AKG weekly charts - Issue #102
This newsletter is a weekly selection of 10 charts hand-picked across the internet which pertains to our investment strategy and bring an updated insight and perspective.
Connect on various social media platforms here
Subscribe to (free) AKG weekend readings newsletter here
Summary of financial markets in last week here
Follow #FCOTTReco and #FCBookReco on our Twitter page here.
Check out last week recos - The Social Dilemma on Netflix and Artificial Intelligence: A Guide for Thinking Humans" by Melanie Mitchell.
[1] Investment funds have turned net short of the London Metal Exchange (LME) copper contract for the first time since June 2020, mirroring the bearish positioning already established on the CME's contract.
Since copper is used in infrastructure (power, shipping, buildings etc.) machinery and discretionary consumption (housing, vehicles, appliances etc.) its demand is widely accepted as a lead indicator of the direction of the economy. Another dissociation with the benchmark indices?
[2] S&P 500 line in the sand - ~4200 has been breached last week on closing basis. ~4400 is another line. Given all the positives - Peak earnings, debt ceiling limit raised, Fed going on pause are now priced in, will this range of 4200-4400 act as bull trap?
Whichever way you think, it is clear risk:reward is not as favourable as it was in late March-2023 when the rally in stock market started. Stocks may still follow their own trajectories depending on news and earnings flow.
[3] Nifty50 has gained ~6.5% from the end of FY23; and the broader market indices like Nifty Midcap100 (~12%) and Nifty Smallcap 100 (~13%) have done significantly well during this period, indicating much improved sentiments. This view would imply that presently the sentiment of greed is dominating the sentiment of fear. Will Nifty catch up the gap or SMID keeps moving ahead?
PS : We have taken multiple stock actions for FC subscribers in our equity research strategies (refer here) during the last two weeks to reflect this outperformance of SMID.
[4] Asia's imports of seaborne thermal coal surged to the highest on record in May as cheaper prices tempted buyers in the region's developing economies.
Hotter than usual weather and solid economic growth are driving India's imports, with lower prices meaning coal-fired power plants that run on imported fuel can make profits even when selling into India's price-regulated electricity markets.
No wonder power and power ancillaries stocks are performing well on the stock markets (Disc : Biased)
[5] The government bond yields have been rising again in UK as they see little signs of inflation topping. Liquidity may get tightened in US now as debt ceiling raised. India US10yr relatively flat despite 2000 notes mini-demo. Interesting few weeks ahead!
[6] As per media reports (see here), food grain production has achieved the required growth in FY23. Production expected to rise in FY24 despite El-Nino.
At some point of time, growth in export markets like Europe and US will stabilize. Inflation in raw materials behind us. Agrochemical stocks available at mouthwatering valuations. Contra bet value investors can look at the sector!
[7] The elementary principle of economics is that the price of anything is a function of demand and supply equilibrium. Higher demand pushes the equilibrium to a higher price point and vice versa. However, the bond markets in developed economies have been defying this principle for the past 25yrs.
The situation has shown some signs of reversal in the past one year, but this may not last if the US Fed decides to begin easing rates sometime in the next 12months, while the latest debt ceiling deal results in a massive rise in bond supplies.
This trend is relevant for equity investors, since this could keep the cost of capital lower, affording much higher price earnings multiples to various businesses.
[8] The spread between US and India 10yr G-Sec yields (318bps) is presently at its lowest level, at least since the GFC. Given the hedging cost and just 2 notch above junk rating for India G-Sec, presently the Indian bonds may not be very attractive for the USD investors.
Though there is not much empirical evidence available to substantiate this, there is a probability of rise in flows to Indian equity, which has been witnessing strong FPI selling for the past couple of years.
[9] Post the GFC, the developed economies in particular have struggled with persistent deflationary pressures. Despite unprecedented new money printing and near zero (and negative) rates, major economies faced strong deflationary forces. Consequently, the prices of financial assets and real estate witnessed strong bull markets.
The US debt deal would result in further strengthening of deflationary forces which are structurally aided by the adverse demographic changes and changing consumption patterns.
[10] The discount between spot prices three months future at LME widened to the largest since 2006, indicating poor outlook for copper demand in the near term. Add to this ~30% price correction in LME copper, and we have red signal flashing.
PS : We have issued a note to FC subscribers (refer here) on 29th May, 2023 detailing impact on the investment strategy on this trend.
Disclaimer:
This newsletter is for information and educational purposes only. In this material, Amit Kumar Gupta (SEBI registered Research Analyst, INH100009327) has used information that is publicly available and is believed to be from reliable sources. While utmost care has been exercised, the author does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. Readers, before acting on any information herein should make their own investigation & seek appropriate professional advice. Any sector(s)/ stock(s)/ issuer(s) mentioned do not constitute any recommendation and the RA may or may not have any future or existing position in these. All opinions/ figures/ charts/ graphs are as on date of publishing (or as at mentioned date) and are subject to change without notice. Any logos used may be trademarks™ or registered® trademarks of their respective holders, our usage does not imply any affiliation with or endorsement by them. Past performance on charts may or may not be sustained in the future and should not be used as a basis for comparison to infer any investment ideas.