Date published -2023-08-15
(This is a very truncated version highlighting excerpts of our full report which is available for our paid subscribers)
Reports out early this week indicate that Michael Burry, famous for his ‘Big Short’ during the global financial crisis has recently purchased around $1.6bn worth of put options on major US indices. While there is little additional detail to signal whether these are offset against other options or trades, it does imply that the famous bear has backing his convictions yet again and plays into some of the loss of momentum we are seeing in key markets.
Global markets remained under pressure last week with losses concentrated in the US tech sector with the NASDAQ falling 1.8%, a second consecutive week of losses. The S&P 500’s losses were more muted, down 0.7% for the week – also a second consecutive week of losses. The Dow Jones industrial average was the relative outperformer, falling only 0.1% for the week. Macro markets were characterized by a stronger dollar and significantly higher yields on the US 10-year treasury last week. We also had crude oil prices remaining sticky above the $85 mark.
Losses in the NASDAQ last week were concentrated amongst large cap stocks with recent market darling NVIDIA falling 8.5%. Energy stocks continued to rally on the back off stronger oil prices. This is in line with our view on Brent and Sasol which we have been riding comfortably for a few weeks now. But pay attention to our updated crude view this week for some short term tactical nuance.
Pharmaceutical giant Eli Lilly was among the strongest performers last week ending over 17% higher. The company beat both revenue and earnings expectations, but a lot of the excitement centred around its diabetes drug which has also gained popularity for use in tackling obesity. Disney was also a surprise gainer for the week, up 1.8% after the company beat on earnings but missed expectations on revenue. The optimism in the market was largely related to the company announcing that it would be increasing prices as well as cracking down on password sharing in its streaming service.
South African markets were relatively flat last week, with a public holiday in the middle of the week likely impacting activity. Sasol was a notable outperformer, gaining about 10% last week on the back of both stronger global oil prices as well as a weaker rand. Glencore was not as lucky, falling 2.5% last week. The diversified miner reported headline earnings down 58% and indicated pressures on margins. A trading update from Impala Platinum (-2%) warned that headline earnings could be at least 20% lower as weak PGM prices impact the group. Nedbank (+1.75%) released an earnings update which showed revenue up 14% and operating profit up 22%. However, in line with trends we have seen at other South African banking groups, impairments have increased sharply leading to a more muted increase in headline earnings per share of 11%.
Key Earnings out this week: SA - MTN, Absa, Goldfields and Exarro. Global - Home Depot, Target and Walmart.
Our feature this week looks at one of our longer running short positions. The Nikkei 225 has been in our short stance for 5 weeks now. The importance of this chart is highlighted as markets have been uncertain recently and we widened our stop loss level about 2-3 weeks ago in order to remain in the trade. Risk management is important but so is calibrating one's levels to ensure that you do not get prematurely closed out of a trade if the rationale for the position remains sound! We provide our original chart (inset) as well as the recent update.
On the macroeconomic calendar, last week kicked off with Chinese data. Exports from China fell 14.5% year on year. This was the steepest decline since early 2020. Exports to the US slumped 23% ahead of declines in exports to the European Union (-21.4%). Imports into China fell by 12.4%. Imports from the US were down 11.2%, well ahead of the decline in European imports (-3%). Chinese inflation for July fell into deflation territory. Prices declined 0.3% year on year, slightly ahead of consensus estimates for a decline of 0.4%.
The key focus last week on the macro front was the release of US inflation data for July. Prices rose by 3.2%, slightly ahead of the 3% increase in June. We provide more detail on the drivers in our full report. The slight uptick in headline CPI as well as commentary from several Fed speakers were catalysts for market moves. The commentary indicated that Fed may need to continue acting to ensure that inflation declines sustainably. Bond yields in the US ticked higher and the dollar also exhibited some intra week strength, hurting emerging market currencies like the rand.
Mining production in South Africa rose by 1.1% year on year in June, ahead of the downwardly revised decline of 0.7% in May. South African manufacturing production rose 5.5% in June, up strongly from a downwardly revised 2.4% gain in May.
The focus this week globally will likely be on the FOMC minutes set for release mid-week. In line with the release of several company results in the retail space in US, we also expect the release of retail sales data from China, the US, South Africa and the UK. European, UK and Japanese inflation data will also be watched closely. We also have the release of South African employment data for Q2 which while not market moving, is worth a look.
We have one long and one short position in our weekly market carousel. We keep our speculative long (commodity) but more active traders may want to consider a tactical profit take within the wider swing trade. Our short position (equity) continues to perform well. We maintain a record of 8 'No Position' stances as we wait for better price action to initiate trades. Our trade ideas this week include a speculative long on a strong momentum domestic (SA) listed stock and a speculative long on a low beta global FMCG stock.
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