What’s happening in markets?
US equities (US500.I and USNAS100.I): Gains broadening beyond tech
Equities continued their advance, with the S&P 500, the Nasdaq 100, and Russell 2000 making new highs. Both the S&P 500 and Nasdaq climbed 1.2%, closing at 4,425 and 15,185 respectively. Russell 2000 added 0.8% to 1,889. A Fed pause and robust economic data, such as an increase of 0.3% in retail, contrary to an expected decline on Thursday, reinforced the notion of a soft-landing scenario for the U.S. economy. In addition, expectations of stimulus measures in China boosted commodities-related stocks. The surge in the equity market was broad-based. All 11 sectors of the S&P 500 rose, with seven of them gaining over 1%. Microsoft (MSFT:xnas), Meta (META:xnas), and Oracle (ORCL:xnas) each gained more than 3%. Adobe (ADBE:xnas) rose by over 3% in extended trading after reporting an earnings beat and upbeat outlooks due to strong AI-related demand.
Treasuries (TLT:xnas, IEF:xnas, SHY:xnas): Yields plummet as initial jobless claims stay high
U.S. Treasuries rallying, causing yields to plummet, in response to the latest data on initial jobless claims. Contrary to consensus forecasts of a decline, the claims remained at their highest level since October 2021, reaching 262K. A large block purchase in the 5-year futures added to the bids for Treasuries, in particular to the belly of the curve. The 5-year notes outperformed, seeing yields falling 8bps to 3.91%. The 2-year yield declined 5bps to 4.64% and the 10-year yield fell 7bps to 3.72%.
Treasury released April foreign holders of U.S. Treasury securities data, China’s holdings of Treasuries remained steady at USD869 billion while Japan’s holdings rose USD39.3 billion to USD1,127 billion. Treasury announced auctions of USD12 billion 20-year bonds and USD19 billion of 5-year TIPS next week.
Hong Kong & Chinese equities (HK50.I & 02846:xhkg): China's stimulus measures drive surge in Hang Seng and CSI300 Indexes, boosting consumer and EV stocks
The Hang Seng Index surged 2.2% while the CSI300 Index gained 1.6% in response to China's central bank's decision to cut the key policy rate, the 1-year Medium-term Lending Facility Rate (MLF rate), by 10bps to 2.65%. This move, although widely expected, reaffirmed investors' belief that China is intensifying its efforts to stimulate the economy, with more policies expected in the future. Moreover, the May activity data released on Thursday was weaker than anticipated, further increasing expectations of a broader stimulus package and making a supportive impact on the market.
In the Hong Kong bourse, investors focused on consumer stocks, China property, EV, and e-commerce stocks, as they anticipate measures to stimulate domestic consumption and the property sector. Among textile and sportswear companies, Shenzhou (02313:xhkg) experienced a remarkable surge of 11.4%, followed by Li Ning (02331:xhkg) with an 8.9% increase, and Anta (02020:xhkg) with a 7.5% gain. Meituan (03690:xhkg) led the e-commerce stocks with a surge of 7.8%, followed by JD.COM (09618:xhkg) with 5.2%, and Alibaba (09988:xhkg) with 4.5%. The EV sector also saw positive movement, with XPeng (09868:xhkg), Li Auto (02015:xhkg), and BYD (01211:xhkg) each gaining around 4%.
Another factor boosting market sentiment is the visit of Secretary Blinken to China and a senior Treasury official's visit to Hong Kong. These visits indicate efforts from both the US and Chinese governments to foster communication. A State Department official informed reporters that there would be a series of visits between the US and China in both directions, further signaling an attempt to manage the tension between the US and China.
In A-shares, CATL experienced a significant surge of 8.2%, leading the advance in the new energy space, particularly in lithium, solar, and energy storage. Optimism surrounding increased consumption-related policies also contributed to gains in the automotive, household appliances, food, and beverage sectors. Additionally, stock brokerage names saw positive movement as optimism gradually returned to the stock market.
FX: Dollar slumped, yen weakness to pressure BOJ
The US dollar tumbled overnight on Thursday, with the decline initially sparked off by a hawkish ECB pushing EUR higher but later extended on retail sales and jobless claims exceeding expectations and further reducing conviction around another two rate hikes to come from the Fed as the Dot Plot showed. EURUSD, as expected, found a clear direction away from 1.08 to rise to 1.0950. Strong gains in AUDUSD also continued, now getting in close sight of 0.69, with China stimulus hopes continuing to gain traction after disappointing data yesterday. USDJPY touched fresh highs of 141.50 but retreated to 140-handle as the USD declined. But other JPY pairs continued to see upside such as AUDJPY at 96.50 (highest since Sept 2022) and EURJPY at 153.50 (highest since 2008).
Crude oil: sentiment in check on weaker dollar and China stimulus hopes
The US retail sales and jobless claims data continued to question the need for two additional rate hikes from the Fed, supporting the demand outlook. Meanwhile, while overall Chinese activity data was disappointing, Chinese crude throughput in May jumped 15.4% YoY reaching 62 million tonnes. Stimulus hopes also continue to support sentiment and oil prices climbed by over 3% yesterday, with WTI back above $70/barrel and Brent above $75.
What to consider?
US retail sales and jobless claims come in above expectations
Headline retail sales rose 0.3% in May, against expectations for a 0.1% fall, and a nudge lower from the 0.4% increase in April. Still, data was mixed as the GDP input, retail control, rose 0.2%, as expected but down from the upwardly revised 0.7% in April. Meanwhile, jobless claims remained at the recent peaks of 262k, against the street looking for a paring back down to 249k, confirming that the Memorial Day spike was not an irregularity. This will raise concerns about the loosening of the labor market and markets will continue to question the Fed’s forecast of terminal Fed rate at 5.6%.
ECB’s hawkish message
As expected, the ECB delivered another 25bps hike to the Deposit Rate, taking it to 22-year highs of 3.5%. The decision to raise rates was once again premised on the judgement that inflation "is projected to remain too high for too long". Both headline and core inflation forecasts were upgraded through 2025, with core CPI for 2025 also seen above target at 2.3%. Lagarde also gave her strongest warning yet about wage rises and companies pushing up prices. Growth downgrades, meanwhile, were more modest. Lagarde also made it clear that a July hike is on the cards, although September can be a tough debate.
PBoC cuts MLF rate by 10bps, leading to anticipation of a decrease in loan prime rates
The People's Bank of China (PBoC) has announced a 10bp reduction in the 1-year Medium-term Lending Facility Rate (MLF rate), bringing it down to 2.65%. The MLF rate holds significant importance as a key policy rate within the monetary tools. Following this rate cut, it is anticipated that Chinese banks will lower the Loan Prime Rates (LPR) when they are reset next week. Market consensus suggests that the LPR, to be announced on June 20, is likely to follow suit and decrease in line with the MLF rate.
Under the current interest rate framework in China, the central bank adjusts the MLF rate as a guide, while commercial banks formulate their LPR quotes by adding a spread to the MLF rate. This ultimately reflects in the actual lending rates offered by commercial banks, creating a complete chain of interest rate transmission. The MLF and LPR have typically been adjusted concurrently. In order to boost demand for housing, it is probable that the 5-year LPR, which mortgage loans are indexed to, may see a more significant downward adjustment, possibly by 15bps while the 1-year LPR quote may decrease by 5bps.
China’s retail sales, industrial production, and fixed asset investment slow youth unemployment hits new high
Retail sales growth in China experienced a slowdown in May, expanding by 12.7% Y/Y compared to 18.4% in April, falling short of the expected 13.7%. The growth in auto sales also moderated to 24.2% Y/Y in May from 38% in April. Excluding auto sales, retail sales growth further declined to 11.5% Y/Y in May from 16.5% in April. The rebound in catering services, following the reopening, also softened to 35.1% Y/Y from 43.8%.
Industrial production growth in China also had a decline, with a Y/Y increase of 3.5% in May compared to 5.6% in April. Manufacturing production slowed to 4.1% Y/Y from 6.5%, while the mining sector declined 1.2% Y/Y compared to flat growth previously. Despite a 17.3% Y/Y increase in auto output, there were declines of 7.3% Y/Y and 1.3% Y/Y in crude steel output and steel product output, respectively. The decrease in steel output reflects the sluggishness in the property market. Additionally, cement production fell by 0.4% Y/Y.
Fixed asset investment growth decelerated to 2.2% Y/Y in May from 3.9% Y/Y in April, primarily impacted by slowdowns in both the manufacturing and property sectors. However, infrastructure investment growth rose to 8.8% Y/Y from 7.9% Y/Y. Notably, the weakness was particularly prominent in the property sector, as property investment declined by 10.2% Y/Y in May, worsening from a 7.2% decline in April. New home sales growth, in terms of floor space, experienced a decline of 2.7% Y/Y in May, following a 4.6% Y/Y increase in April.
The youth unemployment rate (16-24 years old) in China increased to a new high of 20.8% in May, up from 20.4% in April. These discouraging figures amplify the likelihood of additional stimulus measures from Chinese authorities to address the economic challenges.
Urgency rising for Bank of Japan to signal willingness to make policy shift
The bottom is dropping out of the Japanese yen ahead of Friday’s Bank of Japan meeting, in part as a number of central banks have adjusted their policy expectations higher recently and yields at the long end of the US yield curve are perched near the highs since the March US banking turmoil pushed them lower. At his first meeting as Bank of Japan Governor back in April, Kazuo Ueda stated that the bank would take up to eighteen months to conduct a policy review (likely wanting to incorporate one more year of wage talks next March to see if inflation will prove sustained before moving with any notable tightening). But with the most recent collapse in the Japanese yen, the market could yet force the BoJ’s hand and require that the bank make at least a few tweaks to indicate it won’t allow the JPY to absorb intensifying pressure. The market is pricing the BoJ to deliver perhaps a hike of the policy rate from –0.10% to 0.0% through its December meeting.
U.S.-China diplomatic engagement intensifies as Secretary Blinken embarks on visit
Kurt Campbell, Deputy Assistant to the President and Coordinator for the Indo-Pacific said the U.S. “will seek to manage the competition and work together where our interests align from a position of confidence in ourselves and in the importance of consistent, clear, and high-level communication with other great powers. Secretary Blinken’s trip [to China] will advance this approach, and we expect a series of visits in both directions [between the U.S. and China] in the period ahead.” U.S. Secretary of State Antony Blinken is flying to China this weekend for an official visit.
Adobe raises revenue and earnings outlook on AI demand
Adobe reported a 10% increase in fiscal Q2 sales to USD4.82 billion, beating USD4.77 billion forecasted by analysts. The EPS of USD3.91 also surpassed the consensus estimate of USD3.79. The software giant raised its revenue guidance for the full fiscal year, ending November 2023, to USD19.3 billion from USD19.2 billion previously indicated. The company also revised up the full-year adjusted EPS projection to USD15.75 from USD15.5. The management gave an upbeat outlook for the company’s sales as they saw strong demand for its software from the surge in generative AI.
Triple-witching in US stocks
Friday is triple witching day in US stocks. Stock options, index futures, and index futures options derivatives contracts simultaneously expire. Witching occurs 4 times a year, on the third Friday of March, June, September, and December. Trading volumes tend to surge on these days, as does volatility, particularly in the final hour or so leading into the close.
U.S. authorities probe Goldman's role in Silicon Valley Bank
The Federal Reserve and the Securities and Exchange Commission (SEC) are currently examining Goldman Sachs' involvement as an advisor to Silicon Valley Bank for its capital raising efforts and as a purchaser of the failing regional lender's securities portfolio in the days leading up to its closure. Additionally, the U.S. Justice Department has issued a subpoena to the investment bank as part of its investigation into Silicon Valley Bank.
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