Trying to figure out if this bear market is about to end or not is proving rather difficult. There are signs that inflation has topped out and that Emerging Markets are leading disinflation. Odds are good that we will likely see a few more interest rate hikes, although not as aggressive as before, to give us the ‘higher for longer’ regime that has so clearly been communicated by central banks. On one side we think that the slowing easing inflation is a product of higher interest rates and global economies slowly grinding deeper into recession, while on the other side China is waking up and there can be no doubt that this is hugely positive for Emerging Markets and commodities prices in general. Will that reignite inflation, or will that merely push Emerging Markets to outperform Developed Markets as they capitalise on China waking up? Time will tell if this is truly the turning point or not, but odds are good that we are in for a strong short-squeezy kind of week.
Bigger picture (offshore trade ideas)
Let’s start with some highlights from recent research pieces published over the last week or so.
Inflation
There is a lot more out there about inflation that what we are going to look at today, but the charts that we found most interesting are the ones above. They show that over the last 3 months inflation in the U.S. has basically stopped. This shows that higher interest rates are working as they are intended too. This now needs to push into negative territory (aka. disinflation or deflation). It is starting to look like this will happen very soon, the question is; is deflation a result of a recession? The answer seems obvious (yes) as we are of the view that the U.S. is already in recession. Not everyone agrees with that assessment though and some are calling for much more pain ahead (which of course, would drive deflation in a big way as the economy slows down significantly more from here). There is also the fact that historically, sharp declines in inflation generally lead to recessions. So, is there more pain to come, or are we out of the woods? The last chart shows that Emerging Markets are leading the way in disinflation, which bodes well for us here in South Africa.
China waking up
China has gone from the country nobody could invest in, to the country everyone is scrambling to get invested in. We’ve seen now that China is starting to ease off of the COVID restrictions and that life is starting to return to normal. We are also seeing that steel producers in China are once again building their ore stockpiles. It appears that it is all systems go for China to get back to business as usual. Again, this bodes well for us here in South Africa as Chinese demand for commodities in an already constrained market will likely push commodities prices up the page and we will turn out to be the winners. This has us thinking about energy (oil) as well as things like hospitality, airlines and base metals. We think these are all going to be great sources of ‘value’ in the coming year.
This one is for the bulls
The chart above shows the quantum of money sitting on the side-lines waiting for better days to be invested. Once this market turns in a meaningful way, this is a lot of money that needs to flow into equity markets. The next bull market is going to be massive!
S&P 500 (SPY)
This resistance / trendline has been in place for a full year now and is finally being properly tested. We think the odds are very good that we see SPY break above it in the coming week (on the back of some of the view expressed above). Is it going to be a fake-out, or are we going to see equities markets lead the economic cycle and start to recover around 6 months before the U.S. economy stops contracting and starts growing again? Let us know your thoughts on twitter.
Brent Crude Oil
Fake-out of breakout? We think breakout.
U.S. Dollar Index (DXY)
DXY has been softening significantly for the last few months. Currently 101 seems to be a support level, which is broken opens 99 as the next support level. Overall, this bodes well for Emerging Market currencies. We need to wait for 101 to break though, as it could act as a strong support and potentially reverse the trend we’ve seen over the last few months.
USDZAR
It looked like the ZAR was in for some major weakness late last week, although that reversed on Friday (along with global equity markets turning higher). As it stands now, we no longer think that the downward sloping trendline we have on this chart is accurate and given the DXY context above, we think that it’s rather more likely that we head toward R16.50 in during the remainder of the month.
Hang Seng Index (HSI)
HSI is attempting to break horizontal resistance. We expect that it will in due course and likely be one of the strongest performing indices in the coming months.
Tencent (0700)
Tencent looks pretty much the same as HCI and we think that we might see a resurgence of the old powerhouse stock that drove our local market so well for so many years.
South African trade ideas
JSE Top 40 Index (ALSI)
From a pure chart perspective it looks a little overcooked and due for a pullback. That said, we’re not really comfortable with the short trade here as there are just too many things that we think might push the market higher in the coming week. Truth be told, we’re surprised at how well our market has been doing in comparison to our global peers. The ALSI is trading near all-time highs after all. Once the China bull is fully awake and commodities start to fly once more, there is likely a lot more upside to be had for our humble little market. Our economy might not be in a great place, but certainly our market will be.
Anglo American PLC (AGL)
AGL is currently trading in a resistance zone, but once cleared to the upside, the recently established bullish trend has much room to make new highs. Be patient though and wait for confirmation that the resistance zone is cleared. We would be buyers if there is some weakness. Below R700 would present a great opportunity for us.
Vodacom (VOD)
VOD looks a little dicey in our view. The R120 level has held strong for a long while and is currently presenting a high risk-reward opportunity. We saw VOD break below this support very briefly late last year, only to reverse and run to R130. This time around, if VOD can get and close below R120, we think it will make for a great short.
More ideas inside our community
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