US equity futures posted a strong rebound on Friday, which particularly sent financials and energy stocks higher. Exxon Mobil gained another 3.60% on Friday, surging near 15% over the past two weeks, as oil consolidated gains above the $75 per barrel.
Asian equities kicked off the week on a mixed note. China was closed, but equities in Japan kicked off the week plunging below their 200-dma. Stocks in Hang Seng slipped more than 2% as trading on China’s Evergrande Group and its property services were halted in Hong Kong following a report revealing that the company agreed to sell a controlling stake in the unit to raise much-needed cash. Another Chinese property company Hopson shares stopped trading and its bonds plunged on news that they would buy 51% stake in Evergrande. Then, of course, China injected the equivalent of $70 billion over the past five days to avoid a broader financial risk to the system. Though the Evergrande crisis is not over in China, global investors no longer see the Evergrande waves hitting the international markets.
But the worries of supply chain continue giving cold chills. The worsening global supply chain disruption, combined with rising inflation – which looks much less transitory than what the policymakers first thought, and which results in a narrowing capacity to respond to a slowing economic growth – could continue weighing on investor sentiment this week.
have a couple of important events to watch. First, OPEC meets today and could announce an increase in monthly production goals, given the faster-than-expected growth in demand sent oil prices significantly higher over the weeks. US crude surged more than 22% between August and September. The expectation of higher OPEC supply leads to some profit taking in oil this morning, and the announcement could further halt the recent rally. But the exponential rise in natural gas prices should continue pushing higher the demand for fuel as replacement into the colder months in the northern hemisphere. Therefore, it looks like the oil producers have little to fear in the actual energy crunch environment, and rising supply above the actual 400’000 barrels per day may not hit the mood in the oil markets for long.
On the other hand, the upside in oil should remains limited at around the $80pb, as this fast rise in energy crisis can only stall the economic recovery and lead to a pullback in global demand. It’s a fine balance, but the power is in the hands of the supply side, for the moment.
The rising energy costs is a growing headache for inflation, and the central banks. We have two important central bank meetings this week: the Reserve Bank of Australia (RBA) will meet on Tuesday, and should keep rates unchanged, and the Reserve Bank of New Zealand (RBNZ) will meet on Wednesday, and is expected to raise the official cash rate by 25 basis points to 0.50%. The RBNZ rate hike will be a warning that tighter monetary policies is not a bluff, but they will start happening to ease the inflationary pressures.
Due tomorrow, the European producer prices are expected to post an increase past the 13% in August, but we can see a number more than that.
And, the economic data better be good to keep investor sentiment nice and sweet, as whatever we see on the data front, if inflation keeps rising, the central banks will need to remove support. And this brings me to the US jobs data due in the next couple of sessions. On Wednesday, the ADP report is expected to print a 430K new nonfarm jobs added in September, and likewise, Friday’s NFP figure is expected to reveal a 460K new nonfarm jobs in September. So, the expectations are gently moving away from the 800K or a million job additions of the past couple of months after last month print fell to 235K.
In summary: the global chip and energy shortage is getting worse, the inflation is rising, the recovery may be slowing, and that puts central banks between a rock and a hard place, where the best they could do is to do nothing, like the European Central Bank (ECB), or to tighten their monetary policy to avoid losing control on the economy. Let’s see if the selling pressure we saw in equities in September could extend to October, or investors will find a silver lining to push prices higher, like the Merck’s Covid pills that apparently reduced hospitalization and death by 50%. Merk shares jumped more than 8% on Friday and if the pills work, well they could just take off for substantial gains, and help the other recover September losses as well.
But I feel like this time, we could see a further downside pressure building, where energy and financials could outperform their peers.
