Bear market bounce continues ahead of QT, Shanghai to resume manufacturing on Wednesday boosting mining sentiment. Infant milk stocks rally

What’s happening in markets that you need to know     

Bear market bounce roars. But for how long? A ‘technical rally’ is continuing in the downbeat names of 2022 which has helped the Nasdaq rally 7.1% last week, and the S&P500 gain 6.6%, marking its first positive week in 8 weeks. The technical indicators suggest this short term secular rally could continue, as technical traders (i.ie Quant traders) may be forced to buy into stocks that are in oversold territory, like Apple (AAPL), Microsoft (MSFT) and IBM (IBM) were. Secondly, keep in mind, we could likely see down beat stocks rally into the end of half year in the US, and EOFY in Australia (30 June); whereby fund managers are somewhat forced to bring their asset allocations back into alignment; i.e. top up their tech positions, which have fallen 30% for example and take profits from commodities, which are up 50% for instance. This reflects why Moderna (MRNA) and Tesla (TSLA) rose 7% each for example on Friday, despite both companies likely to see earnings growth slow in 2022. And we alluded to last week, we think caution remains in the air, and tech stocks could resume their limbo long term bearish pull back, as the Fed starts QT this week, and most businesses in the S&P500 are  guiding for profit growth to slow.

Asia Pacific equities are trading higher buoyed by the tech rally, end of Half-year top-ups and China reopening hopes. Australia’s ASX200, is trading up 1.2%, at its highest level 4-weeks with Tech, Miners and Healthcare fueling the rally. Downbeat tech names like Block (SQ2) are up 10% on the back of no news. Block’s shares are down 27% this year and ETFs like iShares ASX200 (IOZ) for example, typically have a 0.5% weight to SQ2. So using the above theory, given SQ2 shares have fallen a lot, you’d think the ETF would need to top up its SQ2 holding to bring the ETF’s asset allocation back into alignment. This is something to keep on your radar – as it’s end of month, half year and EOFY next month. So consider watching your favorable profitable tech stocks that are growing earnings. In other news, AGL (AGL) torched its demerger of its retail and power generation businesses and the company’s Chairman will resign. Billionaire Cannon-Brookes says it’s a huge day for Australia and means Australia’s green path is ahead. 65% of AGL’s profit comes from selling electricity, 34% from gas, and the business wants to pivot to clean energy and away from coal. If the company split, AGL proposed to run its coal-fired power station for another two decades.  

Japan’s Nikkei (NI225.I) was trading close to 2% led by Fast Retailing and Sony. Singapore’s STI index (ES3) saw modest gains of 0.2% led by REIT stocks that remain a key inflation hedge. Singtel shares continue d to slide after the earnings miss on Friday, but reopening theme remains at play and poised to benefit consumer stocks.

Hong Kong and China equity markets rallied on relaxation of lockdowns and recent better-than-feared results from large internet companies .   New local COVID cases fell to 67 in Shanghai and 12 in Beijing.  The Shanghai municipal government announced 50 measures to support the economy, corporate and households to recover from the 2-month long lockdown.  Starting from June 1, factories are allowed to resume production without having to apply for pre-approval from the authorities. Domestic consumption stocks gained on the prospect of reopening. Jiumaojiu(09922) jumped over 8% and China Resources Beer(00291) gained 7%. Chinese internet stocks followed through from last week’s post result rallies, further rising between 3% and 8% this morning. Low expectations and bearish positions before result announcements contributed to the strong price performance. Meituan (03690) is scheduled to report Q1 results on June 2 and rose 6% this morning.  Bloomberg’s survey of analyst estimates expect the company’s Q1 revenue to come at RMB45.3 billion, a 22% year-on-year increase and to have an adjusted net loss of RMB4.8 billion in the quarter.  Hang Seng Index (HSI.I) gained 1.7% and Hang Seng TECH Index (HSTECH.I) surged 2.6%.  CSI300(000300.I) gained 0.7% by mid-day.

Crude oil heating up amid China easing hopes. Brent crude has touched early March highs of $120/barrel today and WTI is at $116 as China eased anti-virus lockdowns and the EU worked on a plan to ban imports of Russian crude. Thursday’s OPEC+ meeting remains a key event risk. US natural gas prices are also approaching $10 ahead of the summer driving season as the market remains tight.

What to consider?

US core PCE prices. US core PCE data was out on Friday, and it came in as expected at 4.9% y/y and 0.3% m/m. This was slower than last month's 5.2% y/y and may prompt more talk of inflation peaking out. While PCE is the preferred Fed metric, what cannot be ignored right now is that food and energy prices still have more room to run on the upside suggesting that inflation will remain higher for longer. The May CPI print is due on June 10, so that will be the next one on the radar for further cues in terms of Fed's rate hike trajectory but for this week, the focus will be on the jobs report due on Friday.

Eurozone inflation prints out this week. The energy price shock has been bigger for Europe, and May prints are due for Spain, Germany, France, Italy and the Euro-area in the week ahead. Food price pressures continue to build up amid the supply shortages and protectionist measures, and further gains in May will add more weight to the ECB’s resolve to exit negative rates from Q3 with more aggressive tightening. EUR has gained 1.5% against the USD last week, and is now trading above 1.07, and resistance is seen near 1.0780 and the 1.0800 big figure.

When a company delivers weaker than expected results, what’s next? The world’s biggest electric vehicle maker, CATL (CATL) is facing further hurdles and started to receive broker downgrades for 2022, after missing earnings expectations. Market consensus dropped its price target 13%. This highlights that after a company misses expectations and guides for a weaker outlook; a stock can be susceptible to downgrades by investment banks. It’s worth noting, that not only are Electric Vehicle (EV) companies, at the mercy of paying for higher battery metals costs (lithium, nickel, copper, cobalt), which hurts earnings growth, but so too are battery makers. This is another reason why at Saxo, we prefer commodity companies, that are key beneficiaries of higher raw material prices, which are likely to continue in 2022.

Potential trading ideas

Infant formulae makers are not to cry over. As mentioned last week, the baby formulae shares have been cast into the lime light as the US is amid a 50% shortage. New research suggest, the situation worsened, and US supply is down 70%. Last week, the US received supply from Nestle (NESN) via a special Air Force one delivery. Today, the US FDA said Australia’s Bubs Australia (BUB) will also assist, and provide at least 1.25m cans of infant formulae to the US. Bubs Australia’s shares (BUB) rose 44% as a result, as earnings upside could extend beyond the short term if the US increases the order. Peer-infant milk company A2 Milk (A2M) shares rallied 9.5% on the news.

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