 when 170,000 local government officials were called onto a televised conference on pandemic control. After opening slightly higher, Hang Sang Index (HSI.I) and CSI300 (000300.I) were fluctuating between moderate gains and losses this morning. Alibaba (09988) fell 3% ahead of reporting results.
What to consider?
Fed minutes remain short of a surprise. The Fed has refrained from surprising on the hawkish or the dovish side, surprising as it has actually raised the PCE inflation guidance for 2022 and 2023 – we are now at 4.3% for this year and 2.5% for 2023. In fact, with the increasing hints of flexibility, Fed is increasing the pricing in of a pause for September. There was no mention of 75bps or the risk of a recession which acted as a relief for markets and led to the financial conditions loosening slightly – the reverse of what the Fed actually intends to do. We discussed more on the Fed's stance in our macro note yesterday.
Geopolitics at the forefront again. While Russia is said to be opening two sea corridors from Ukraine ports to help ease the global food supply crunch, the war still doesn’t seem to be getting to a close even after three months. Russia is still making progress in the east of Ukraine. Meanwhile, US-China relations are on the burner again after President Biden made comments on Taiwan.
Investors need to be comfortable feeling uncomfortable, as we haven’t seen the bottom in the market yet. So what’s next? We’ve already seen liquidity dry up (mass selling in stocks, fund managers are seeing large outflows) PLUS idle trading accounts are collecting dust. And Quantitative tightening (QT) has not even started yet. It starts in June. The US Fed minutes overnight revealed two different Fed members talked about how QT can create 'un-anticipated effects in the financial markets'. The Fed is not only rising rates but in an unprecedented move, we know they are reduced their $9 trillion balance sheet and removing that stimulus from the market. The takeaway? We will likely see professional investors reassess the landscape over the next few months after QT grips. And then, see how stocks with low PEs and earning growth are looking before buying the dip.
Semiconductor stocks weighed down by the poor tech sentiment. While supply pressures, China lockdowns and rising input costs have weighed on semiconductor firms this year, the general sentiment has also been fragile due to PC demand peaking. Adding to the mix, general rotation out of the tech sector in the current market downturn also means some pressure on semiconductor stocks. Japan’s Tokyo Electron is down 11% YTD while Lasertec has lost over 50% and TSMC is down 18% since the start of the year.
Some ECB policymakers remain wary of aggressive tightening. ECB’s aggressiveness in tightening policy is still a question, but most policymakers remain ready to support President Lagarde’s plans to exit negative rates in Q3. EURUSD is likely to see 2-way moves in the run up to a change in policy settings, but there still is upside potential as ECB exits negative rates while Fed’s hawkish surprises are getting limited.
Negotiations on avoiding delisting of Chinese companies in US. exchanges is continuing to stall. Despite repeated optimism from the Chinese authorities, Y.J, Fischer, director of the U.S. SEC’s international-affairs office says that significant issues remain and Chinese companies may face delisting as soon as in March 2023 if the China Competitiveness Bill, which incorporates bills to shorten the audit paper compliance deadline by a year, got legislated by the Congress later in the year.
Shanghai announces immediate resumption of speed-post service and partial resumption in-person classes from June. With new local cases having fallen to 338, Shanghai’s postal offices resumed domestic speed-post and parcel delivery service yesterday. Students in senior high 2nd and 3rd year will resume in-person classes from June 6 and students in junior high 3rd year will resume in-person classes from June 13. Other students will remain studying from home till end of term.
Key company earnings to watch this week:
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