Good morning Coachmen, after an exhilarating week at the Collision conference in Toronto (alongside some issues with our service provider) we are ready to roll into what’s sure to be another tumultuous week for markets.
“Everybody comes to a point in their lives where they want to quit. But it’s what you do at that moment that determines who you are.”
- David Goggins
Adding to last week’s 5% resurgence in the S&P 500, futures are indicating further advances in North American equities despite Morgan Stanley’s recent drastic increase in the likelihood of a recession (a 30% increase in probability! Read their report here). It’s worth noting that a majority of the bulge-bracket investment banks now pin the chance of having a drawn-out contraction in the economy at around a 50% probability - a driving factor for many models has been the hawkishness of the Federal Reserve and cost-push inflation from the commodity sector.
While markets did gap up over the last couple of days, this 4000-point level is a key area of value that the index has struggled to remain above for the last few weeks. However, more than a few risk-off catalysts present themselves within markets this morning with the main one being Russia’s possible first default on debt since 1918; Russia has just hours left before the grace period on the missed payments of two Eurobonds is over and they are on the line for about $100M by EOD - while this amount is pretty nominal, depending on Russia’s payment or non-payment, the implications on the other $20B of their debt held by foreigners could send shockwaves through markets. Further to Russia’s global implications, the US, UK & Canada are in the process of banning Russian gold imports, even though these imports have already been largely choked off due to previous rounds of sanctions - gold per oz is currently sitting at $1,827, relatively unchanged on this news. Despite all of this, the VIX has managed to stay pretty tame last week, only jumping 5% in the latter half of Friday’s trading, however falling again in today’s pre-market.
Special Bulletin: Diesel Engine Oil Shortage - Reports are coming in that we are set for a catastrophic shortage of diesel engine oil for the foreseeable future. Let me paint the picture, a handful of companies produce the world’s supply of the additive package needed to chemically alter the compound for use in diesel engines. Current estimates suggest that production of new motor oil could cease entirely for the next 12 months at a minimum. As diesel engine oil is required in a variety of essential societal functions, namely use for farm equipment, heavy machinery, and transportation. The majority of these vehicles will be unable to last for an entire year off of one oil change, and as a result, this shortage is likely to push an already strained supply chain to its breaking point.
Long: Trip.com (TCOM-NASDAQ) | Timeline: 3-5 days
Trip.com Group Ltd (TCOM), a leading one-stop travel service provider of accommodation reservation, transportation ticketing, packaged tours and corporate travel management, is set to report earnings today after market close. Not only are people finally beginning to travel once again, but they are now scavenging through the internet in order to look for the best deal in this high inflation environment. That being said, TCOM has positioned itself to bounce back ahead of earnings after a 51% beat-down from the start of 2021. Turning to the chart above, bulls have been struggling to stay afloat over the last few years due to Covid-19 restrictions heavily impacting the company’s operations, however, traders have played out a widely used reversal pattern - a falling wedge. This pattern acts as a bullish signal as it reflects that a sliding price is starting to lose momentum and that buyers are starting to move in to slow down the fall. Although this pattern is used very often among traders, a stop loss should always be put in place just in case price action tests the lower level of this channel once more before breaking out.
Long: Suncor (SU-NYSE) | Timeline: 4-6 days
As we all know the current global energy landscape is at best chaotic, and realistically deeply troubled. Since the war in Ukraine began, Western European nations that have refused to bend the knee and buy Russian gas in Rubles have been suffering immensely. Europe’s largest economy, Germany, has been feeling this pain much more than most as the NordStream 2 pipeline, designed to deliver gas from Russia into Germany, has been effectively shuttered. The situation has become so dire that known eco-centric nations including Germany have begun to fire up their once-mothballed coal plants in order to avoid blackouts within their nations (Source). This has also been compounded by their requests for an alteration of their climate plan which previously aimed to halt financing of overseas fossil fuel projects (Source). These policy reversals provide an opportunity for Canadian energy to truly shine, and this pack of energy producers is led by the behemoth Suncor. With diversified assets across the oil and gas production line, they are poised to benefit from sustained upward price action from nearly anything fossil fuel-related. While it is true that gas exports from North America to Europe are somewhat unsustainable for the time being due to the lack of supertankers worldwide, the desperation for gas across the European continent is likely to propel Suncor’s price upwards. In terms of technicals, Suncor lost some momentum last week as the price of natural gas dropped from around the $6.70 mark down to current levels of roughly $6.15, this troubling news from Europe is likely in advance of a sustained upward movement in the nat gas market. This also comes as the company is trading far above both the 50, and 200-week moving averages, with the 50-week breaking out above the 200 in early May.
Chart of the Day - US housing market on the brink of collapse?