Summary: Equity markets surged as robust job gains alleviated recession concerns, propelling the S&P 500 up 1.5% and the Nasdaq 100 by 0.7%. The VIX plummeted to its lowest level since February 2020 at 14.6. Cyclical stocks and regional banks experienced a strong rebound, while Treasury yields climbed on solid non-farm payroll data for May. USDJPY surged above 140. Chinese and Hong Kong stocks rallied on anticipations of housing demand stimulus, driving the Hang Seng Index up 4% and the CSI300 Index gaining 1.4%. President Biden signed the bipartisan debt ceiling bill. Crude oil gapped up in Asia, reaching USD75 at one point after Saudi Arabia announced to cut an extra 1 million barrels a day starting from July.
Equity investors expressed their enthusiasm over a robust job gain, which alleviated concerns of a recession, while the unemployment rate and weekly earnings data indicated a potential decrease in wage inflation. As a result, the S&P 500 surged by 1.5% and the Nasdaq 100 climbed by 0.7%. The stock market rally was widespread, with all 11 sectors in the S&P 500 experiencing gains, led by materials and industrials. Notably, Celanese (CE:xnys), 3M (MMM:xnys), and DuPont (DD:xnys) registered remarkable surges of over 8%.
The market sentiment has shifted risk-on. The CBOE Volatility Index (VIX) dropped to 14.6, reaching its lowest level since February 2020. Additionally, the previously struggling regional banking sector staged a strong rally, with SPDR S&P Regional Banking ETR soaring by 6% on Friday and surpassing the 50-day moving average.
Yields surged due to an unexpectedly large increase in non-farm payrolls for May, coupled with upward revisions for the preceding two months (see details below). The initial market reactions were volatile as traders deliberated the strong headline payroll figures against the rise in the unemployment rate due to a decline in employment indicated by the household survey, as well as the moderation observed in average hourly earnings and weekly hours. Consequently, selling pressure intensified and extended the losses in Treasuries throughout the afternoon trading session, resulting in yields concluding near their highest levels of the day. The 2-year yield surged 16bps to 4.5% and the 10-year yield added 10bps to 3.69%.
Hong Kong and mainland Chinese stocks rallied strongly driven by China real estate, Internet, and EV names. The Hang Seng Index surged 4% and the CSI300 Index advanced 1.4%. Market chatters of additional policies from the Chinese authorities to stimulate demand for residential housing and the expectation of a pause in rate hikes in the U.S. were cited as triggers for the upward movement. Given the prevalent underweight allocation to China exposure among institutional investors and the widespread pessimism prevailing in the market toward Chinese and Hong Kong equities, even minor catalysts were sufficient to spark a rush to buy. A close above the 200-day moving average (currently at 19286) in the upcoming sessions could enhance the technical outlook for the Hang Seng Index and potentially trigger further buying.
The advance in both Hong Kong and mainland bourses was foremost led by China real estate stocks, with Longfor (00960:xhkg) soaring 17.2% and Country Garden Services (06098:xhkg) surging 13%. EV stocks also performed well, benefiting from strong May delivery figures. BYD (01211:xhkg) gained 4.5% after doubling its sales to over 240k vehicles in May. Nio (09866:xhkg), Li Auto (02015:xhkg), and XPeng (09868:xhkg) saw gains ranging from 3.8% to 7.9%. China Internet stocks rallied sharply, with Tencent (00700”xhkg), Alibaba (09988:xhkg), JD.COM (09618:xhkg), Baidu (09888:xhkg), and Meituan (03690:xhkg) surging by 6% to 7.8%.
The dollar index firmed up following the US jobs report on Friday as the headline job gains and revisions of the last two months were a positive surprise. As yields surged, USDJPY rose above 140 again after some expected intervention brought the pair to 138.50 last week. The move to 140+ was being extended slowly at the Asian open on Monday keeping focus on May highs of 140.93. GBP also extending the downside, and eyes are on 1.24 while EURUSD is testing a break below 1.07. AUDUSD stays above 0.66 after firmer CPI print last week and China’s Caixin manufacturing PMI also supports sentiment. Meanwhile, iron ore futures rallied last week on hopes of fresh policy support for China’s property sector.
WTI crude oil futures (CLN3) gaps up 4.5% at the Asia open on Monday, touching $75, the highest level since May 2 after Saudi Arabia agrees to an extra 1m barrel per day (bpd) supply cut in July to bring stability to the market. This will be on top of a broader OPEC+ deal to limit supply into 2024 as the group seeks to boost flagging oil prices. OPEC+ has in place cuts of 3.66 million bpd, amounting to 3.6% of global demand, including 2 million bpd agreed last year and voluntary cuts of 1.66 million bpd agreed in April. The group also agreed on Sunday to reduce overall production targets from January 2024 by a further 1.4 million bpd versus current targets to a combined of 40.46 million bpd, but these reflect lower targets for Russia, Nigeria and Angola to bring them into line with actual current production levels. While the cuts once again show OPEC’s commitment to support oil prices, the impact from a similar move in April has been completely erased due to the concerns about the weakness of the global economy and its impact on demand.
Copper recorded its first weekly gain in seven weeks as focus turned back to fundamentals amid a slightly improved macro outlook. The deal to lift the US debt ceiling helped boost sentiment across commodity markets, while the strong NFP headline along with weaker details continued to suggest that Fed will remains on a cautious path. Prospects of housing stimulus in China also lifted industrial metals like Copper and Iron ore. Still, a break above $3.80 is needed in copper to reverse the downtrend. Meanwhile, Gold traded higher last week to challenge resistance above $1980 before another strong US job report helped drive some profit taking ahead of the weekend. Key support has now been confirmed around $1950 while resistance remains at $1984.
The US nonfarm payroll report released on Friday saw strong headline gains of +339k in May, coming in well above the expected 195k. There were also a net +93k revision to the headline prints of the last two months. Wage data was also firm, coming in at 0.3% MoM and 4.3% YoY. And yet, while the Establishment survey was a blowout beat and the strongest print since January, the Household survey unexpectedly tumbled by the most since April 22 as it plunged by 310K jobs resulting in a 0.3% jump in the Unemployment rate which rose from 3.4% to 3.7%. Odds of a June rate picked up slightly after the release, but still only 30% probability is seen, with a July rate hike priced in fully by the markets now. Several Fed officials such as Jefferson and Harker have also recently hinted that the Fed could skip tightening in June to give themselves more time to assess the effect of their actions so far.
President Biden successfully enacted the bipartisan legislation on Saturday, effectively halting the $31.4 trillion debt ceiling and mitigating the potential risk of a default by the U.S. federal government. As a result, the focus of the market has shifted towards assessing the bond market's reaction to the influx of Treasury securities and the implications of replenishing the Treasury General Account (TGA) with $500 to $600 billion at the Federal Reserve (Fed), particularly in relation to liquidity within the banking system.
The magnitude of this impact primarily hinges on whether the increase in the TGA arises from a reduction in bank excess reserves, thereby draining liquidity from the banking system, or from a decrease in the Reverse Repo balances of the money market fund at the Fed, which would transfer liabilities on the Fed's balance sheet without affecting banking liquidity.
If money market funds choose to procure the newly issued Treasury bills from the Treasury and finance the transaction by reducing their investments in the Fed's Reverse Repos, while the Treasury deposits the acquired funds into the TGA at the Fed, the liquidity of the banking system would remain unaffected. However, if investors opt to withdraw funds from their bank accounts to purchase the newly issued Treasury bills, and the Treasury subsequently deposits the resulting proceeds into the TGA, it would lead to a depletion of banking liquidity.
The Ukrainian armed forces failed to achieve success in a large-scale offensive on five front sectors in the south Donetsk area, official spokesman of the Russian Defense Ministry Lieutenant General Igor Konashenkov said. In an interview with the Wall Street Journal released on June 3, President Volodymyr Zelensky had said that Ukraine is "ready for counteroffensive."
Newswire reports suggest that Amazon is in talks with wireless carriers, including Verizon (VZ:xnys), T-Mobile (TMUS:xnas), and Dish Network (DISH:xnas), to offer low-cost or even free mobile phone service to its Prime subscribers. Following this news, the share price of Dish Network surged by 16.4%, while Verizon slid 3.2% and T-Mobile shed 5.6%. Meanwhile, Amazon registered a gain of 1.2%.
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2024: The wasted year
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
