Long-term trends: Battery electric versus hydrogen

Scania EV

The shift towards sustainable transport systems is growing, with progress being made in electric vehicles and hydrogen fuel cells as alternatives to carbon fuels.

Heavy Transport

The major obstacle with heavy transport has been low battery range and lengthy charging times for electric vehicles (EV), leaving hydrogen fuel cells as the obvious choice.

Now, Sweden’s Scania AB, one of the world’s largest truck and bus manufacturers, is shifting emphasis to EV. Citing progress in battery technology — energy storage capacity per kg, charging times, charging cycles and economics per kg — Scania expects electrified vehicles to account for around 10 percent of their total vehicle sales volumes in Europe by 2025. And as high as 50 percent by 2030.

Hydrogen Fuel Cells

“Scania has invested in hydrogen technologies and is currently the only heavy-duty vehicle manufacturer with vehicles in operations with customers. The engineers have gained valuable insights from these early tests and efforts will continue. However, going forward the use of hydrogen for such applications will be limited since three times as much renewable electricity is needed to power a hydrogen truck compared to a battery electric truck. A great deal of energy is namely lost in the production, distribution, and conversion back to electricity.

Repair and maintenance also need to be considered. The cost for a hydrogen vehicle will be higher than for a battery electric vehicle as its systems are more complex, such as an extensive air- and cooling system. Furthermore, hydrogen is a volatile gas which requires more maintenance to ensure safety.” (Scania, January 19, 2021)

The Volkswagen AG-owned heavy vehicle manufacturer does, however, note that stationary fuel cells will still play an important part in electric charging systems. Especially in areas with abundant renewable energy, and in rural areas off the main electricity grid.

Conclusion

Electric vehicle technology has progressed much faster than hydrogen fuel cells and is the clear leader in the race for sustainable transport systems.

Markets that are likely to outperform in 2021

There is no reliable benchmark for assessing performance of different markets (stocks, bonds, precious metals, commodities, etc.) since central banks have flooded financial markets with more than $8 trillion in freshly printed currency since the start of 2020. The chart below from Ed Yardeni shows total assets of the five major central banks (Fed, ECB, BOC, BOE and BOJ) expanded to $27.9T at the end of November 2020, from below $20T at the start of the year.

Central Banks: Total Assets

With no convenient benchmark, the best way to measure performance is using relative strength between two prices/indices.

Measured in Gold (rather than Dollars) the S&P 500 iShares ETF (IVV) has underperformed since mid-2019. Respect of the red descending trendline would confirm further weakness ahead (or outperformance for Gold).

S&P 500 iShares ETF/Gold

But if we take a broad basket of commodities, stocks are still outperforming. Reversal of the current up-trend would signal that he global economy is recovering, with rising demand for commodities as manufacturing output increases. Breach of the latest, sharply rising trendline would warn of a correction to the long-term rising trendline and, most likely, even further.

S&P 500 iShares ETF/DJ-UBS Commodity Index

Commodities

There are pockets of rising prices in commodities but the broader indices remain weak.

Copper shows signs of a recovery. Breakout above -0.5 would signal outperformance relative to Gold.

Copper/Gold

Brent crude shows a similar rally. Breakout above the declining red trendline would suggest outperformance ahead.

Brent Crude/Gold

But the broad basket of commodities measured by the DJ-UBS Commodity Index is still in a down-trend.

DJ-UBS Commodity Index/Gold

Precious Metals

Silver broke out of its downward trend channel relative to Gold. Completion of the recent pullback (at zero) confirms the breakout and signals future outperformance.

Silver/Gold

Stock Markets

Comparing major stock indices, the S&P 500 has outperformed the DJ Stoxx Euro 600 since 2010. Lately the up-trend has accelerated and breach of the latest rising trendline would warn of reversion to at least the long-term trendline. More likely even further.

S&P 500 iShares ETF/Euro Stoxx 600

The S&P 500 shows a similar accelerating up-trend relative to the ASX 200. Breach of the latest trendline would similarly signal reversion to the LT trendline and most likely further.

S&P 500 iShares ETF/ASX 200

Reversion is already under way with India’s Nifty 50 (NSX), now outperforming the S&P 500.

S&P 500 iShares ETF/Nifty 50

S&P 500 performance relative to the Shanghai Composite plateaued at around +0.4. Breakout would signal further gains but respect of resistance is as likely.

S&P 500 iShares ETF/Shanghai Composite

Growth/Value

Looking within the Russell 1000 large caps index, Growth stocks (IWF) have clearly outperformed Value (IWD) since 2006. Breach of the latest, incredibly steep trendline, however, warns of reversion to the mean. We are likely to see Value outperform Growth in 2021.

Russell 1000 Value/Growth

Bonds

The S&P 500 has made strong gains against Treasury bonds since March (iShares 20+ Year Treasury Bond ETF [TLT]) but is expected to run into resistance between 1.3 and 1.4. Rising inflation fears, however, may lower bond prices, spurring further outperformance by stocks.

S&P 500 iShares ETF/Long_term Bond ETF (TLT)

Currencies

The US Dollar is weakening against a basket of major currencies. Euro breakout above resistance at $1.25 would signal a long-term up-trend.

Euro/Dollar

China’s Yuan has already broken resistance at 14.6 US cents, signaling a long-term up-trend.

Yuan/Dollar

India’s Rupee remains sluggish.

Indian Rupee/Dollar

But the Australian Dollar is surging. The recent correction that respected support at 70 US cents suggests an advance to at least 80 cents.

Australian Dollar/Dollar

Gold, surprisingly, retraced over the last few months despite the weakening US Dollar. But respect of support at $1800/ounce would signal another primary advance.

Spot Gold/Dollar

Conclusion

Silver is expected to outperform Gold.
Gold is expected to outperform stocks.
Value stocks are expected to outperform Growth.
India’s Nifty 50 is expected to outperform other major indices. This is likely to be followed by the Stoxx Euro 600 and ASX 200 but only if they break their latest, sharply rising trendlines. That leaves the S&P 500 and Shanghai Composite filling the minor placings.
Copper and Crude show signs of a recovery but the broad basket of currencies is expected to underperform stocks and precious metals.
The Greenback is expected to weaken against most major currencies, while rising inflation is likely to leave bond investors holding the wooden spoon.

The S&P 500 and Plan B

The S&P 500 penetrated its rising trendline, warning of a re-test of support at 3000. But selling pressure on the Trend Index appears to be secondary.

S&P 500

Transport bellwether Fedex retreated below long-term support at 150 on the monthly chart — on fears of a slow-down in international trade. Follow-through below 140 would strengthen the bear signal, offering a target of 100. The bear-trend warns that economic activity is contracting.

Fedex

Brent crude dropped below $60/barrel on fears of a global slow-down. Expect a test of primary support at 50.

Brent Crude

Dow Jones – UBS Commodity Index broke primary support at 76 on the monthly chart, also anticipating a global slow-down.

DJ-UBS Commodity Index

South Korea’s KOSPI Index is a good barometer for global trade. Expect a re-test of primary support at 250.

KOSPI

While Dr Copper, another useful barometer, warns that the patient (the global economy) is in need of medical assistance.

Copper (S1)

The Fed can keep pumping Dollars into financial markets but at some point, the patient is going to stop responding. In which case you had better have a Plan B.

ASX 200 retracement likely

A short candle with a tall shadow on the ASX 200 weekly chart warns of short-term selling pressure. Expect retracement to test the new support level at 6800.

ASX 200

Weakness has been driven by the Resources sector, with a gravestone candle on the ASX 300 Metals & Mining index warning of selling pressure at resistance at 4800 and a likely reversal to test support at 4450.

ASX 300 Metals & Mining

A short candle on the ASX 300 Banks index warns of increased short-term selling pressure. Respect of the descending trendline would signal another decline; breach of support at 7250 would confirm. Penetration of the trendline is less likely but would suggest that a bottom is forming.

ASX 300 Banks

We continue to hold a bearish view on the domestic economy but recognize that the temporary tailwind from resources (iron ore) may partly alleviate this. IT and Healthcare sectors are, in our view, over-priced and we maintain our focus on defensive and contra-cyclical (gold) stocks.

Commodities & Global Growth

Commodity prices warn that the global economy is still in a slump.

The Dow Jones – UBS Commodity Index remains at one-third of its 2007 peak, with no sign of recovery.

DJ-UBS Commodity Index

The fall in crude prices hasn’t been as severe, but Brent Crude is again weakening and looks set for another test of $50/barrel.

Brent Crude

Shipping rates for dry bulk goods, such as iron ore and coal, have fallen, with the Baltic Dry Index close to long-term support at 500.

Baltic Dry Index

Supply interruptions to iron ore production in Brazil have cushioned Australian producers from a sharp down-turn in iron ore prices. But coal exporters are feeling the pinch.

RBA Chart Pack: Bulk Commodity Prices

Recovery of Brazilian production over the next two years is expected to add downward pressure to iron ore prices.

The only positive appears to be container shipping rates. The Harpex Index rose steeply in 2019, reflecting increased demand for container shipping of finished goods.

Harpex Index

Somewhat surprising, since this coincided with US-China trade tensions and tariff increases. The answer may lie with importers on both sides of the Pacific attempting to front-run the imposition of tariffs and build inventories in case of supply interruptions and to allow time to adapt their supply chain. Expect the index to retreat in the early part of 2020.

It looks like low global growth will continue.

ASX 200 lifted by resources

The ASX 200 is advancing towards its medium-term target of 7200 after breaking resistance at 6800. A high trend index trough signals buying pressure.

ASX 200

Primary driver of the advance is Resources. Signing of phase one of the US-China trade deal lifted iron ore, which is  testing resistance at 95. Consolidation at/below 95 is likely, however, given that the mid-2019 peak was caused by supply disruption in Brazil.

Iron Ore

The ASX 300 Metals & Mining index is headed for a test of resistance at 4800.

ASX 300 Metals & Mining

Financials are weak, but the ASX 300 Banks index found support at 7250. Respect of the descending trendline would warn of another decline, with a short-term target of 7000. Penetration of the trendline is less likely but would warn that a bottom is forming.

ASX 300 Banks

The ASX 200 REITs index is testing resistance at 1680, reflecting the investor demand for yield.

ASX 200 REITs

A weakening Australian Dollar may lift exports slightly but reflects concerns over the phase one US-China trade deal and the impact substantive purchase commitments made by China will have on other energy and commodity suppliers. Breach of 68.50 would offer a short-term target of 67 US cents.

AUDUSD

We continue to hold a bearish view on the domestic economy but recognize that the tailwind from resources may partly alleviate this. IT and Healthcare sectors are, in our view, over-priced and we maintain our focus on defensive and contra-cyclical (gold) stocks.

ASX 200 breakout

The ASX 200 broke resistance at 6800, signaling a fresh advance. Expect retracement to test the new support level; respect would strengthen the bull signal.

ASX 200

Primary driver of the advance is resources. Talk of an imminent phase 1 US-China trade deal lifted iron ore, which is now testing resistance at 95. Expect retracement to test primary support at 80 but respect would confirm that a base has formed.

Iron Ore

The ASX 300 Metals & Mining index is advancing in step with iron ore prices, with a short-term target of 4800.

ASX 300 Metals & Mining

Financials remain weak, with the ASX 300 Banks index ranging in a bearish narrow band between 7200 and 7500. Respect of the descending trendline would warn of another decline, with a short-term target of 7000.

ASX 300 Banks

The ASX 200 REITs index recovered after a false break below 1580, with a short-term target of 1680.

ASX 200 REITs

We maintain a focus on defensive and contra-cyclical (gold) sectors because of our bearish outlook for the Australian and global economy.

ASX 200 hesitant because of banks

Financials are still weak. The ASX 300 Banks rally appears short-lived, posting a red candle for the week. Expect another test of support at 7200; breach would test primary support at 6750.

ASX 300 Banks

The ASX 200 REITs index recovered above support at 1600. False breaks on both the bull and bear side indicate hesitancy but declining peaks on the Trend Index warn of long-term selling pressure.

ASX 200 REITs

The ASX 300 Metals & Mining index is more bullish, having broken resistance at 4450. Expect retracement to test the new support level; respect would confirm the target of 4800.

ASX 300 Metals & Mining

Talk of an imminent trade deal lifted iron ore above previous support at 90. Expect another test of primary support at 80, but respect would confirm that a base is forming above 80.

Iron Ore

A bearish financial sector is holding the ASX 200 back. Follow-through above recent weekly highs would signal another advance, while reversal below 6600 would test primary support at 6400. Further consolidation between 6400 and 6800 is just as likely given the gradual decline on the Trend Index.

ASX 200

We are avoiding highly-priced growth stocks and focusing on defensive and contra-cyclical sectors because of our bearish outlook for the Australian and global economies.

ASX 200 hesitant

The resources sector is strengthening.

The ASX 300 Metals & Mining index broke resistance at 4450, suggesting another advance. Buoyed by rising iron ore prices, the breakout offers a target of 4800.

ASX 300 Metals & Mining

Talk of an imminent trade deal lifted iron ore above previous support at 90. Expect another test of primary support at 80, but respect would confirm that a base has formed above 80.

Iron Ore

Financials, on the other hand, are still weak.

The ASX 300 Banks index continues in a down-trend. Expect retracement to test resistance at 7600 but reversal seems unlikely at this stage. Respect of resistance would confirm a target of 6800.

ASX 300 Banks

The ASX 200 REITs index broke support at 1600 after a false break through 1650. Typical of a bull trap, expect a decline to test support at 1500.

ASX 200 REITs

A bearish outlook for banks is keeping the ASX 200 hesitant. The daily chart shows narrow consolidation below resistance at 6750; a bullish sign. Breakout is likely but the Trend Index below zero warns that buyers are cautious.

ASX 200

We maintain low exposure to Australian equities, with a focus on defensive and contra-cyclical stocks, because of our bearish outlook.

Banks drag on ASX 200

Banks are plagued by fears of large AUSTRAC penalties for breaches of anti money-laundering and counter-terrorism regulations. Commonwealth have paid a $700 million fine, Westpac have already been charged, NAB alerted investors of potential liabilities in their annual report, while ANZ says there are no signs of transgressions.

In other problem areas, mortgage stress continues to rise, with Martin North (Digital Finance Analytics) estimating that 32.5% of households are now in mortgage stress “based on an assessment of their cash flow.” Worst hit are fringe suburbs, where the rate is as high as 60%.

Elsewhere, RBNZ eased their calls for major banks to increase Common Equity Tier 1 Capital (CET1) to 13.5%, with a further 2.5% comprising other forms of capital such as hybrids and convertible preference shares, and relaxed the phase-in from 5 to 7 years. But the changes will still $13.8 billion in additional capital, according to the big four banks. APRA, by comparison, requires a CET1 ratio of 10.5%.

The ASX 300 Banks index continues to trend lower, with declining peaks on the Trend Index warning of selling pressure. Expect retracement to test resistance at 7600; respect would confirm the  target of 6800.

ASX 300 Banks

The ASX 200 REITs index is again testing support at 1600 after a false break above 1650. Breach of support remains unlikely, with financial markets searching for yield, but would offer a target of 1500.

ASX 200 REITs

Iron ore has made a bear market rally to test resistance at 90. Respect of resistance is likely and would warn of another decline.

Iron Ore

A Trend Index peak near zero on the ASX 300 Metals & Mining index warns of another test of support at 4100 (neckline of a large head-and-shoulders reversal pattern). Breach would offer a target of 3400, while respect of support would indicate that a base is forming.

ASX 300 Metals & Mining

Declining banks are dragging the ASX 200 lower and another test of support at 6400 is likely. A resources sector reversal would increase the chance of top forming on the broad index

ASX 200

We maintain low exposure to Australian equities, with a focus on defensive and contra-cyclical stocks, because of our bearish outlook.