Markets brace for slower eco growth and rate hikes, Energy stocks in vogue, why Tesla is on the nose

What’s happening in equites that you need to know?

The US main indices are back in correction territory, the Nasdaq 100 (USNAS100.I) is a bear market down 21% from its November high; The S&P 500 (US500.I) has fallen 13% from its January high, while the Blue Chip index, the Dow Jones 30 has fallen 10% from its high, meaning  they are both in correction. The Nasdaq this year alone, is down 19% this year, and further selling could come for the Nasdaq and S&P500 and the Dow Jones ahead of large Fed rate hikes, which will likely slow global growth and company’s earnings growth. Also so far, 148 of the S&P500 companies have reported resulted, with earnings growth coming in at 2% according to Bloomberg, while the most earnings growth has come from Energy companies (108% earnings growth) and 103% from industrials (with companies benefiting from reopening trade).

Crude oil (OILUKJUN22 & OILUSJUN22) rose 3% back over $101 with supply fears now a focus again for traders. We are still seeing stronger than expected sales, earnings and profits from oil stocks on the back of the oil price rising 33% this year. US energy stocks like Occidental Petroleum (OXY) and Haliburton (HAL) in are up 89% and 52%.

Google parent Alphabet (GOOGL) quarterly results missed estimates, as YouTube Ads, and Europe sales slowing, falling short of expected. All in all, revenue excluding payouts to distributions partners, rose 23% in the quarter to $56 billion. Alphabet also announced a $70 billion buyback program, which will support share price growth. However the market will still have to navigate slimmer margins for 2022 that the market is factoring in. Alphabet shares fell 2.6% in afterhours trade and they trade 18% down this year.

Microsoft (MSFT) results meanwhile were positive with the giant reporting robust growth in cloud demand. Quarterly revenue rose 18% to $49.4 billion, with its two main cloud businesses growing steadily. Microsoft shares rose 4.5% in after hours trade after it reported sales and earnings beat expectations. Microsoft shares are down 19% this year.

Asian equities in red over US rout as tech drags. Asian equities were broadly in decline as US tech earnings disappointed and China lockdown concerns continued to weigh. Japan’s Nikkei (NI225.I) was in losses of 1.7% in the morning while Singapore’s STI Index (ES3) was marginally lower, still supported by reopening stocks such as REITs, airport operator SATS (SATS) and agribusinesses like Wilmar (F34) and Golden Agri-Resources (E5H).

The Australian share market’s ASX200 is down for the third day, down 0.7% on Wednesday. However the iron ore miners, BHP, RIO and FMG are higher after the iron ore price rallied, moving up 2.32%, seeing its first day of green in five days and re-entering its long term rebound. Back to the broader market, the ASX200 is in a technical pull back on day charts, and weekly, suggesting further pull backs could be ahead as the RBA is likely to hike rates sooner than expected. It comes as today’s inflationary read, showed CPI rose 5.1% year on year, in Q1 (stronger than 4.6% expected), taking Aussie inflation to a 20 year high. So the market now thinks the first RBA rate hike will come in May, instead of June. This caused the Australian dollar (AUDUSD) to rally off its fresh flow. However, the AUDUSD uptrend will likely resume once China snaps its lockdown.

Chinese infrastructure stocks rally on Xi’s call to increase spending on infrastructures.  Chinese infrastructure names rallied in China’s A share market and in Hong Kong.  President Xi Jinping hosted a meeting of the Central Committee for Financial and Economic Affairs yesterday.  In the meeting, he told officials from a number ministries to comprehensively strengthen and increase infrastructure construction, especially for transportation, energy, and water management. He also called for broadening of long-term financing channels for infrastructure projects.  Many construction, cement and other infrastructure concepts rose more than 3%.  Trading in the board market however was lackluster.  CSICSI300 Index (000300.I) gained 0.5% while Hang Seng Index (HSI.I) declined modestly.  HSBC (00005) fell another 3% after yesterday’s 4% decline as investors being disappointed by the bank’s common equity tier 1 (‘CET1’) capital ratio having fallen to 14.1% and not conducting additional share buyback. 

What you need to consider

Tesla (TSLA) shares fell 12.2% as the price of a lithium battery sky rockets, at a time when Musk looks to close his $44b purchase of Twitter.  The price of lithium will likely hit another all-time high this year, which will hurt Tesla's earnings. Lithium demand is expected to more than double by 2025, while supply is short. Also keep in mind, the average lithium battery now costs $6,000 and at least about 14% of Tesla's costs are from lithium. At Saxo, we prefer commodity companies over car makers, as more earnings growth will likely continue to come from commodities. Also consider General Motors for example, has a PE of 5.95 times earnings Vs Tesla 118.08 times earnings. Meaning other car makers are cheaper. Tesla’s revenue growth is also expected to fall in 2022 and 2023, and Tesla’s profit growth is slowing. Tesla's earnings (EBITDA) margins are slim too. So any disappointment in Tesla’s results, higher lithium prices etc., or a big sneeze from the Fed will hurt its shares.

Better earnings news from consumer firms continues. Visa (V) has flagged a travel recovery into the summer, and there were some bits of positives in earnings from restaurant chain Chipotle (CMG), food maker Mondelez (MDLZ) and beverage giant Pepsico (PEP). This comes despite the war from Ukraine and higher commodity prices, so it underlines the fact that companies that have pricing power will thrive despite the equity rout. While these gains are not enough to reverse the drag from tech on equities, it highlights the importance of getting the right exposure as equity markets brace for tighter liquidity conditions.

China’s industrial profits rose 8.5% YoY in Q1. The growth however concentrated in state-owned industrial enterprises.  Private industrial enterprises’ profits grew only 3.2% YoY.  The mining sector was the bright spot with profits rising 148% YoY.  Profits in the manufacturing sector and utilities sector, however, fell 2.1% YoY and 30.3% respectively.  Within the manufacturing sector, chemicals, textiles, non-metal minerals processing and electric equipment were the best performers, seeing profits growing 10% to 18%.  Autos did poorly with profits down 11.9%.  While upstream coal mining, oil and gas exploration profits rose over 150%, the downstream oil, coal and other fuel processing’s profits fell 29.8%. Food processing, electricity and heating and ferrous metal processing were among the industries with the largest declines in profits.

Shanghai’s new Covid cases declined for the fourth consecutive day with 13,562 new cases (or 12,312 after adjusting from reclassification) on Apr 26. Beijing had 34 new Covid cases on Apr 26 and continued mandatory testing. 

Japan spending plan to ease inflation concerns. PM Kishida has announced a 6.2 trillion yen package to ease the burden of high commodity/energy prices on companies and consumers. It is estimated to shave 0.5 percentage point off overall CPI from May through September, according to the cabinet office. While this gives room to the Bank of Japan to stay course, it also means further weakness in the yen is hard to avoid.

Singapore strengthens maritime position. Major oil rig builders Sembcorp (S51) and Keppel (BN4) have finalized a merger of their offshore and marine engineering services businesses. The deal is also expected to further strengthen Singapore's position as a maritime and offshore & marine hub, especially at a time when oil prices are back to record levels, which could fuel demand for oil drilling and rigs. The deal will also help the combined entity adapt better to energy transition to cleaner and renewable sources.

Europe stagflation risks rise. Russia is set to cut off gas to Poland and Bulgaria on Wednesday, as it continues to demand payments in rubles. There is a threat of similar measures against other EU countries as well, with the biggest threat being a cut off in German gas supply.

GBPUSD weak on the back of poor macro data. Weak retail sales and PMI from UK have put pressure on the sterling. Market is now pricing 146 basis points (bps) of rate hikes for the rest of the year, down 25bps from last week. GBPUSD is down more than 4 big figures since Friday with GBPUSD now below 1.2600 and EURGBP is up 125 pips to 0.8450. Bank of England's Governor Andrew Bailey warned last week about the risks of a possible recession and a slowdown in the UK labour market.

Trading ideas to consider

EURUSD at 5-year lows but still strong on a trade-weighted basis. EURUSD has failed to generate any gains after the re-election of Emmanuel Macron as president of France. With a selloff in European equities and further risks to Euro growth with Russia cutting gas supplies, the ECB tightening expectations may take a hit. EURUSD tumbled to 1.0635, the lowest since April 2017, and next target will be Jan 2017 low of 1.0339. If this Russian gas cut off extends to Germany, we may see a further move down in EUR. But the EUR decline so far has been dominated by USD gains, and a look at the trade weighted EUR suggests there is more room for a run down in the single currency.

Key earnings to watch:

• Wed, Apr 27: T-Mobile US (TMUS), Boeing (BA), Kraft Heinz (KHC), Ford Motor (F), Meta Platforms (FB), Qualcomm (QCOM)
• Thu, Apr 28: Caterpillar (CAT), Twitter (TWTR), Comcast (CMCSA), Merck (MRK), Amazon (AMZN), Apple (AAPL), Intel (INTC), PayPal (PYPL)
• Fri, Apr 29: Exxon Mobil (XOM), Chevron (CVX), Colgate-Palmolive Company (CL)