What’s happening in markets?
US equities (US500.I and USNAS100.I): tech gains unwind
The benchmark US equity indices ended the day in red with NASDAQ 100 leading losses, down 1.4% and S&P 500 down 0.5%. Fed Chair Powell added little new information in his comments at the House, still making a case for another two rate hikes. But other Fed members were leaning dovish. Tech sentiment was however relatively weaker, led by Tesla which slid 5% after a downgrade from Barclays. Microsoft and Nvidia also dragged. Oil prices however underpinned a recovery in energy stocks while crypto stocks like Coinbase and Microstrategy rallied after bitcoin surged above 30k.
Treasuries (TLT:xnas, IEF:xnas, SHY:xnas): hot UK CPI causes jitters
Treasuries were flat after initial losses post-hot UK CPI and higher oil prices were unwound after Fed member Bostic called for pause and a solid 20yr auction. Treasury 2-year yields ended 3bps higher while 10yr yield was nearly unchanged.
Hong Kong & Chinese equities (HK50.I & 02846:xhkg): markets tumble; NEV names surge on tax break extension
Hang Seng Index tumbled by 2%, extending its loss to 4.1% over three consecutive days, as investors grew frustrated with China's gradual economic stimulus measures ahead of a public holiday in Hong Kong and mainland China. Chinese Internet, solar, and sportswear stocks were among the hardest hit. However, new energy vehicle (NEV) makers defied the downward trend following China's extension of tax breaks for NEV purchases until 2027, coupled with positive headlines. Nio saw a 4% surge after Abu Dhabi acquired a 7% stake in the company, while XPeng gained 2.2% with its plan to introduce right-hand drive cars for the Hong Kong market. Meanwhile, mainland bourses saw the CSI300 decline by 1.5%, primarily due to semiconductor, telecommunication, media, and computing stocks, while the auto supply chain sector and electricity utilities registered gains.
FX: GBP in a wild ride as the setup for BOE gets complex with hot UK CPI
The dollar was sold-off in the US session overnight despite Powell sticking to the script and making a case for two more rate hikes. However other Fed members sounded relatively dovish, and pricing for July rate actually came down. GBPUSD took a look below 1.27 before rising back towards 1.28 later as markets remain in doubt whether BOE can address the inflation concerns. EURGBP surged to 0.86 from 0.8525 as EURUSD surged back towards 1.10 with ECB officials reiterating that the battle against inflation is not won. USDJPY remains locked in range with Japan’s May CPI due tomorrow.
Crude oil: recover as demand situation remained stable
Crude oil prices rose over 1.5% overnight, with WTI prices back above $72/barrel and Brent above $77. While Fed Chair Powell reiterated the case for two more rate hikes, other Fed members last night sounded dovish relieving demand concerns. Expectations for further measures from China on policy easing also continue to underpin expectations for demand recovery. Meanwhile, API inventory data showed that US stockpiles dropped by more than 1 million barrels last week and official data will be eyed today along with another round of commentary from Chair Powell. A host of more central bank action may also be key for oil traders.
What to consider?
Powell sticks to the script, other Fed members lean dovish
Fed Chair Powell started two days of Congress testimony yesterday. For now, Powell didn’t offer much different from what we have heard in the past. He said the Fed will raise rates twice more this year, calling that "a pretty good guess" although he agreed that officials can now move at a more moderate pace to bring down inflation. Fed Chair Powell said the economy is very strong with a very strong labour market driving the economy and that inflation is moving down gradually. Other Fed speakers were somewhat dovish. Goolsbee (voter) and Bostic (2024 voter) both highlighted a preference to wait and watch due to the lags of monetary policy.
UK CPI shock piles pressure on BOE, decision due today
UK May inflation came in dramatically higher than expected. Headline inflation remained unchanged at 8.7% YoY in May vs. 8.4% expected, and because the contribution from energy and food reduced, that means core inflation actually rose to 7.1% YoY from 6.8% previously. Markets are now split between expecting a 25bps and 50bps rate hikes at the meeting today and a terminal rate of 6% is fully priced in. Governor Bailey has shown a reluctance at every turn to turn fully hawkish, but this data is so stark, requiring a strong response, that we have to expect that the BoE does what it can to claw back as much credibility as it can. Finger pointing and a small hike, or doubts that BOE could deliver, could prove devastating for sterling.
China extends NEV tax breaks through 2027
China extended the tax exemption on new energy vehicle (NEV) purchases until December 2027, surpassing the original deadline of the end of 2023. The purchase tax break in 2024 and 2025 will provide potential savings of up to RMB30,000 per vehicle. This benefit will be halved to RMB15,000 in 2026 and 2027. The move will result in an estimated total tax benefit of RMB520 billion for Chinese consumers.
Turkey’s central bank expected to announce a jumbo rate hike
The Turkish central bank is expected to normalize its policy rate to something close to actual prevailing rates in the country, so the official policy rate will be bumped from 8.50% to 20% or higher in a pivot away from its loose stance. But that will still keep the benchmark nearly 20% below zero when adjusted for inflation of 40%. That will be an interesting test for TRY after a step-wise like revaluation post-election. The language on price stability is also expected to be firm. Other policy measures should also be pro-lira, but it is likely to be a wild ride.
More central banks on the agenda – SNB, Norges Bank
Hawkish rhetoric this week will also be supported by 25bps rate hikes expected for the Swiss National Bank and Norges Bank – with announcements from both due today – and there is scope for both to go 50bps as well. SNB Chairman Jordan, speaking after May’s CPI, said that inflation is more persistent than thought and both second- and third-round effects are being seen, cementing the case for another rate hike. Likewise, the resurgence in Norway’s May CPI has raised scope for a 50bps surprise as well from the Norges Bank.
Japan’s May CPI may leave little scope to expect BOJ tightening
Bank of Japan doesn’t fail to give a dovish surprise meeting-after-meeting, and focus has now turned to the July meeting which will include the updated outlook. But ahead of that, inflation and wage data will be key to assess as Governor Ueda has set those to be the key targets for the central bank to consider retreating its easy policies. May CPI is due on June 23, and the headline is expected to soften to 3.2% YoY from 3.5% previously amid retreating cost-push factors, while core is still likely to stay firm and come in at 4.2% YoY from 4.1% previously. The Tokyo inflation data for May, which provides a leading indicator for national price trends, showed that headline and core inflation eased to 3.2% from 3.5%, and softer than the respective 3.9% and 3.3% estimates to suggest inflation was stabilizing, although ex-fresh food & energy CPI continued to accelerate, to 3.9% from 3.8%, as expected.
Bitcoin breaks 30k amid ETF excitement
Bitcoin surged above $30,000 a more than one-year high on growing hopes on the prospect of a spot bitcoin exchange-traded funds, or ETF. Balckrock, Invesco and WisdomTree have made new filings for a spot bitcoin ETF, which is expected to renew demand from institutional investors.
AI focus: Accenture earnings to bring a test of corporate AI integration
Accenture’s (ACN:xnys) fiscal third quarter earnings is due before market opens today. The stock has gained about 20% YTD amid the AI impact expectations as well as cost-cutting efforts that include a plan to lay off 19,000 employees. Last week, the company announced a massive $3bn in artificial intelligence over the next three years. These plans may be elaborated further in the earnings call and could boost sentiment, further adding fuel to the recent AI wave in the market. The company is expected to deliver adjusted EPS of $2.99 on revenue of $16.49bn from fiscal Q2 EPS of $2.69 on a revenue of $15.81bn.
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