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Time to Buy Chinese Large Caps? Global Week Ahead

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On Friday morning, at the end of global week ahead, the U.S. nonfarm payroll print arrives.

After a lousy first half of 2022, the world’s major stock markets hope for some macro sign — one that allows the U.S. central bank to dial back its hawkish tack.

What if June U.S. nonfarm job additions end up well below consensus (at +295K)? That could supply that needed major negative U.S. macro surprise.

Elsewhere, central banks action looks to be front-and-center, too:

  • Last Friday, July 1st, the ECB kicked off its bond reinvestment scheme; done to shield southern Europe's fragile economies from another sovereign debt crisis
  • The emerging markets' policy-tightening spree looks to continue, and
  • Down in Australia, a half-point policy rate lift is expected


Next are Reuters five world market themes, reordered for equity traders.

(1) On Friday, July 8th, U.S. nonfarm payrolls land. Look for +295K.

U.S. data have recently provided more than their fair share of nasty surprises in a sign the Federal Reserve's 150 bps in rate hikes are seeping through the economy.

But with no let-up in inflation, the Fed is on autopilot with rate rises. Friday will show how the other leg of the Fed's inflation/employment mandate is performing.

Analysts expect 295,000 jobs U.S. jobs were added in June; a figure significantly below that could bolster the argument for smaller or slower rate hikes, following the most recent 75 bps move.

Traders have dialed down bets on where rates might peak, enabling a tentative equity rally. So, for some on Wall Street, a weaker jobs print may end up being good news.

(2) In H2-22, mainland Chinese stocks may be an attractive niche.

For all the angst over Chinese capital outflows, MSCI's China stock index ended the first half of 2022 down -12%, comparing favorably with the S&P 500's -20% fall.

One reason was a June bounce, driven by the easing of COVID lockdowns. With officials pledging support for markets and the economy, and easing their tech sector crackdowns, investment banks are again rushing to slap Buy labels on Chinese shares.

There are headwinds, including the possibility of Western sanctions down the road and more property sector defaults. Long-awaited policy easing may be slow in coming, given the rest of the world is in rate-hike mode.

Still, with Western and emerging market stocks reeling from rate hikes and inflation, China may be in for an upbeat H2.

(3) European Central Bank to do north-south bond-spread tightening.

Starting July 1st, the European Central Bank (ECB) is to use proceeds from maturing German, French and Dutch debt to buy bonds from Italy and other southern states.

The aim is to prevent their borrowing costs from rising too much compared to richer peers — so-called fragmentation.

So far so good. Expectations of ECB support helped lower Italy's 10-year borrowing costs by 100 bps since mid-June, while its yield premium over Germany is just above 200 bps, tumbling from a perceived 250 bps danger line hit two weeks ago.

It's hard to say how long the feel-good effect will last; Citi analysts say the spread-tightening is overdone, and markets have priced already 50 billion euros in bond reinvestments. The test starts now.

(4) Eastern European central banks have hike policy rates more too.

This year has tempered a long-held view that EU nations such as Poland and Hungary are part of a lucky fringe within emerging markets. In fact, regional policymakers are under immense pressure from double-digit inflation, risks from the Russia-Ukraine conflict and crashing currencies.

Hungary's central bank has just jacked up rates by 175 bps — more than three times what was expected — illustrating the painful price pressures. The forint, nevertheless, languishes near record lows against the euro.

Romania is expected to hike rates by 75 bps to 4.5% on Wednesday, while Poland's central bank could up its current 6% interest rate by 100 bps at its Thursday meeting. Serbia, too, is seen lifting its 2.5% benchmark rate.

Nor is inflation the only problem: ratings agency Fitch warns that the Czech Republic, Hungary and Slovakia are among the most vulnerable to a Russian gas supply cut-off.

(5) Thursday, the Reserve Bank of Australia (RBA) will likely raise its policy rate.

Reserve Bank of Australia Governor Philip Lowe says the choice at Thursday's policy meeting is between a quarter-point rate hike or a half-point one. But markets are not buying it.

Instead, they expect Lowe to pull a 50 bps increase out of the hat, and see rates at 1.5% by August from the current 0.85%.

And why not, after getting stung by a shock half-point hike last month, rather than the 25 bps that was expected.

A weak Aussie dollar that is boosting imported inflation is contributing to those bets. And remember, Lowe has a track record of talking down rate hike risks, only to capitulate later. With inflation at two-decade peaks, traders are betting on more of the same.

Zacks #1 Rank (STRONG BUY) Stocks

With the Japanese yen trading at 135 per USD now, I decided to highlight 2 Japanese large-cap stocks on our #1 list this week.

Their ~$20 a share stock prices may well be attractive entry points.

(1) The Kroger Co. (KR - Free Report) : This is a $47 per share stock, making for a market cap of $33.8B. I see a Zacks Value score of A, a Zacks Growth score of A and a Zacks Momentum score of B.

(2) Olympus (OCPNY - Free Report) : This is a $20 per share maker of precision medical instrument, based in Japan. That makes for a market cap of $25.8B. I see a Zacks Value score of D, a Zacks Growth score of C and Zacks Momentum score of A.

(3) Komatsu (KMTUY - Free Report) : This is a $22 per share manufacturing, construction and mining heavy equipment maker, based in Japan. That makes for a market cap of $21.5B. I see a Zacks Value score of A, a Zacks Growth score of C and Zacks Momentum score of C.

Key Global Macro

On Monday
, the Euro Area producer price index (PPI) for May arrives. I see a whopping +38.5% y/y print expected, after a prior +37.2% y/y landed in April. Wow. Just wow.

The S&P global composite PMI for Australia comes out for June. The prior was 52.6.

On Tuesday, Mainland China’s Caixin services PMI was 41.4 in May. That’s a COVID shutdown print. We get an update.

The Euro Area global composite PMI for that key region comes out for June. The prior is 51.9.

On Wednesday, there is a non-monetary policy ECB meeting.

Euro Area retail sales come out for May. I see a +5.4% y/y print expected, after a +3.9% y/y print.

U.S. JOLTS job openings for May should be 11.4 million, the same high level seen in April. No slowdown in labor demand is expected. Yet.

On Thursday, US ADP job adds were +128K. We get their monthly update a day late, due to the Fourth of July holiday at the start of the trading week.

On Friday, U.S. nonfarm jobs additions for June should be up +250K (+295K according to Reuters), and the unemployment rate should remain static at 3.6%.

Average U.S. hourly earnings for June should be up +5.2% y/y, the same as last month.

Conclusion

Looking a bit further out, the middle of July shows us the start of Q2 earnings season.

I see JPMorgan’s (JPM - Free Report) Q2 earnings come out Before Market Open (BMO) on Thursday, July 14th.

Are U.S. earnings estimates going to come down, and shock U.S. large and small stocks alike, into an even lower orbit?

That remains to be seen.

Here is a June 29th update from Zacks Research Director Sheraz Mian, on that topic:

“The reality is 2022 earnings estimates for half of the 16 Zacks sectors have come down since the start of the year, with the biggest declines for the Consumer Discretionary, Retail and Aerospace sectors.

“Aggregate Energy sector earnings estimates for the year increased by +73.4% since the start of the year. Other sectors enjoying significant positive revisions since the start of the year include Basic Materials, Autos, Consumer Staples and Construction.

“In the aggregate, S&P 500 earnings estimates for the year outside of the Energy sector have been cut -9.8% since the start of the year.

“It is reasonable to expect estimates to come down further as the economy slows down in response to aggressive tightening. But it is inaccurate to claim that estimates have not come down.

“Beyond Q2, the growth picture is expected to modestly improve.”

That’s it for me.

Have a great trading week.

Warm Regards,

John Blank
Zacks Chief Equity Strategist and Economist


In-Depth Zacks Research for the Tickers Above


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JPMorgan Chase & Co. (JPM) - free report >>

The Kroger Co. (KR) - free report >>

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