Charts and caffeine: JP Morgan's top ASX energy pick

Hans Lee

Livewire Markets

Welcome to Charts and Caffeine - Livewire's pre-market open news and analysis wrap. We'll get you across the Friday session and share our best insights to get you better set for the investing day ahead.

MARKETS WRAP

  • S&P 500 - 3,675 (+0.22%)
  • NASDAQ - 11,266 (+1.24%)
  • CBOE VIX - 30.90
  • FTSE 100 - 7,016 (-0.41%)
  • STOXX 600 - 403.24 (+0.1%)
  • USD INDEX - 104.65 (+0.98%)
  • US 10YR - 3.231%
  • GOLD - US$1,842/oz

THE CALENDAR

I'd probably sum up this week's macro calendar in three words: speeches and surveys. Namely, speeches in the form of central bank governor appearances and global PMIs. 

All next week, Federal Reserve governors will be appearing at various events but Chair Jerome Powell is giving his semi-regular testimony to the US Congress later this week. That also goes for Reserve Bank governor Philip Lowe. 

PMIs on the other hand is a clustered collection on Thursday - and will help the European Central Bank identify how much (or little) economic activity has changed on the continent.

Finally, UK CPI is out next Wednesday. That's interesting because last week, the Bank of England projected inflation would hit - get this - 11% this spring. 

Yikes.

STOCKS TO WATCH

If you think the oil/energy trade is getting old now, then you may want to chat to JP Morgan's Mark Busuttil. For our stock-to-watch segment today, I thought I'd take a look at the rationale behind his overweight Woodside Energy (ASX:WDS) thesis. 

The BHP petroleum/Woodside merger boosted the latter's market capitalisation by more than 100%. Like other analysts who cover the stock, Busuttil has highlighted the complimentary nature of the assets, the help it will give to its cash flows, and perhaps most importantly, how that changes the game for share buybacks.

But the part that got my attention was the price target. Given how far energy prices have run, Busuttil still has a $37 price target on the stock for this time next year. The stock is also now his preferred pick in the oil and gas space.

READ MORE: For a contrasting case that backs Santos (ASX:STO), click here.

Outside of the brokers, I'm paying close attention to the further demise of buy-now-pay-later (BNPL). This is after reports on Friday that Humm Group and Latitude Financial called off plans to merge the consumer finance assets. The end to the deal signifies what could be the last days of some of the pandemic's most crowded trades.

Finally, in a previous edition of CnC, I mentioned how Citi had placed a "buy" rating on GUD Holdings. Since then, the company has been shifted down to a neutral following its earnings downgrade.

THE TWEET

If you like avocados, look away now. If you don't like avocados (i.e. me), then this tweet might be for you. World avocado supplies are (by quarterly measurement standards) near the peak and it could take many years for supplies to recuperate.

THE CHART

I find this chart particularly interesting - it's the lag in US inflation following rate hikes. Fixed-income traders have been talking for a long time now about how far global central banks are "behind the curve". This is an excellent example of what they are talking about. Since (core) inflation often peaks during or after the recession, the Fed (and its compatriots) will most likely be hiking well into a recession and thus, prolonging it. If you want proof of how that's manifesting right this second, talk to the Bank of England.

THE STAT

November 2020: The last time junk bond yield spreads were as wide as they are now in the United States. (Source: Bloomberg)

Spreads on US junk-rated corporate bonds are one gauge that could suggest big defaults are on the way. The differential enticing investors into buying said bonds is now at its highest since November 2020. Of course, there's a reason these yields are generally so high - the default risk that the corporates who carry them are much higher.

BEST READS IN BUSINESS NEWS

What’s Stagflation, and Why Is It Such a Worry Now? (Bloomberg): You know when the explainers are coming out, it can't be a good sign.

Amazon CEO Jassy’s First Year on the Job: Undoing Bezos-Led Overexpansion (WSJ): It may not have been a great year for its share price but Andy Jassy has had an unenviable task over the last year - to transform the company's workforce while keeping on the long term track.

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Hans Lee
Content Editor
Livewire Markets

Hans is a content editor at Livewire. He edits the website's pre-market wrap "Charts and Caffeine", moderates the macro series "Signal or Noise", and leads Stats Incredible in the daily newsletter.

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