Carlsquare weekly market letter: Commodity bull run– when will it affect inflation?

• We are currently witnessing a bull run in commodities with copper leading the way, but it is widespread across metals and cryptocurrencies. Agricultural commodities are not there yet (except for cocoa). All in all, this can be a headwind for central banks looking to cut interest rates, as higher commodity prices push up inflation.
• Due to some priorities, we are taking a break from the weekly reports, but will be back in August. We wish you all a great summer!

It is in many ways a strange market in which the big US technology companies still lead the way. In the old economy, industrial companies were the best measure of economic performance. In the late 1900s, Charles H. Dow developed a stock market theory that we now call the Dow Theory. It has six different steps, which you can read about here.

https://www.cmcmarkets.com/en/trading-guides/dow-theory

In general, Charles H. Dow saw the stock market as a good measure/forecast of economic cycles. To measure the trend, he created the first two indexes, i.e. a group of companies. One group was industrial companies. The other group was transport companies.

Above is the list of the first stocks in the Dow Jones Industrial Average. There are not many names to recognize here 😉.

Looking at the current list, the names come from a wide range of companies, reflecting US blue chip companies in general. With this broad population, we can still see that the index components reflect the growing and more dynamic part of the economy, although there are very few components that represent the industrial sector today.

Looking at the Dow Jones Industrial (blue line), we can see that the Dow Jones Industrial gives a buy signal for the stock market and for the economy. The problem is that the Dow Jones Transport Index is in a downtrend and therefore does not confirm the Dow Jones Industrial. This shows that the signals are still mixed according to the Dow Theory.

Looking at the Dow Jones Industrial Average in more detail, the price action is encouraging with higher highs in a well-defined uptrend. But look at the volume at the bottom! We really need the retail investors to come back so that the negative trend in volume can improve. As we wrote a few weeks ago, perhaps the comeback of the meme stocks can be part of this.

In summary, the Dow theory was irrelevant because the economy has evolved and is no longer transport based. Or we should be cautious about the current trend.

But equities also face competition from other markets, such as commodities.

Copper leads the way because it is a metal that is heavily used in construction. There is a reason why copper is nicknamed Dr Copper, as it is also a good signal for the wider economy.

A rise in the copper price is currently a good sign that the Chinese market is improving. Just remember that a parabolic move in any asset must come to an end sooner or later. One way to trade this is to buy and hold until copper breaks below EMA5 or EMA9 daily.

Other metals are following copper higher, such as gold and silver (which we have talked about many times). Above, gold is working its way to new all-time highs.

Bitcoin and other cryptocurrencies are also on the move. There is a lot of buzz around crypto. For us, it is also a sign that China is coming back and that crypto is one of the few ways to move capital out of China.

There are probably three reasons for the run-on commodities:

– Better economic outlook

– Inflation hedging and

– Momentum trading.

URA is one of many ways to gain exposure to the commodities market. URA is an ETF that contains uranium producers.

A look at the long-term chart from 2010 shows that there is plenty of room to the upside if the positive trend for nuclear power continues.

As commodity prices rise, speculation about higher inflation will return. This is an ongoing debate that affects the temperature of the market.

The good news is that neither interest rates nor oil prices have yet signaled a new uptrend.

The S&P 500 has been working its way up along the upper Bollinger Bands. The last three days have seen some hesitation ahead of today’s Fed minutes and the Nvidia quarterly report. As can be seen on the upper part of the chart, the MA lines are all in a nice uptrend. This means that any pullback can usually be bought. It is very rare for the market to break down without a longer topping process with the MA lines in this nice setup.

NVDA is due to report after the close this evening and will of course have the power to move the whole market. Technically, the previous high is both a magnet and a resistance line. A break above it can provide a new leg higher and would likely push the entire market in the same direction.

Happy trading!

Q1 2024 earnings season

As of Friday 17 May 2024, approximately 465 S&P 500 companies (93% of all companies) have reported their Q1 2024 results. 78% have reported positive earnings surprises and 60% have reported positive revenue surprises.

The best performing sectors in terms of Q1 2024 earnings performance have been Health Care, Information Technology and Consumer Staples with 87% of Q1 reports beating expectations. Meanwhile, Consumer Discretionary, Real Estate and Utilities are the worst performers, with only 72%, 69% and 61% of Q1 2024 earnings beating expectations.

The average earnings growth rate for S&P500 companies in Q1 2024 has increased from 5.4% to 5.7% in the last week. As of 31 March 2024, the earnings growth rate for S&P500 companies in Q1 2024 was estimated at 3.4%.

For Q2 2024, 54 S&P500 companies have issued negative earnings guidance, while 37 S&P500 companies have issued positive earnings guidance.

The 12-month forward P/E ratio for the S&P 500 is 20.7x. This P/E ratio is above the five-year average (19.2) and the ten-year average (17.8).

The following table shows the six largest US companies that have reported quarterly results since 15 May, along with the actual and expected EPS, the percentage deviation, and the post-announcement price movement. The average EPS surprise is 10.3% and the median is 6.7% for all 115 reporting companies since 11 April. The post-announcement price movement for 115 US companies is 0.0% on average and 0.5% on median.

The next table shows the four OMX companies that have reported since 15 May and their Q1 earnings, sales and new orders compared with expectations. Of the 87 OMX companies that have reported since 27 March, 59% reported better-than-expected results, while 37% beat sales forecasts. In terms of new orders, 53% of companies (eight out of fifteen) beat analysts’ pre-announcement estimates.

Week Ahead

Reports and events on Wednesday, 22 May:  Golden Ocean, Selvaag Bolig, Analog Devices, Nvidia, Synopsis, Target, and TJX Companies. Capital Markets Day for JM.

Japan’s Machinery Orders and Trade Balance for April will be released at 1.50 CET. The UK’s CPI and PPI and Sweden’s unemployment rate for April are due at 8.00 CET. From the US, we get April existing home sales, weekly oil inventories (DOE) and the minutes of the Fed’s FOMC meeting on 1 May.

Reports on Thursday, 23 May: Embracer, Intuit, Medtronic, NetEase, Workday, Royal Bank of Canada, and The Toronto Dominion Bank. Capital Markets Day for Fortnox.

The day will be dominated by the May Purchasing Managers’ Indices from Japan, France, Germany, the Eurozone, the UK, and the US. From the eurozone we also get the Household Confidence Indicator for May. From the US, the Chicago Fed’s national activity index and new home sales for April, initial jobless claims and the Kansas Fed index for May will be released.

Reports on Friday, 24 May:  –

Friday begins with Japan’s CPI for April at 1.30 CET. This is followed by Sweden’s PPI and the UK’s Retail Sales for April, as well as Germany’s Q1 GDP at 8.00 CET. 45 minutes later we get the French industrial confidence indicator for May. From the United States, we have durable goods orders for April and the Michigan index for May.

Reports on Monday, 27 May:  –

We start at 3.30 CET with Chinese industrial profits for April. The Swedish Financial Supervisory Authority reports on the stability of the financial system at 8.00 CET. Then we look at the German IFO index for May at 10.00 CET.

Reports on Tuesday, 28 May: Adevinta.

SCB publishes the Swedish trade balance for April at 8.00 CET. At the same time, German wholesale prices for April are due. From the US, we get the weekly Redbook retail sales, the S&P/CS house price index for March, the Dallas Fed index for May and the weekly statistics for oil inventories (API).

Disclaimer:

The information in this presentation is based on what the publisher, Carlsquare, believes to be reliable sources. However, we cannot guarantee its content. Nothing in the presentation should be construed as a recommendation or solicitation to invest in any financial instrument, option, or the like. Opinions and conclusions expressed in the presentation are for the recipient’s use only. The contents may not be copied, reproduced, quoted, or distributed to anyone else. Carlsquare shall not be liable for any loss arising from any decision taken based on the information contained in this presentation. Past performance should not be taken as an indication of future results. Changes in foreign exchange rates may affect the value, price or income of an investment made abroad or in a foreign currency.

The analysis is not directed at U.S. Persons (as that term is defined in Regulation S under the United States Securities Act and interpreted in the United States Investment Companies Act of 1940), nor may it be distributed to such persons. The analysis is not intended for natural or legal persons where the distribution of the analysis to such persons would involve or entail a risk of violation of Swedish or foreign laws or regulations.