Market Strategist
Summary: US equities returned from holiday on a weak footing as FOMC minutes showed appetite for further rate hikes. Bond yields climbed with 10-year Treasury yield getting in close sight of 4%. Still, big tech stocks surged with Meta leading the pack on the launch of its Threads app as a rival to Twitter. China services PMI disappointed, while Eurozone PMIs also raised recession alarm. Yellen’s visit to China will be in focus before labor market indicators in the US take the focus.
US equities closed in the red after returning from Independence Day holiday as the Federal Reserve’s minutes from its June meeting showed further appetite to resume hikes, which brough further gains in bond yields and 10-year yield rose to highs of 3.95%. Still, big tech was largely higher as Meta surged to a 52-week high ahead of the launch of its rival Twitter app. That helped NASDAQ 100 to close almost unchanged while S&P 500 was down 0.2% while Dow Jones slid by 0.4%. Apple however failed to follow big tech gains and was down 0.6%. Automakers continue to surge with GM and Toyota now adding to positive sentiment with higher unit sales growth in Q2.
Hang Seng Index fell by 1.6% with Meituan down 2.4%. Hang Seng China Enterprises Index was down 1.9% as China’s June services PMI came in significantly weaker than expected. Geopolitical situation also continues to keep the sentiment fragile as US and China engage further in chip wars and Janet Yellen is starting her visit to Beijing today. CSI 300 closed down by 0.8%.
While the US FOMC minutes had little impact on market expectations of the Fed path, the clarity on some of the members having been inclined for a 25bps rate hike at the June meeting signalled greater conviction that further rate hikes will continue. This saw yields running higher and USD in gains across the G10 board. AUDUSD weakened from the 0.67 handle after China’s disappointing services PMI, and pair was close to 0.6650 in early Asian hours. EURUSD also moved more convincingly below 1.09 while GBPUSD was still close to 1.27 handle. The final EU HCOB Composite PMI in June was revised lower to the contractionary territory of 49.9 from 50.3, despite expectations for it being left unchanged, raising the recessionary alarm.
Crude oil prices surged on Wednesday as US markets came back from holiday and traders assessed the impact of the production cut announcements from Saudi Arabia and Russia. WTI rallied to $72/barrel as it caught up to the moves in Brent over the US holiday on Tuesday. However, at the OPEC International Seminar, UAE said it won’t be joining voluntary cuts at this time. Meanwhile, geopolitical risks were also heightened following reports of US Navy ships stopping Iranian forces from seizing two oil tankers near the Strait of Hormuz. Demand concerns also eased as API reported crude inventories declining by 4.4mn barrels last week, and focus will turn to the labor market indicators in the rest of the week.
Chicago wheat futures were up over 5% on Wednesday as Monday crop conditions report from the US was assessed by traders after returning from holiday. The USDA reported that just 37% of the winter crop was harvested as of Sunday, versus 52% last year. The agency also unexpectedly cut its spring wheat rating as rains failed to improve conditions. Meanwhile, concerns on Russian supplies also lingered after recent rains suggesting market tightness could continue. The USDA rated 51% of U.S. corn in good-to-excellent condition, up a point from the prior week. Soybean conditions, however, fell by a point.
The tone of the FOMC minutes was somewhat different than what a unanimous pause decision may have hinted. Some members favoured an increase in interest rates at the June meeting, but went along with a pause. Almost all of the members continued to highlight the need for further rate hikes. Many also noted that, after rapidly tightening, the Committee had slowed the pace of tightening and that a further moderation in the pace of policy firming was appropriate in order to provide additional time to observe the effects of cumulative tightening and assess their implications for policy. As expected, no material change was seen to market’s expectations for the Fed from here, with July rate hike still priced in with over 80% probability and terminal rate seen at 5.4% as focus turns to JOLTs, ISM services and NFP data due into the close of the week.
The final EU HCOB Composite PMI in June was revised lower to the contractionary territory of 49.9 from 50.3, despite expectations for it being left unchanged. This comes as services PMI was revised lower to 52 from 52.4 and raised the recessionary alarm for the Eurozone. Meanwhile, ECB 12-month consumer inflation expectations seen at 3.9% down from 4.1%
The Caixin Services PMI for June was out at 53.9 overnight, far below the 56.2 expected and the 57.1 in May. It was the weakest reading since January and dampened hopes that the China economy may be showing some early signs of a recovery after targeted stimulus measures over the last few weeks. China's largest banks cut rates for the nation’s $453b corporate 1y USD deposits for the 2nd time in weeks to 5.09% from 5.7%.
China’s restrictions on exporting gallium and germanium metals crucial for semiconductors and electric vehicles have further raised concerns about potential curbs on rare earth exports, that could disrupt global supply chains. Chinese officials will meet with major producers of the metals on Thursday to discuss the export restrictions, Reuters reported. Meanwhile, Janet Yellen visits Beijing from Thursday with the goal of finding areas of common economic ground and opening communication channels amid increasingly turbulent US-China relations.
General Motors Co. and Toyota Motor Corp. both posted strong sales gains in the second quarter, signs of consumer health in the auto market as semiconductor supply improves. Toyota's unit sales in the US rose 7.1% in the second quarter, with 29% jump in June deliveries of EVs. Meanwhile GM's unit sales surged 19% in Q2. Ford’s unit sales numbers are due out on Thursday.
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