What’s happening in markets?
US equities (US500.I and USNAS100.I): stocks slide as profit-taking and rebalancing drive market decline
Last Friday, there was a decline in the S&P 500 Index by 0.8%, while the Nasdaq 100 Index had a 1% drop. This weakness was across all 11 sectors of the S&P 500, with utilities, consumer discretionary, and information technology leading the decline. In the semiconductor sector, profit-taking became apparent, resulting in a 1.9% drop for Nvidia (NVDA:xnas) and a 1.8% loss for the Philadelphia Semiconductor Index. On the other hand, CarMax (KMX:xnys) saw a significant increase of 10% after surpassing Q1 EPS estimates.
Additionally, some of the day's activities were linked to the constituent changes of Russell indices, which took effect after the close of trading on Friday. Another notable aspect was the selling associated with pension fund month-end and quarter-end rebalancing, which garnered attention among traders.
Treasuries (TLT:xnas, IEF:xnas, SHY:xnas): yields fall, following declines in European yields on soft German and French PMIs
US Treasuries rallied (yields fell) during European hours following the sharp drop in German bund yields after soft German and French PMI data. A late sell-off in U.S. equities helped sustain gains in Treasuries. Fed officials, both non-voters, sent mixed messages as Bostic preferred holding rates at the current level for longer while Daly said two more hikes were reasonable. Meanwhile, Treasury Secretary Yellen said the recession risk was diminishing. The 2-year yield fell 2bps to 4.74% while the 10-year yield shed 6bps to 3.73%.
Hong Kong & Chinese equities (HK50.I & 02846:xhkg): Hang Seng Index extended losses as stimulus hopes fade
Last Friday, the Hong Kong equity market resumed trading after a public holiday, while mainland bourses remained closed. However, the Hang Seng Index suffered a sharp decline of 1.7%, extending its downward streak to 5.7% across four consecutive trading days. Investors, losing faith in the prospects of aggressive stimulus measures, opted to liquidate their positions into a thin session. In the absence of Southbound flows as the mainland was on holiday, the trading volume was the second lowest in 2023. Adding to market concerns, the offshore yuan weakened to 7.2286 at one point, reaching its lowest level since November last year.
This downward trend in sentiment was particularly evident in sectors such as healthcare, property developers, consumers, new electric vehicles, and Internet names, which experienced significant losses. Sino Biopharmaceutical (01177:xhkg), plunging 7.2%, was the worst-performing stock within the Hang Seng Index, followed by China Resources Land (01109:xhkg). Hang Seng Tech Index shed 2.1%, driven by EV stocks and digital health names.
FX: NOK and GBP fail to get support from larger-than-expected rate hikes
The US dollar was bid up on Friday amid global growth concerns as flash PMIs signalled growth worries. EURNOK rose back above 11.85 after a dip to sub-11.55 following the surprise larger rate hike from Norges Bank. GBPUSD also had no upside from the larger-than-expected rate hike last week and traded just around 1.2730 at the start of the new week. USDJPY dipped below 143.50 from Friday’s highs of 143.87 amid verbal intervention and risk aversion spurred by Russian setup over the weekend. AUDUSD was the heaviest last week as China stimulus underwhelmed, and has now dipped below 0.67.
Crude oil: bouncing higher on Russia risks
Oil prices continued to slide on Friday as growth concerns escalated following dismal flash PMI numbers. Hawkish surprises also returned with larger-than-expected rate hikes from some central banks, and overall decline of ~3% was seen in oil prices over the week. Meanwhile, lower investor appetite for commodities was also impacted by a stronger USD. This comes amid stronger than expected supply. However, weekend events in Russia (read below) brought supply concerns back on the radar and oil prices reversed higher at the Asian open. WTI prices jumped to $70/barrel from lows of ~67.50 while Brent got back close to $75 from $72/barrel.
Gold: erases Friday’s spike but upside bias returned on safe-haven demand
Gold rallied on Friday as the weak economic backdrop came back in focus on disappointing flash PMI numbers. Earlier in the week, prospects of further rate hikes brought high real yields back in focus, but the sharp gains on Friday were quickly reversed. Weekend reports of Russia coup however have brought safe haven demand back in focus, and Gold was seen heading back to support-turned-resistance at $1930.
What to consider?
Russian mutiny could bring risk aversion in focus
A civil war has broken out in Russia with Wagner Group leader Yevgeny Prigozhin leading a convoy towards Moscow and loyal parts of the Russian military attacking it. The Russian Federal Security Service (FSB) also released a statement saying not to obey “Criminal and Dangerous Orders by Yevgeny Prigozhin and to assist the Russian Armed Forces and FSB in apprehending him alongside other Wagner Commanders.” Later it was reported that Prigozhin gave the order to return convoys headed to Moscow back to their bases in order to avoid bloodshed. It was also reported that Prigozhin will leave for Belarus in a deal that was brokered by Belarusian President Alexander Lukashenko. He agreed to leave the country in exchange for charges being dropped. While this may mean that the situation has been deescalated for now, it will be hard for status quo to return.
Japan intervention risks come early on Monday
Japan's Finance Ministry's Vice Finance Minister for International Affairs Kanda was on the wires in early Asian hours on Monday with verbal intervention to support the yen. He is Japan’s top currency diplomat and commented that they will respond to FX moves if it becomes excessive and will not rule out any options. This comes as USDJPY rose above 143.50 in Friday’s US session, but the impact of verbal intervention was so far limited in early trading.
BOJ’s summary of opinions for the June meeting were also released, and these argued that it was appropriate to maintain current monetary easing, although noting that there is strong chance consumer inflation will moderate, but won't slow back below 2%, toward middle of current fiscal year. This will continue to fuel expectations of a policy tweak.
Flash PMIs signal slowdown risks starker for Eurozone than the US
US Flash Manufacturing PMI for June fell to a 6-month low of 46.3 from 48.4, coming in below the expected 48.5. Composite PMI dropped to 53.0 (prev. 54.3) but remained in expansionary territory, while services PMI dipped to 54.1 (prev. 54.9), albeit above the consensus of 54.0. While the pace of growth may be slowing, but US companies were still signaling further expansion of business activity, and the situation appeared more dire in the Eurozone. The euro-area manufacturing PMI slid to a fresh low of 43.6 from 44.8 in May, while the pain was also seen expanding to services where PMI came in at 52.4 from 55.1. Composite PMI fell from 52.8 in May to 50.3 in June, staying just above the 50-mark.
The divide between Fed members is widening
Fed member Mary Daly (non-voter) noted that two more rate hikes this year is a very reasonable projection, but it is only a projection and we do not know for sure - implying she is in-line with the median Fed dot plot in 2023. Raphael Bostic (non-voter) was however on the other end of the spectrum, saying that he does not see any more rate hikes this year.
China’s tourist trips and tourism revenues jumped during the public holiday last week
During the 2-day public holiday last week, China registered 106 million domestic tourist trips, marking a remarkable 32.3% Y/Y increase and reaching 112.8% of the same holiday period in 2019. Domestic tourism revenue was estimated to reach RMB37.2 billion during the holiday, representing a 44.5% increase Y/Y and a recovery to 94.9% of the corresponding period in 2019.
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