Summary: The US debt ceiling showdown simply refuses to go away as a factor in the current market environment, with the latest talks collapsing on Friday as President Biden was at the G7 summit in Japan and overshadowed the notable developments there. Still, markets are taking the news in stride as US equities continue to trade near the top of the range and USDJPY merely suffered a significant wobble. Looking ahead, headlines from the US debt ceiling drama will dominate until a solution is found.
The US debt ceiling is lurking in the background as US equities retreated on Friday with S&P 500 futures declining but closing above the 4,200 level. Equity sentiment has started on a good note in Asia Monday morning with Japanese rallying again to a new high extending this year’s gains to 14.9%. This week’s key focus is on the US debt ceiling deal and earnings from Nvidia, Snowflake, and Costco. On Thursday, we will get another data point on the Chicago Fed National Activity Index which will provide insights into the broader US economy as of end of April. Technically, the focus this week is whether S&P 500 futures can close the week above the 4,200 level and solidify its momentum.
Hong Kong equities, ensnared within a confined trading range, exhibited resilience as they mounted a rally from the lower echelons of said range. Driving this resurgence were China Internet companies and EV stocks. Demonstrating their mettle, the Hang Seng Index surged by 1.6%, while the Hang Seng TECH Index experienced a commendable ascent of 2.6%. In anticipation of imminent earnings announcements, Kuaishou (01024:xhkg), a prominent social platform, witnessed an impressive surge of over 7%. Further uplifting the market, notable gains were observed in Alibaba Health (00241:xhkg), Baidu (09888:xhkg), Bilibili (09626:xhkg), and JS.COM (09618:xhkd), all of which recorded gains surpassing 3%. Within the EV sector, NIO (09866:xhkg) led the pack, experiencing a noteworthy surge of 5.7%. Meanwhile, the CSI300 Index relinquished some of its early advances and was nearly flat from previous Friday's closing level.
Friday saw the debt ceiling risks back on the front burner 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 before finding support. EURUSD has avoided a test of support at 1.0745 for now, and returned back above 1.08 while GBPUSD trades back near 1.2450 ahead of the UK CPI data this Wednesday. NZD was the strongest currency last week, and is now testing 0.63 handle ahead of the RBNZ meeting this Wednesday, while AUDNZD broke below the 1.0600 support area, trading to its lowest level since December after an RBNZ survey showed year-ahead inflation expectations rise to 7.4% from 7.0% in Q1.
Crude oil trades lower for a third day following choppy trading week with China’s lacklustre recovery the focus after economic data missed expectations. Also, in focus the US debt debacle along with still firm US economic data reducing the expectations of rate cuts this year despite Powell’s comments on Friday re-confirmed a June rate pause. Hedge fund selling in the paper (futures) market extended to a fourth week. In the week to May 16, the WTI and Brent long was cut by 17.6k to 267k and near the post-banking and pre-OPEC+ cut low at 241k lots. Overall, WTI and Brent both trades within four-dollar ranges, with current resistance at $73.50 and $77.50 respectively.
Gold prices (XAUUSD) traded lower last week as the dollar and bond yields rose and the market reduced rate cut expectations for this year. The metal however manged to bounce from key support in the $1950 area on Friday after Powell re-confirmed a June rate pause. Continued focus this week on the dollar, debt ceiling discussions and economic data for signs of strength that may further reduce rate cut expectations, reduced to less than two (25bps cuts) by December from more than 3 at the beginning of the month. Hedge funds responded to gold’s drop below $2k in the week to May 16 by cutting their net long by 10% to a still elevated 131.8k lots while silver had its net long cut in half to 13.4k. To regain some positive momentum gold would need to break back above its 21-DMA currently at $2003.
US bond yields broke above key resistance levels across the yield curve as markets ended last week pricing 40% chance that the Fed will hike the fed fund rate in June. While bets on a June rate hike regressed to 10% this morning, this week’s numerous Fed’s member speakers, the Fed’s minutes on Wednesday and PCE Index on Friday might impact investors’ sentiment heavily, setting interest rate’s direction. Two-year yields (2YYK3) close above resistance at 4.22% and they might soar to test new resistance 4.30% if they break above this level, they will not find resistance until 4.50%. Ten-year yields broke above resistance at 3.64% and are not on their way to test 3.75%. If they break above this level, they might soar till 3.91%. Thirty-year yields broke above their resistance at 3.87% they are now rising to test resistance at 4%, if they break above this level, they might rise to 4.4%.
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”. Statements 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 chances of reaching June 15 (when further tax receipt income is due) are 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 extend until the last minute, and risks of a liquidity crunch following a deal (due to the huge new issuance needs for the US Treasury) are also massive suggesting the need for downside protection.
After a cyber-security review, China’s Cyberspace Administration of China ordered that Chinese companies dealing with critical information stop buying chips from US-based Micron Technology. The review said that Micron’s chips posed “relatively serious cybersecurity problems” that could “seriously danger the supply chain of China’s critical information infrastructure.” The move was widely viewed as a retaliation against recent US limitations on exporting high-end chips and chip-manufacturing equipment to China. A US Commerce Department spokesperson said the move has “no basis in fact”. Mainland China and Hong Kong revenue exposure is around 15% of total revenue for Micron Technology.
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.
G7 meetings focused on Ukraine and China’s “economic coercion”
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 last Friday, 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 on Friday. 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. Subsequent to the release of the meeting's summary, USDCNH relinquished some gains, concluding the week at 7.0230, only to ascend once again and reach 7.0370 on Monday.
Chicago corn and wheat futures both dropped around 5% last week, with corn hitting an October 2021 low, while wheat touched an April 2021 low below $6 per bushel. Driven by expectations of ample global supplies after a deal to ship Ukraine grains was extended for another two months last week. Poor export demand amid fierce competition from South American exporters of corn and Black Sea exports of wheat both weighing on prices. Focus on the pace of US planting currently underway as well as potential poor harvest prospects in US Plains supporting the price of Kansas hard red winter wheat.
Deere reported Q2 fiscal quarter EPS of $9.65 up from $6.81 a year ago lifting its FY outlook on net income to $9.25-9.50bn from previously $8.75-9.25bn driven by robust demand for the rest of the year.
Republican House Speaker McCarthy is set to meet with President Biden today after talks between representatives of both sides ended in failure on Friday. McCarthy accused the other side of change in positions after left-leaning Bernie Sanders held a press conference and Biden accused McCarthy of being unreasonable and inflexible. If US Treasury Secretary Yellen is correct, crunch time comes as soon as June 1, and an added pressure is the upcoming Memorial Day weekend and its Monday holiday, with Congress back in session on Tuesday, May 30 after the Senate is out this week and the House in session only through this Thursday.
El Niño is on its way, and when the warm weather pattern arrives, it could take a $3 trillion toll on the global economy, according to new research via The Verge. That estimate is based on damages inflicted by El Niño in previous years, plus forecasts pointing to a potentially supercharged event this year. El Niño influences weather across the world when it forms — potentially fueling more severe floods in places while worsening drought in others. Within the US, for example, it can trigger a wetter winter in the southern half of the country but more hot and dry weather farther north. Earlier this week, a warning came from the World Meteorological Organization that this year’s El Niño, combined with climate change, could “push global temperatures into uncharted territory.” A crippling heat wave continues across Asia, driving up prices of sugar, coffee and rice while raising demand for Russian produced coal, gas and fuel oil towards power generation according to a Bloomberg article.
The earnings calendar is getting thinner these days but looking ahead this week there are still some important earnings to watch such as earnings from Nvidia and Snowflake on Wednesday with the former obviously interesting because of the huge interest in AI technology. Snowflake is a good barometer of corporate spending patterns with revenue growth expected to decline to 44% y/y from 85% y/y a year ago. Finally, we are going to watch earnings from Costco on Thursday with analysts expecting 4% y/y revenue growth, but more importantly analysts are expecting it to climb to 8% y/y in the current fiscal quarter ending in August.
1230 – US Fed’s Bullard (non-voter) to speak
0030 – Japan Flash May Manufacturing and Services PMI
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