Top Trade Opportunities for Q2 2022
Heading into the second quarter of 2022, there are a number of high level themes competing for investors' attention.
The first few months of 2022 worked out as anticipated in the 1Q '22 Top Trading Opportunities: the US S&P 500 outperformed the US Nasdaq 100; EUR/USD rates dropped below 1.1000; and the US Treasury yield curve (2s10s) moved towards inversion territory.
There’s really only one area that I want to look at for a top trade and that’s equity weakness, specifically in the Nasdaq 100 and the S&P 500.
The energy sector has experienced significant turbulence following the onset of the COVID pandemic. Since crude oil prices dropped below zero in April of 2020, prices have surged, exacerbated by the Russian invasion of Ukraine in February.
The first quarter of 2022 ended with the US dollar, Australian dollar and Canadian dollar as standout performers while the Turkish Lira, Russian Ruble, Japanese Yen and the Euro were among the worst performers (against the dollar). I favor the commodity currencies against the fundamentally weaker currencies with relatively dovish monetary frameworks.
As 2021 wound to a close, the animal spirits that had become the stock market for much of the previous year were being broken. Then in Q1 the market itself broke. The recent decline was deep, but hardly brutal.
While energies are on a tear lately, their impact on the S&P 500 is limited. Under 5% of the index is comprised of stocks in this sector. This also means many portfolios will be underrepresented this sector.
Fresh on the heels of the US-EU partnership to reduce Europe's dependence on Russian energy sources, Natural Gas futures continue to reach new highs. Natural Gas contracts are up nearly 40% YTD and supply substitution is likely to remain a focus over the next few months.
The S&P 500 has staged an extraordinary rally since stimulus measures were implemented in the wake of the outbreak of the Covid-19 pandemic in early 2020.
Supply chain issues plagued the semiconductor space starting in 2020 and continuing into this year. The semiconductor stocks however seemed unphased as the VanEck Semiconductor ETF (SMH) rallied to an eye watering all-time high.
The Australian Dollar could be poised to benefit in the second quarter, appreciating from the spillover effects caused by Russia's attack on Ukraine.
Amid heightened geopolitical and fundamental risks, the safe-haven appeal of the US Dollar and the hawkish rhetoric of the Federal Reserve has allowed USD to strengthen against its major counterparts, limiting Canadian Dollar gains.
The first quarter was quite eventful for Wall Street, but the war in Eastern Europe was clearly a standout. Geopolitical tensions rattled financial markets, weighed on equities, and sparked a commodity price shock after the United States and its allies imposed heavy economic costs on Russia for invading Ukraine.
The outlook for Ethereum, both technically and fundamentally, is starting to look rosy and this should feed through into its price over the coming quarter.
Whether we blame rising rates, supply chain issues, or the war in Ukraine, the semiconductor space has seen significant downside this year with SMH down 16% to end the first quarter of trading.
AUD/USD may continue to retrace the decline from last year as the exchange rate is on the cusp of testing the October high (0.7556), but the diverging paths for monetary policy may curb the bullish price action.
After a strong Q1 in 2022 for the ZAR (which has been the trend over the past few years), the rand could be in for a turnaround. Before delving into potential Q2 influences it is important to remind ourselves of the rand's recent support.
Despite the Bank of England hiking at the fastest pace in over a decade, Cable is on course for its worst quarterly performance since Q1 2020.
Oil prices surged in the first quarter on Russian sanctions and a rebound in global demand. China’s largest Covid outbreak since the pandemic started and a more aggressive Fed may halt the rally.
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