Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
Access both platforms from your single Saxo account.
Lennar and the US housing market, Tesla’s geopolitical risk is rising
Peter Garnry
Chief Investment Strategist
Summary: The US housing market is slowing down with real estate brokers laying off people and mortgage applications hitting some of the lowest levels since 1990. For homebuilders the situation is even worse as the much higher financing costs are not being offset by lower prices on construction materials. We take a look at the US housing market and Lennar's Q2 earnings published in the US pre-market session. In today's equity update, we also take a look at Tesla and the growing geopolitical risk over Elon Musk's decision to deliver Starlink to Ukraine.
Can the US housing market avoid a material slowdown?
This year’s change in the US 30-year mortgage rate from around 3.3% to recently 6% has a caused a dramatic fall in mortgage applications with the 12-week average now in the 5% percentile since 1990 suggesting housing activity is slowing fast. Several real estate brokers have recently laid off employees in an anticipation of declining activity.
Lennar, the second largest US homebuilder, has just reported FY22 Q2 (ending 31 May) earnings with revenue at $8.4bn vs est. $8.1bn as the homebuilder is still enjoying the tailwind from previous orders. More impressively the gross margin improved 340 basis points to 29.5% suggesting good cost management amid cost pressures. New orders increased only 4% reflecting the dynamics explained above while the backlog rose 16% y/y and the backlog dollar value increased 33% to $14.7bn reflecting the inflation in construction materials and thus prices of new homes. Lennar’s new orders guidance for the current quarter is 16-18,000 vs est. 17,750, so demand is coming in weaker than estimated.
For homebuilders the situation is situation is even worse with Lennar’s share price down 44% reflecting revenue and profitability slowdown. Higher financing rates for homes while building material costs remain high coupled with a tight labour market are an awful cocktail making it less attractive to build a new home relative to buying an existing home. The 6-month average of US leading indicators has gone into negative in the latest print with the downward move accelerating suggesting the US economy will materially slow down over the coming six months. Whether it turns into a recession, or to what degree, is still uncertain but the probability is definitely rising.
Ironically it is the rising recession risk that is now cooling commodity prices and fading the momentum in interest rates reducing the pressure on equities. Historically drawdowns are not a continuous decline to the trough, but instead a stop-and-go sequence, and it is likely that unless adverse developments enter the equation that we could be in for a slightly more positive equity market in the weeks to come. The next leg down in equities to new lows could come from the fact that there is a natural limit to how high the nominal interest rate can go before the Fed will have to halt the tightening and thus allowing inflation to run hotter for longer which will likely cause headwinds for equities longer term.
Tesla is now facing two major risks
The NHTSA recently elevated its probe into Tesla’s Autopilot increasing the risk of a potential suspension. With rising commodity prices Tesla has been raising prices lately to protect its gross margin, but the majority of the cash flow generation is coming from its software sales of Autopilot. In fact, Tesla has said it themselves that they expect the majority of future free cash flow coming from the Autopilot software. A suspension is a key risk as we have highlighted before.
Another risk emerging for Tesla is well described in today’s FT article Elon Musk’s Starlink aid to Ukraine triggers scrutiny in China over US military links in which Elon Musk’s decision to send Starlink receivers to Ukraine is seen as a threat to China’s national security. The Chinese EV market and the Shanghai Gigafactory have been very important factors behind Tesla great success in the past couple of years. The question is whether increasing geopolitical risks and the tensions between China and the US could suddenly become a major issue for Tesla.
Tesla’s share price is still priced for perfection execution and we acknowledge the impressive results of the company, but when something is priced for perfection the sensitivity to changes in expectations is so much greater. Latest Market Insights
Quarterly Outlook
-
-
Quarterly Outlook
Equity Outlook: Will lower rates lift all boats in equities?
Peter Garnry
Chief Investment Strategist
After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto... -
Quarterly Outlook
FX Outlook: USD in limbo amid political and policy jitters
Charu Chanana
Chief Investment Strategist
As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ... -
Quarterly Outlook
Macro Outlook: The US rate cut cycle has begun
Peter Garnry
Chief Investment Strategist
The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c... -
Quarterly Outlook
Commodity Outlook: Gold and silver continue to shine bright
Ole Hansen
Head of Commodity Strategy
-
Quarterly Outlook
FX: Risk-on currencies to surge against havens
Charu Chanana
Chief Investment Strategist
Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperfo... -
Quarterly Outlook
Equities: Are we blowing bubbles again
Peter Garnry
Chief Investment Strategist
Explore key trends and opportunities in European equities and electrification theme as market dynami... -
Quarterly Outlook
Macro: Sandcastle economics
Peter Garnry
Chief Investment Strategist
Explore the "two-lane economy," European equities, energy commodities, and the impact of US fiscal p... -
Quarterly Outlook
Bonds: What to do until inflation stabilises
Althea Spinozzi
Head of Fixed Income Strategy
Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain ... -
Quarterly Outlook
Commodities: Energy and grains in focus as metals pause
Ole Hansen
Head of Commodity Strategy
Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities i...
Disclaimer
The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.
Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)