Morning Note: China, Equities and Oil

Here's yesterday's entry to our internal market log:

6-5-2022
Our expectations around the Chinese setup seem to be playing out. That being a relaxing of covid restrictions and the implementation of significant stimulus – leading to Chinese equity outperformance and a bid under industrial commodities into the second half of the year. Strong political incentive makes this a likely scenario.

An additional potentially-bullish development has to do with the US considering the lifting of tariffs on some Chinese goods.

Two headlines today:

“Beijing will relax more virus controls on Monday as the threat subsides.”

“Lifting Tariffs on Goods May Make Sense, US Commerce Chief Says”

The above supports a bid under global equities as well, however, it also amounts to an easing of financial conditions which would essentially embolden efforts by the Fed to rein in inflation. I.e., in terms of monetary policy, it potentially exacerbates that headwind for equities.

Speaking of commodities; two more headlines from today:

“Saudi Aramco boosts oil prices for north-western Europe and the Mediterranean.”

“Saudi Arabia boosts all Asian oil prices for July shipments.”

While we remain long-term bullish on oil, and while current macro pressure remains to the upside (restarting China demand, etc.), the space looks very overbought right here. The slightest catalyst will likely see it correct in potentially large fashion. We’ll maintain our protective put option on XLE for the time being.

Asian equities were mixed overnight, with 9 of the 16 markets we track closing lower.

Europe's rallying this morning, with all but 1 of the bourses we follow (6 of the 19 are shuttered this morning) trading higher as I type.

US stocks are up to start the session: Dow up 227 points (0.69%), SP500 up 1.05%, SP500 Equal Weight up 0.86%, Nasdaq 100 up 1.53%, Nasdaq Comp up 1.46%, Russell 2000 up 0.59%.

The VIX sits at 24.97, up 0.73%.

Oil futures are up 0.49%, gold's down 0.03%, silver's up 1.53%, copper futures are down 0.88% and the ag complex (DBA) is up 1.10%.

The 10-year treasury is down (yield up) and the dollar is down 0.01%.

Among our 38 core positions (excluding cash and short-term bond ETF), 33 -- led by solar stocks, Albemarle, emerging market equities, semiconductor stocks and silver -- are in the green so far this morning. The losers are being led lower by carbon credits, base metals futures, treasury bonds, Dutch Bros and emerging market bonds.

"...humans are endowed with basically the same emotional and rational qualities in the twenty-first century as they were in the seventeenth century (or at any other epoch). Humans are still essentially driven by at least a modicum of greed and fear in their quest for well-being."

Sornette, Didier. Why Stock Markets Crash

Have a great day!

Marty