Next Week in Stock Markets
Stocks rallied last week to end at a pivotal juncture. After starting September on a rough note stocks have shown strength heading into the end of the month. With news of Evergrande default risk seemingly not systemic (at this point) investors will focus on the upcoming deadline for the US Debt Ceiling which has far greater importance and ramifications if a deal to raise the limit is not reached by September 30. The last government shutdown began in December 2018 and lasted 35 days. During that time the S&P500 declined by 10%. This time however the stakes cannot be higher.
Q3 earnings season will begin Oct 10 with the investors looking for clues leading up. With the last 2-3 months of global economic data weaker we could see companies begin to reflect within this reporting season. Higher inflation, higher energy costs and higher shipping costs will all show up and its going to be interesting to see how the corporations will pass on these higher costs to the consumer. Consumers themselves are showing weakness in spending and sentiment so equity markets are at risk for a deeper selloff if forward looking profits estimates do not satisfy.
While we wait for the above to transpire we still see many opportunities. For one, the price of Natural Gas continues to outperform relative to other commodities. The rolling 5 and 10 year average supply levels have decreased by 10 and 17% respectively. About 20% of US production is actually exported into international markets. Oil prices have also shown strength on improving demand and tighter supplies. We continue to like the setups in many of the producing companies in both Canada and the US. And with recent M&A activity in the sector also adding to the bullish sentiment.