Traders become short term bulls in a bear market, but are on edge after oil creeps up

What’s happening in markets that you need to know     

Big picture for equities? We have had some short reprieve so markets are rallying from the Fed’s minutes this week, plus its end of month, end of half year in the US approaches, as does Australian EOFY. So portfolio rebalancing may have triggered a selective short-term technical rally in some downbeat names. Meaning fund managers are being forced to bring their assets allocations back into alignment, meaning, they are compulsory buying into tech. As we said on the podcast last night, this will likely continue for now. For clients, some are taking this bull run in a bear market, as a potential opportunity for a short term gains, before locking in profits before the markets resumes its long term bearish downtrend.

At Saxo across the APAC region, we’re seeing clients take on a short term tactical view on markets over the last week: 70% of clients are buying shares - the most bought names this week include Tesla, Apple, Amazon, Microsoft, NVidia, Alphabet (Google). Secondly, options have picked up too, with many clients using option to hedge their long term positions in stocks. And thirdly in Indices, there has been the most trades in the Nasdaq 100, 51% of clients are buying for the short term likely continued rally, while 49% are shorting the Nasdaq amid the long-term bearish tone. In Futures, there’s also been a lot of trading in light crude with buy orders picking up as China looks to continue to ease restrictions, which will likely cause oil to rise in demand and price.

Asia Pacific equities extended Wall Street rally on month end flows and China tech earnings. The risk-on tone from the overnight markets found further legs in the APAC session. After the big drop in US equities this month, portfolio managers are likely to buy into the month-end to bring allocations back in line with their strategy. (side note Monday is a US holiday). Japan’s reopening also spurred gains in Asian airlines while higher oil prices supported Asian energy stocks. Japan’s Nikkei (NI225.I) was up over 0.6% as airlines and consumer stocks got a bid, and Singapore’s STI index (ES3) also gained close to 0.6%. Singtel was down close to 2% after it reported earnings this morning, and missed revenue and profit estimates for the full year.

Australia’s ASX200, is trading up 0.9%, at its highest level in a week, beefed up by commodity companies this week. However today, Square (SQ, SQ2) is trading up 6%, after the payment giant, who makes over 70% of its money from Bitcoin transaction rallied on the back of bond yields falling. However, the best performer today is arguably being caused by traders exercising their short positions on gambling company PointsBet (PBH). PBH is up the most today 14% after tumbling 66% this year. This reflects that in this climate, volatility will continue, and investors must read between the lines of a rally. That being said, fund managers might also be buying small exposures in down beat tech ahead of end of financial year. In company news, Rio Tinto (RIO) said the iron ore market will likely pick up as China is ‘very determined to meet’ its growth targets and accelerate infrastructure. This is in line with what we've been saying for some time. Also today, lithium companies like Allkem (AKE) hit new highs rising 3% after the lithium sector had a fire cracker put under this week for two reasons, the Labor Govt brought in an EV policy and secondly, the world’s biggest lithium company Albemarle (ALB), upgraded its earnings for the 2nd time this month expecting the lithium price to push higher on rising demand and lack of supply.

China internet stocks boosted by better than expected results from Alibaba (09988) and Baidu 09888). Alibaba’s revenues in the March 2022 quarter grew 9% YoY.  While net profit was down 24% YoY to RMB21.5 billion, it was well above the RMB18.5 billion expected by analysts.  Management refrains from giving forward guidance, citing the outlook for the pandemic situation and the trend of retail demand being uncertain.  Baidu’s Q1 2022 total revenues grew 1% YoY.  Net profit declined 10% YoY to RMB3.8 billion but it was more than double the market expectation.  Baidu’s cloud revenue, up 45% YoY, was notably better than what peers recently reported.  Hang Seng Index (HSI.I) climbed 2.9% and Hang Seng TECH Index (HSTECH.I) surged almost 4%. Alibaba rose 12% and Baidu surged 14%.  The less hawkish than feared speech from U.S. Secretary of State Antony Blinken laying out the Biden’s administration’s policy towards China help improve sentiment. In A shares, CSI300(000300.I) rose 0.8%, being led by computing, oil and gas, ferrous metal, food and beverage, defense and electric equipment.

What to consider?

Pricing out the Fed hikes. As we’ve said previously, we don’t think we have reached peak capitulation in US equities yet, we think inflation probably won’t come down as the Fed expects. Rate hikes have start to being priced out, and we now have the terminal rate at 2.77% compared to 3% on May 3 before the latest Fed meeting. But we think there could be surprise hawkishness. US GDP 2^nd estimate came in lower than expected at -1.5% and pending home sales were down 3.9% m/m vs. estimates of -2.0%. Initial jobless claims were better than expected after the spike last week, but continuing claims were worse than expected. PCE prices remain on watch today, and inflation is likely to stay higher for longer.

US consumer back in focus as retailer earnings turn. Retailer earnings turned the table with Macy’s (M), Dollar General (DG) and Dollar Tree (DLTR) not just beating estimates but still remaining upbeat on guidance for the year. (DLTR’s guidance for Q2 was weak but FY guidance was maintained). Despite mixed US eco data, this helps to calm recession fears and continues to show the strength of the US consumer although spending patterns are shifting.

China’s industrial profits fell 8.5% YoY in April and decelerated to a growth of 3.5% YoY in the first four months of the year. In April, profits in the manufacturing sector dropped 22.4% YoY while the mining sector continued to outperform and surged 142% YoY, with the coal mining industry and oil & gas exploration and development industry leading the charge.  Non-ferrous metals and chemicals were among the outperformers in the materials sector. 

First signs of an exit plan from the BOJ. USDJPY saw a pull back on Thursday on the very first hints from BOJ about an exit from the easy monetary policy. Kuroda said the BoJ will likely combine rate hikes and balance sheet reduction through specific means, with timing to be dependent on developments. Meanwhile, Kuroda said FOMC rate hikes may not necessarily result in a weaker JPY or outflows of funds from Japan if it affects US stock prices. Tokyo inflation reported this morning has stayed around the 2% mark – but underlying price pressures still remain restrained. 

Potential trading ideas to consider?

Crude oil resuming its uptrend. Crude oil pumped up to a two-month high, with Brent breaking the key 115 level as the US summer driving season demand underpins, in addition to the broader risk appetite improvement. Also, the UK government announced it will impose a windfall tax on energy firm profits. Oil (and commodities in general) remain in a long term bullish uptrend amid structural supply constraints. The US oil giant, Occidental Petroleum (OXY)is up 136% year to date. Marathon Oil (MRO) is up 74% YTD, Halliburton (HAL) up 75% YTD on the NYSE with companies like these to continue to see momentum as the oil price resumes its uptrend. Japan’s Inpex (1605) has gained over 100% in the last 1 year and is still expected to record solid revenues and earnings growth next year. However, Japan’s power companies like Kyushu Electric (9508) and Tohoku Electric (9506) will continue to see further pressures.

Chinese mining and materials stocks and ETFs (e.g. Global X MSCI China Material ETF, CHIM:arcx) may benefit from the resilience of profitability in the mining and materials sectors despite macroeconomic headwinds as well as the potential rise in demand from infrastructure construction.

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