Recession fears sent S&P 500 briefly into bear market territory

What’s the big picture?

Investors have shifted their focus from the pace of Fed rate hikes and slowdown in the Chinese economy to the risk of a U.S. recession.  After hitting a high at 3.20% on May 9, U.S. 10-year treasury note yield has retraced 40bps lower to 2.80% in response to the prospect of slower U.S. growth.  We remain cautious of general equities amid the risk off mood, while S&P 500 closed lower for the 7th consecutive week and briefly entered bear market territory. Meanwhile, select Agri business stocks and industrial metals continue to hit new highs.

What’s happening in markets?

Agricultural stocks shine as Wheat prices remain elevated with global wheat supplies running out. Diversified agribusiness Elders (ELD) upgraded its earnings guidance, upon citing Australian crop conditions will bolster, and cattle and sheep prices will remain high, which will push its earnings 30% higher than last year’s record. Meanwhile,

US dollar on a bearish trend in Asia amid risk-on. The US dollar continued to lose ground in the Asian hours as risk sentiment was rather upbeat, and gains were led by commodity currencies. NZDUSD rose above 0.6450 as RBNZ is expected to announce a 50bps rate hike this week. AUDUSD caught a bid as well following a clear victory for the Labor party in Australia’s election at the weekend but AUDNZD saw a downside bias. USDJPY broke below the key 127.50 level again but Fed minutes due this week will be a key input for yield spread direction. GBPUSD gained 1.8% last week and was seen extending the gains to 1.2500+ in Asia.

AUDUSD rallies to new two-week high after the Australian Labor Party gets sworn in after winning the Australian Federal Election. Coal, oil and LNG companies were left unscathed, while Australia’s Prime Minister elect is set to bring in an electric vehicle policy, offering a $2k tax incentives. The Labor Party also vowed to provide stimulus for select green metals (steel, alumina and aluminium), hydrogen electrolysers, and waste reduction. And Labor vowed to increase Defence Spending over time and keep it at over 2% of GPD).

Gold (XAUUSD) marches past 1850. Gold prices continued to be bid on Monday and the yellow metal surged above $1850/USD. We still remain bullish long term on gold as noted by Ole here, and a move above $1868 (38.2% retracement of the 210-dollar April to May correction) will be key to reverse the bearish momentum.

Hong Kong and mainland China equity markets’ week-long outperformance is being tested by the surge in Beijing Covid-19 cases.   Last week, as investors shifted their focus to the U.S. recession risk, Chinese equities outperformed over 500bps (CSI300 +2% vs S&P500 -3%) despite very poor April data in credit, industrial production and retail sales.  Premier Li Keqiang’s reiteration of front-loading of stimulus measures, Vice-premier Liu He’s remarks on supporting the healthy development of the platform economy and private enterprises and a larger than expected cut in 5-year Loan Prime Rate cut, plus Shanghai’s plan to gradually lift lockdown in June, helped trigger investors flows into Chinese equities.  The bar was probably low for a tradable rally as the sentiment and position had been quite low for sometimes. The medium trend of the market, however, remains down.  The surge in COVID cases in Beijing dampened sentiment and contributed to an over 1% retracement in Hang Seng Index (HSI.I) and CSI300(000300.I).  The Beijing municipal government tells residents in five districts, including the central business district Chaoyang and the IT hub Haidian to work from home through May 28. 

Asian equities were mixed on Monday after Wall Street sees a late rebound on Friday. With the backdrop of a mixed US session overnight on Friday, Asian equities started the Monday session on a positive note but pared some gains later as overall sentiment remained fragile. Japan’s Nikkei (NI225.I) remained in gains of 0.6% at last look led by insurance as Tokio Marine (8766) reported a jump in earnings. Singapore’s STI index (ES3) was still down 0.5% led by DFI Retail (DFI) and Jardine Matheson (JM).

What to consider?

US Gas prices hit record and will likely move up again with power grids stretched. This is all ahead of World Gas Conference, which will intensify the spotlight on the energy sector. Meanwhile, Exxon Mobil, Chevron Corp and Shell will hold shareholders meetings this week. While sweeping energy shortages threaten prices to go higher, they’ll face questions about what they are doing to reduce emission.

UK retail sales stayed upbeat but consumer confidence was at record lows. UK retail sales rose 1.4% in April beating expectations of a 0.3% decline, a significant surprise given the general sentiment of inflation biting the consumers. Customer confidence however fell to a 50-year low of -40, and with further tightening to come after 9% inflation print reported last week, more economic pain will likely remain on the radar.

Flash global and Eurozone PMIs. With inflation concerns being increasingly priced in by the markets, focus is now shifting to the possibility and extent of economic slowdown, and Eurozone likely faces the biggest threat in that regard. Flash Eurozone PMIs will be on watch this week to gauge the extent of damage to the economy. First up, German IFO index release today will further signal the reverse effect of sanctions on Russia. The business expectations index edged up to 86.7 in April from 84.9 in March, but that’s still well below the 10-year average of about 97.4.

Alibaba (09988) is reporting March 2022 quarterly results on Thursday.  Consensus estimates are calling for a 7% increase in revenues and a 29% fall in earnings YoY. Analysts are concerned that the Company may report a decline in customer management revenues (ads & commissions) and slower growth in cloud revenues.  Tencent’s disappointing results in its cloud business and glim assessment of the prospect of cloud services in China have intensified investors’ worries about Alibaba’s cloud service revenues.  This morning, the share of Alibaba fell over 4%.

China releases its plan to boost healthcare.  The State Council released the country’s 14th Five-Year National Health Plan (2021-25) aiming at increasing the life expectancy of its population by 1 year and other healthcare targets.  The Plan will boost government spending on healthcare and may have a positive impact on the share prices of leading companies in the Chinese healthcare industry. 

Potential trading ideas to consider?

Safe haven currencies will be in focus again if risk sentiment turns sour. We do not think we have seen all the bad yet on equities. More retailer earnings due this week may show a further dent to consumer spending, while China’s rise in Covid cases will continue to be closely watched as well. The more upbeat Monday morning mood has meant a slide in safe haven currencies like dollar, swiss franc and yen while the risk-on currencies like AUD and NZD have been boosted.

Apple reshoring from China to Vietnam and India.  Over the weekend, the Wall Street Journal reported that Apple was planning to boost its supply chain outside China to countries such as Vietnam and India.  Investors who are interested in this potential development may take a look at some equity ETFs such as VanEck Vectors Vietnam EFT (VNM:bats), Premia MSCI Vietnam ETF (02804:xhkg) and iShares MSCI India ETF (BATS_BZX).

Key earnings release this week:

• Monday: Meituan, Sino Biopharmaceutical, Zoom Video, XPeng
• Tuesday: Kuaishou Technology, Intuit, NetEase, AutoZone, Agilent Technologies
• Wednesday: Bank of Nova Scotia, Bank of Montreal, SSE, Acciona Energias Renovables, Nvidia, Snowflake, Splunk
• Thursday: Royal Bank of Canada, Canadian Imperial Bank of Commerce, Lenovo, Alibaba, Costco, Medtronic, Marvell Technology, Baidu, Autodesk, Workday, VMware, Dell Technologies, Dollar Tree, Zscaler, Farfetch
• Friday: Singapore Telecommunications

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