Mounting recession fears hammered commodity prices and pushed down bond yields

What’s happening in markets?

Commodities are getting hit in a big way due to recession fears

Energy prices have continued to move lower amid the rising risk of demand destruction but also on reports of Biden administration’s gasoline tax holiday. WTI crude futures were down over 3% and sank below $103/barrel while brent futures slid below $109. But something to consider is that while US consumers at the pump would pay less under the proposed tax scrap, that would likely add to the global demand pressure for oil and oil products. That means further demand supply imbalance, so even tighter markets and more medium-term price pressures.

Talk of a recession on the horizon gets louder

Layoffs increase and commodities take another haircut, while the oil price fell to a one month low, and copper (a proxy for global growth) fell to 15-month low.  Meanwhile, amid the push for coal in Australia and Germany, the Newcastle Coal Price rose off its one month low. Clean energy stocks continue to slide as the world pivots back to fossil fuels for cheap, immediate energy needs and to ‘band aid’ over the energy crisis.

APAC markets are mixed

APAC central banks will need to up their game and play catch up with the Fed, which means Asian bonds have more to lose. But equities displayed some resilience on Thursday as fears of a recession mean that the Fed tightening cycle would be cut short.

Singapore’s STI (ES3) was up 0.6% and led the gains in the region with REITs leading the way even as US futures stayed in red. Australia…

Japan’s Nikkei (NI225.I) also remained in modest gains as yen weakness remained restrained. Fast Retailing led the move in the index. North Asian markets like Taiwan and Korea were in the red.

Australia’s ASX200 is up 0.3% up on Thursday with property stocks leading the charge for two vital reasons

Firstly US mortgage application rose the second week and secondly the Australian 10 year bond yield fell off its high, falling to 3.8%. Meaning property yields may not be in question and for many investors, as  many think property still offers attractive ‘stable’ rents (yields). As such shares is commercial landlords like Bunnings landlord, BWP Trust (BWP) is trading 3.69% up, with other commercial landlords like Growthpoint Property (GPT) and industrial property groups like Centuria Industrial REIT (CIP) trading up over 3% each. On the flip side, clean energy stocks continue to see carnage, with Lake Resources (LKE) falling over 17% today, continuing its slide after the company’s managing director left the group and sold his shares. Other lithium stocks are continue to slide like Liontown (LTR) and Novonoix (NVX) losing over 7%, while uranium stocks are also under the knife, with Paladin (PDN) down over 7% as much of the world pivots back to fossil fuels for cheap, immediate energy needs and to band aid over the energy crisis.

Chinese industrial metal mining stocks were sold amid commodity price weakness

Hong Kong and mainland China equities had lackluster trading with moderate gains.  Alibaba (09988) rose over 3% following a Bloomberg report suggesting that Ant might apply to the PBoC to become a financial holding company as part of the effort to clear the way for a potential IPO of Ant.  Industrial mental mining stocks declined. Jiangxi Copper (00358) was down 6% and China Molybdenum (03993) declined 8%.  Global industrial metal prices have recently been under pressure as fears of global economic slowdowns or even recession having picked up.

Yen gains on intervention possibility

USDJPY was heavy in the Asian session, sliding to 135.18 from 136.26 at the open. The move was sparked as former FX chief Takehiko Nakao was speaking to Bloomberg TV and said that intervention in foreign exchange markets to stem the yen’s slide can’t be eliminated. He also said that the current weak yen is not good for Japan’s economy, a divergence from what we have been used to hearing that a weak yen is good for the economy but it’s the pace of depreciation that has been a problem. This reaffirms our view that yen’s weakness has gone beyond the point of providing any benefits to companies. He also blamed the monetary policy for the current weakness in the yen.

What to consider? 

Powell's testimony invokes more recession fears

Fed Chair Powell’s testimony to the Senate Banking Committee yesterday jolted the markets as he highlighted a aggressive tightening even if that comes on the cost of a recession. He has kept the doors open for everything, by not even ruling out a 100bps rate hike but also saying that he saw rates going modestly above neutral (~2.5%) as against the current market pricing of a peak at 3.75% ahead of his comments. The market doesn’t seem to be buying his 100bps remark, and that means there is still scope for short end yields to drop and USD to weaken further.

Downside pressure worsens in equites

Chinese authorities issued new guidelines asking internet platforms to  better manage the behaviors of live streamers

China’s National Radio and Television Administration and the Ministry of Culture and Tourism jointly issued new guidelines which require the internet platforms to be responsible for the behaviors of the livestreamers broadcasting on their platforms.  The guidelines also require the livestreamers to adhere to the “right” direction of political value and not to spread fake news or disturb social orders. 

Singapore May inflation will be out today

Singapore May CPI on the cards today and will likely inch higher to 5.5% from 5.4% in April on rising food and fuel costs. Rents are also rising due to construction delays and demand is still high, and authorities have announced a fiscal package directed to vulnerable households recently highlighting the toll higher prices are taking on overall economic activity.  Accelerating inflation will likely cap recent retail sales momentum and moderate Q2 GDP growth. Still, we cannot rule out further tightening from the Monetary Authority of Singapore in October.

Potential trading and investing ideas to consider?

Softening in Eurozone PMIs may not spell trouble for EURUSD

Eurozone PMIs have stayed modestly strong despite the weakness in the economy, but a further slowdown is likely in the cards as preliminary data is reported later today for June. While that could usually spell trouble for EURUSD as it further weakens the case for ECB tightening beyond the case of peripheral spreads, the US recession is shaping the market sentiment more for now. With US PMI due later today as well, this might mean that the potential for EURUSD to test recent lows at 1.0350 may remain restrained.          

Investors to move to coal and fossil fuel and out of clean energy

With Australia’s government calling for ‘all the resources’ it can to scale up immediate energy needs with Australia suffering an energy crisis, the Coal price  in Australia, moved off its one month low and appears to head higher with demand rising and coal supply remaining short. Over in Germany, their government is about to kick off coal production to rid the country of Russian gas imports. This global issue will put upside in fossil fuel companies and further put downward pressure on lithium, hydrogen and uranium stocks. That being said coal stocks are some of the best performers this year on the ASX, so are subject to EOFY and end of half year (in the US) rebalancing. So some coal stocks, like Whitehaven Coal (WHC), New Hope Coal (NHC) and Yancoal (YAL) appear to be in correction (profit taking territory), before they likely head back up to higher ground. Inversely, lithium and hydrogen companies, face further selling pressure.

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