7.18.22: To understand today's market reversal, understand Gazprom's "Force Majeure" and its implications.
Key U.S. and China brief market notes by Larry's Analyst Staff Team. Remember to focus on the signals that move fundamentals and not the noise created by news.
Note to Readers: Strategist Larry continues to believe that the current market rebound is in the context of a larger decline. Continued upside is possible, but you must understand where risk/reward is likely to be favorable. Please exercise extreme caution. In his July 2nd Half Strategy Report, he discusses levels where he believes additional risk-addition or risk-reduction will be appropriate. In his July 1st Half Strategy report, he discussed caution on Chinese Internet, an opinion that materialized and has helped his members prepare accordingly. In his latest report, he discusses the new perspective with which we should be approaching U.S. and China equities.
This email is brought to you by Interactive Brokers, one of our preferred brokerages to buy HK-Listed Shares in our China Internet Equity Coverage Universe. The more tense US-Sino tensions, the more important it will be to consider HK-listed shares compared to US ADRs.
In our emails, we will provide the following coverage points:
An email headline that implies our views
Brief Snapshot of U.S. & China markets and valuation
Our Analyst Team’s Chart in Focus
U.S. & China Upcoming Economic Calendar Snapshot
Notable Chart from Media Outlets
Fear & Greed Index Recap
I hope you find this newsletter to be insightful and enjoyable! - Larry and Team
U.S and China Markets Brief Snapshot 🇺🇸 🇨🇳
(Powered by our Channel Financial Data Provider YCharts)
S&P 500 Index: 3863.16
KWEB (Chinese Internet) ETF: $29.18
Analyst Team Note:
According to Refinitiv, of the 35 companies in the S&P 500 that have reported for Q2, 80% have beaten analysts’ expectations.
While speculation as to the Fed’s policy decision next week will cast a shadow over markets this week, both the ECB and the BoJ will have their chances to shine, given their policy meetings on July 21.
Meanwhile in the FX markets, the US Dollar continues to push forward. “The USD has benefited from demand for safety more than other traditional safe-haven assets in recent months. Positioning on the USD has been rising steadily since 2021, fueling the rise of the DXY to its highest level in over 20 years. The DXY has already benefited sharply from high risk aversion, but calmer waters on global markets are needed to ease the grip on the USD.” - UniCredit
Macro Chart In Focus
Analyst Team Note:
“We think at least some of the decline in momentum in consumer spending is due to the“inflation tax.” With much of the recent rise in inflation coming from food and energy prices, commodities that face relatively inelastic demand in the short run, households may have less available for discretionary purchases. Financial conditions have also tightened, particularly in the mortgage market, where the spread of the 30y mortgage rate to the 10y US Treasury yield has risen sharply. The large run-up in home prices and higher mortgage rates have dented affordability, slowing home sales and housing starts.” - Bank of America
Upcoming Economic Calendar
(Powered by our Channel Financial Data Provider YCharts)
U.S Economic Calendar (Upcoming Data Points)
China Economic Calendar (Upcoming Data Points)
Analyst Team Note:
After reading through the Fed’s Beige Book, here are some notable observations:
Many districts mentioned that consumer spending moderated because greater food and gas costs reduced households’ discretionary income. Likewise, housing demand “weakened noticeably as growing concerns about affordability contributed to non-seasonal declines in sales, resulting in a slight increase in inventory and more moderate price appreciation”
Loan demand was mixed, as “some financial institutions reported increased customer usage of revolving credit lines”, but higher mortgage interest rates weighed on residential loan demand. On the bright side, “Hospitality and tourism contacts cited healthy leisure travel activity with some noting an uptick in business and group travel.”
All districts reported “substantial price increases at all stages of consumption”, but “three quarters noted moderation in prices for construction inputs such as lumber and steel.” Price hikes for food, commodities and energy “remained significant”, but there were also “several reports that price inflation for these categories had slowed compared with recent months but remained historically elevated”.
Chart That Caught Our Eye
Analyst Team Note:
Investors have pressed a large valuation discount on the Russell vs. large caps.
1. The Russell 2000’s recent 32% peak-to-trough decline is >80% of the average decline that we have seen around recessions historically of ~40%.
2. Russell 2000 equity risk premium (ERP) is at record highs - consistent with levels reached during COVID and above the Global Financial Crisis levels.
3. Russell 2000 fwd. P/E is in line with prior recession lows (40% off highs vs. -33% on avg. in prior recessions), and the relative P/E vs. large caps is near record lows.
Sentiment Check
We want to take a moment to thank Interactive Brokers for being one of our Channel’s trusted Partners and to inform my audience of the special features they have given that our online friends here closely follow Chinese Internet stocks (BABA/Tencent).
Much of Larry’s audience is concerned about the US ADR issue of Chinese Stocks being delisted.
Interactive brokers allows investors to buy HK-listed shares of Alibaba, JD, Tencent, and other brand name Chinese Internet companies on the HK market. This will effectively reduce any confusion or work you will have to do in case there is the event of delisting US ADRs
Make sure to check Larry’s most recent market updates via his personal newsletter. See you in our next update.
