What’s happening in markets?

We’ve already seen a lot of pain already, company earnings are slowing, and costs are likely to swell, all ahead of more powerful rate hikes, which will pressure the consumer. We know the S&P 500 shed 9.1% over the past four sessions, closing at 2021 March lows but we think a larger pull back is still ahead. The S&P 500’s top 9 companies (by market cap) shed over $1 trillion in value the past four days. Apple Inc. (AAPL) has lost $242.94 billion; Microsoft (MSFT) has shed $205.00 billion; Alphabet Inc. (GOOGL) has lost $124.72 billion; Tesla Inc. (TSLA) has dropped $64.66 billion in market cap; Berkshire Hathaway Inc. has lost $62.97 billion;  The fundamentals look shaky and the technical indicators suggest more long-term pull backs are ahead in growth and tech names in particular.

Potential trading and investing ideas to consider?

Risk of further pain in bank stocks ahead

We alluded to banks being susceptible for further selling in Australia and American too, with lending continuing to fall, savings rates falling and foreclosure rates being questioned given the average mortgage could increase by $800 per month if central bank rates rise to over 3%. Looking at the S&P Bank ETF (KBE) as an example, it fell to its lowest level since Feb 2021 after losing 27% from Jan 18 to now. Meanwhile, insurance companies in that time, have remained somewhat steady. UnitedHealth (NHH) for example rose 3% over the same period. By and large, we remain bearish on banks while inflation is punitively high.

Risk of a galloping food crisis

Food prices continue to face upside risks due to the rising cost of fertilizer and energy, as well as protectionist measures from some countries like India (wheat, sugar) and Indonesia (palm oil). Our colleague Peter has warned in a piece yesterday that Russia is using the war in Ukraine to stage a food crisis, and market participants are increasingly preparing for an energy and food crisis that will extend well into 2023 and put upward pressure on inflation and cause an economic recession in many emerging market countries.

While that appears gloomy, it also suggests that the commodities sector still have scope for further gains. For exposure to agriculture commodities, you could consider ETFs like Invesco DB Agriculture Fund (DBA) or iShares MSCI Global Agricultural Producers ETF (VEGI).

Weak UK April GDP weighed on GBP

UK’s April GDP contracted 0.3%, coming in worse than expected (+0.2 % and prior -0.1 %). The drop is partially explained by the fact the UK government rolled back overall state support more quickly than other G7 countries (think France or Germany for instance). This is a worrying figure for the Bank of England. But we don’t think it will weigh on Thursday’s monetary policy decision (the consensus expects a 25bps interest rate hike). Extra government support will likely be needed to avoid a consumer-led recession. GBPUSD is at cycle lows below 1.2200, with sights on 1.2000. EURGBP pushed higher towards 0.8600 with European yields sharply higher.

Hong Kong and Chinese equities are down moderately

The region remain relatively calm following a massive selloff in risk assets overnight with overseas equity markets down 2% to 4% and a massacre in U.S. treasuries jumping 34bps to 3.4% and 10-year rising 27bps to 3.36%.  The U.S. money market has raised their Fed hike expectations to 195bps for the next three FOMCs, pricing in a 75bps for this week, another 75bps in July and almost surely a 50bps in September.  The fear of a more aggressive path of monetary tightening and a slower global economy continue to put pressure on equity markets, including Hong Kong and China A shares.  The risk of resurgence of COVID-19 breakouts and strengthening pandemic control measures in China is another one that keep investors awake at night.  As of writing, Hang Seng Index (HSI.I) and CSI300 (000300.I) were down 0.5% and 1% respectively.