Summary: US equities slipped on Friday as debt ceiling talks stumbled, dampening investor sentiment. The S&P 500 dropped 0.1% and the Nasdaq 100 slid 0.2%. Regional banks faced pressure after suggestions from Treasury Secretary Yellen of mergers. Treasuries had a volatile session, initially declining but ultimately ending with higher yields. Chinese equities, particularly China Internet stocks, dragged down the Hang Seng Index by 1.4%. Alibaba was the worst hit. The USD traded weaker against major currencies due to Powell's remarks and stalled debt ceiling negotiations but USDCNH rose to as high as 7.075.
Major indices experienced modest declines on Friday, with the S&P 500 dropping 0.1% and the Nasdaq 100 sliding 0.2%. Investor sentiment was dampened by reports of Republican negotiators walking out of debt ceiling negotiations midway through the day. Within the S&P 500, the consumer discretionary, communication services, and financial sectors underperformed, while energy, healthcare, and materials showed gains. Foot Locker (FL:xnys) faced a 27.1% decline in share price after revealing a 9% year-on-year decrease in same-store sales for Q1 and providing a downbeat outlook. This heightened concerns among investors about weakening consumer spending.
Furthermore, the financial sector, particularly regional banks, faced pressure following Treasury Secretary Yellen's suggestion that additional mergers might be necessary. As a result, the SPDR S&P Regional Banking ETF (KRE:arcx) retreated by 1.9%.
Treasuries finished a choppy trading session with yields from 1 to 5bps higher and the 5-year being the most hit. Initially, Treasuries saw a brief boost as yields declined following news of stalled debt ceiling talks and remarks from Powell suggesting that the Federal Reserve could take a more measured approach to data and interest rates in light of prevailing credit stress. However, these price gains, resulting in lower yields, were short-lived. Ultimately, the 2-year yield concluded the session 1 bps higher at 4.27%, while the 10-year yield closed at 3.67%, representing a 3 bps increase.
Hang Seng Index endured a 1.4% drop, primarily fueled by the decline of China Internet stocks. Among them, Alibaba (09988:xhkg) experienced a substantial sell-off of 6%, emerging as the poorest performer within the benchmark index. The e-commerce behemoth's domestic e-commerce and cloud revenues fell short of expectations, contributing to the negative sentiment surrounding the China Internet sector. JD.COM (09618:xhkg), Baidu (09888:xhkg), and Meituan (03690:xhkg), all Internet stocks, also suffered significant plunges ranging between 3.7% and 4.7%. The Hang Seng TECH Index slid by 2.4%. Notably, Meituan is set to launch food delivery services in Hong Kong on Monday and will report its Q1 results on Thursday.
However, brewers defied the market downturn. Tsingtao (00168:xhkg) advanced by 2.3%, followed by Budweiser (01876:xhkg) at 2% and China Resources Beer (00291:xhkg) at 1.5%. In another sector, airlines experienced gains due to broker upgrades, with China Eastern (00670:xhkg) up by 2%, Air China (00753:xhkg) up by 1.9%, and China Southern (01055:xhkg) gaining 1.4%.
The CSI300 Index slightly edged down by 0.3%. However, losses were mitigated by the strength observed in the semiconductor, household appliance, pharmaceutical, and food and beverage sectors, which offset the weakness seen in the media and financial industries.
Friday saw the debt ceiling risks back on the horizon as talks broke down (read below) while Fed Chair Powell’s remarks also re-confirmed a June rate pause after Fed speakers like Logan and Bullard last week raised the prospect of a hike. This saw JPY making a strong recovery, with USDJPY down from 138.60 to 137.40. EURUSD has avoided a test of support at 1.0745 for now, and returned back above 1.08 while GBPUSD may be looking back at 1.25 if UK CPI this week is hot. NZD was the strongest currency last week, and is now testing 0.63 handle ahead of RBNZ meeting this week.
Crude oil prices were choppy last week with China economic data missing expectations, along with still firm US economic data reducing the expectations of rate cuts this year. But Powell’s comments on Friday re-confirmed a June rate pause. Still, crude oil selling in the paper market extended to a fourth week. WTI and Brent long was cut by 17.6k to 267k and near the post-banking and pre-OPEC+ cut low at 241k lots. WTI prices rose above $73 on Friday before collapsing to $71, while Brent surged to $77.50 before falling to $75.
Gold prices (XAUUSD) broke the key $1980 support last week and dropped to $1950 as rate hike signals from the Fed members returned. Some signals of debt ceiling talks progressing well also reduced the save haven appeal of the yellow metal, but both these factors saw a turnaround on Friday when debt ceiling talks stumbled and Powell re-confirmed a June rate pause. Gold prices jumped back higher to support-turned resistance at $1980 with 200DMA just above at $1990.
Debt ceiling talks between Democrats and Republicans broke down on Friday while President Biden was in Japan for the G7 leaders' summit. US House Speaker Republican Kevin McCarthy said he is not seeing progress while the President is away, and the White House “moved backwards”. Statement from Democrats also hinted that “negotiations are going in the wrong direction” and “Republicans’ demands keep going further to the right." With risks of default back, Treasury Secretary Yellen warned once again that June 1 is the “hard deadline” when the US can pay its bills and that the chance of reaching June 15 (when further tax receipt income is due) quite low before the government runs out of money. As both sides try to get the most out of this deal, there is a lingering risk that talks will likely keep getting extended until the last minute, and risks of a liquidity crunch following a deal are also massive suggesting the need for downside protection.
After some comments from Fed officials last week saw June rate hike pricing climb higher to ~40%, Fed Chair Powell’s comments on Friday brought it back to close to 10%. Powell started the discussion saying inflation is far above its target, and the Fed is strongly committed to returning it to the 2% goal. However, he noted subsequently that policy rate may not have to rise as far as otherwise due to the tightened bank credit conditions. He noted we can afford to look at data and the ongoing outlook, adding the risks of doing too much vs doing too little are becoming more balanced. Minneapolis President Neel Kashkari was also heard late on Sunday, saying that he is open to a June FOMC rate hike pause, but not convinced that the Fed is done yet.
The G7 has issued its strongest condemnation of China as the world’s most advanced economies stepped up their response to what they called rising military and economic security threats posed by Beijing. The G7 members said they were “seriously concerned” about events in the East and South China Seas, and also called for a “peaceful solution” to tensions across the Taiwan Strait. However, the unannounced in-person appearance by Zelenskiy stole the show as he attempted to garner support for his 10-point plan to end the war, as well as using the opportunity to lobby non-G7 attendees like India and Brazil. Zelenskiy said Ukraine will receive F-16 fighters from G-7 allies, but proposed a peace summit to begin in July marking 500 days of full-scale war.
As USDCNH hit as high as 7.0750, a level not seen since early December last year, the China Foreign Exchange Committee (CFXC), an entity sponsored by the People’s Bank of China (PBOC) and the State Administration of Foreign Exchange (SAFE) convened its first meeting in 2023. In the readout of the meeting, CFXC emphasized the importance of market participants adhering to self-discipline in order to maintain stability in the foreign exchange market and curb excessive volatility in the renminbi's value against other currencies. Furthermore, it pledged that the PBOC and SAFE would reinforce their oversight and guidance of market expectations and intervene as deemed necessary.
China's cyberspace regulator banned products made by U.S. memory chip manufacturer Micron Technology from use in key infrastructure. The chip ban could cover sectors ranging from transport to finance. The statement said that Micron products had failed its network security review, and claimed that they presented "relatively serious" security risks and told its companies to stop buying them. The US semiconductor maker said it cooperated with the probe and stands by its products' safety. Washington has blacklisted Chinese tech firms.
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Head of Fixed Income Strategy
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