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Monday’s Bullseye: 12 July 2021

Fawad Razaqzada Fawad Razaqzada 09/07/2021
Monday’s Bullseye: 12 July 2021 Monday’s Bullseye: 12 July 2021
Monday’s Bullseye: 12 July 2021 Fawad Razaqzada
  • Bank earnings: JPM, GS, BAC, MS and C
  • Central banks: RBNZ, BOC and BOJ
  • Data: CPI from US, UK and NZ and Chinese GDP among others
After a relatively quiet period in the stock markets, volatility finally spiked this week, leading to a sizeable drop in mid-week followed by an even bigger rebound. On Friday, the S&P 500 broke to a new record peak as it more than made up its losses from mid-week. Crude oil, which had also dropped on the back of OPEC infighting and concerns over rising delta variant of Covid-19, rebounded sharply on Friday. It was risk back on as calm returned to the markets, in part because of China’s moves to bolster its economy with the People’s Bank of China cutting the reserve requirement ratio. Ahead of the weekend and upcoming bank earnings, we may see the markets drift off their best levels on profit-taking and as investors try and make sense of this week’s volatility.  
 

What’s driving the markets?

 
There are many conflicting signals for investors to deal with, but amid all the noise they still appear happy to do what they have been doing since everything bottomed out in March: buy the dips in stocks.
 
The latest, and short-lived, dip was provided by worries about tapering of bond purchases by the Fed and other central banks, and as optimism over a sharp global recovery was slowly being replaced by mild fears that growth is nearing a peak.
 
The PBOC’s move to trim the amount of cash lenders must hold in reserve has eased concerns over major central banks tapering their emergency stimulus measures in the coming months. On top of this, the ECB’s slight change of inflation target to 2% from “close but below 2%” means the central bank will tolerate an inflation overshoot and thus keep its policy loose for even longer. The FOMC’s last meeting minutes revealed officials still felt that substantial further progress on the US economic recovery "was generally seen as not having yet been met."
 
So, you get the picture, central banks are still likely to keep their respective policies loose. And although rising cases of the delta variant of Covid-19 has weighed on the recovery prospects, this only increases the likelihood of low rates and more QE for longer. Still, it is worth watching bonds as the recent drop in yields is indicative of some investors re-thinking the reflation trade.
 

How will markets react in week ahead?

 
After the latest spike in volatility was quickly followed by calm, we could very well see some further upside on Monday, before the focus turns to the upcoming macro events and company earnings. Individual stocks, especially in the banking sector, should move sharply as investors respond to the quarterly results of Wall Street giants. Later in the week, the stock market rally may fade should yields resume lower again, after the US 10-year finally found support at 1.25% after several down days. This is the key risk facing investors in the week ahead, in my view. There are plenty of triggers for this, including US CPI, Chinese GDP and company earnings and guidance (see calendar below).
 

Bank earnings unlikely to repeat Q1 performance

 
The major US banks will report their quarterly earnings results in the coming week (see below). After a very positive first quarter, lenders may very well struggle to top those numbers in Q2. Indeed, Wall Street analysts on average expect EPS and revenue to decline from levels seen in the first quarter. Still, with the Covid-19 vaccinations having been ramped up and the economy recovering stronger than expected, don’t expect to see many disappointments either. In fact, it is quite possible that with lowered expectations, banks might be able to beat consensus, though probably not like Q1 style. One source of surprise in Q1 was the release of large reserves that some lenders had previously stowed away for loan losses that didn't materialize. Expect the banks to release more such funds as the impact of the pandemic was largely offset by significant intervention from the government and the Federal Reserve. The quieter market conditions in Q2 means profits from trading operations will most likely be lower than in Q1 for US banks.
 

Macro calendar and earnings highlights

 

Tuesday

 
  • Data: Chinese trade figures and US CPI
  • Earnings: JP Morgan, Goldman Sachs and PepsiCo
 

Wednesday

 
  • Central bank policy decisions: RBNZ and BOC
  • Data: UK CPI, Eurozone industrial production, US PPI and Canadian manufacturing sales
  • Earnings: Bank of America, Citigroup, Wells Fargo and BlackRock
 

Thursday

 

  • Aussie employment report and Chinese GDP, industrial production and retail sales
  • UK average earnings and jobless claims
  • US industrial production, jobless claims and a few other macro pointers
  • Earnings: Morgan Stanley, US Bancorp and the Bank of New York Mellon
 

Friday

 
  • BoJ policy decision
  • Data: New Zealand CPI, Canadian retail sales and US consumer sentiment and inflation expectations (UoM)
 
 

The South African Market in focus

By Kearabilwe Nonyana
 

Delta Variant

 
Our market started the week off in the red and that is because of the uncertainty that the more infectious Delta variant of Covid is bringing. Our country has been on lockdown alert level 4 since 28 June 2021 and the market has seemed to overlook this lockdown. But with the slowing down of the gains, it seems that market participants are starting to price in the risk of the economy slowing down due to this new variant. Gauteng remains the epicentre of the virus, which is also the economic hub of the country. This is a key risk, which market participants may start to worry about after largely ignoring it until now. So far, the market has been happy and overlooked the risk as it it’s a short-term risk. But the inability of the South African government to vaccinate the population, as well as the speed at which the mutation of the virus happens, we might face new variants that could be vaccine resistant. It is imperative therefore that the government gets its act together and ramp up the vaccine drive. The JSE benchmark top 40 index ended a volatile week little changed.
 

Mining and Production sales

 
Over the past quarter mining stocks have lost some of their shine. Market participants have been selling them down even though commodity prices were sitting at all-time highs. It is the view of the market that the current highs in commodity prices might not continue. In this production print I believe we will see output gains from the miners which bodes well for their bottom line in earnings. In previous reporting periods, we could see with average prices for commodities being lower than they are right now they had the ability to contain costs and produce healthy profits. I expect this to continue. In recent days, PGM miners and gold miners have been under pressure making them attractive for investors.
 

Retail trade sales

14 July 2021

For the past 2 months, there has been an increase in retail sales numbers. In light of the recent lockdown level 4, these numbers will not reflect the hit to the economy. Only in the next print will we see a slightly softer number. So, I expect the numbers to show another increase. There has been particular interest in Mr price and Clicks group over the current week. The consensus over the two stocks mentioned has been a consistent but the resilience in these stocks and the clientele could present opportunities soon.

Any opinions, news, research, analyses, prices or other information contained on this website is provided as general market commentary and does not constitute investment advice. ThinkMarkets will not accept liability for any loss or damage including, without limitation, to any loss of profit which may arise directly or indirectly from use of or reliance on such information.
Any opinions, news, research, analyses, prices or other information contained on this website is provided as general market commentary and does not constitute investment advice. ThinkMarkets will not accept liability for any loss or damage including, without limitation, to any loss of profit which may arise directly or indirectly from use of or reliance on such information.
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