Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
Summary: Nvidia's shares skyrocketed by 24.4%, propelling its market cap by over $180 billion and inching closer to $1 trillion. The surge was driven by stellar Q2 guidance, boosting the S&P 500 by 0.9%, with Nvidia accounting for 60% of the gain. The iShares Semiconductor ETF jumped 6.7%, and the Nasdaq 100 soared 2.5% on the bullish sentiment. Treasuries sold off, and the dollar index rose amid a shift in Fed expectations. Crude oil dropped as OPEC unlikely to cut production, while gold fell to 2-month lows due to strong US data and progress in debt ceiling talks. The Hang Seng Index plunged below previous lows and erased all the gains it had accumulated in 2023.
Nvidia (NVDA:xnas) stole the spotlight as its shares skyrocketed by 24.4%, propelling its market capitalization by over $180 billion and inching closer to the coveted $1 trillion mark. The remarkable surge came on the back of a stellar Q2 guidance that exceeded all expectations. For an in-depth analysis of Nvidia's impressive performance and the underlying momentum in the AI sector driving its success, please see Peter Garnry's article titled “Nvidia revenue outlook confirms AI bonanza”.
This remarkable ascent also had a significant impact on the broader market, as the S&P 500 Index gained 0.9%, with Nvidia accounting for a substantial 60% of the overall uptick. Following Nvidia's lead, other tech giants experienced notable gains, with Microsoft (MSFT:xnas) rising by 3.9% and Alphabet (GOOGL:xnas) posting a 2% increase. In the semiconductor space, Advanced Micro Devices (AMD:xnas) surged by 11.2%, while Broadcom (AVGO:xnas) added 7.3%. However, Intel (INTC:xnas) faced a setback, losing 5.5% during the session.
Reflecting the industry-wide momentum, the iShares Semiconductor ETF (SOXX:xnas) witnessed a substantial jump of 6.7%. The Nasdaq 100 also experienced notable gains, soaring by 2.5%, fueled by the bullish sentiment surrounding Nvidia's performance.
Treasuries sold off with more pressure on the front end after the release of smaller increases in initial jobless claims and stronger-than-expected GDP and personal consumption (see below). The selling pressure eased temporarily following a strong 7-year auction but it resumed during the late New York session. The 2-year yield jumped 16bps to reach 4.53% while the 10-year yield climbed by 8bps to settle at 3.82%. As a result of these movements, the 2-10-year yield curve flattened by 8bps, closing at -72bps.
The Hang Seng Index experienced a tumultuous start to the trading day as it opened with a significant downward gap, plunging below previous lows and erasing all the gains it had accumulated in 2023. This sharp decline, amounting to a 1.9% drop, sent shockwaves through the market, with various sectors bearing the brunt of the prevailing weakness. Among the most affected were the EV, consumer, China Internet, and shipping sectors.
Orient Overseas (00316:xhkg), a prominent container liner operator, registered a 6.8% decline. Li Ning (02331:xhkg), a notable sportswear manufacturer, experienced a 4.3% drop. Reflecting the broader market sentiment, the Hang Seng Tech Index also suffered, slumping by 2.3%. The decline in this tech-focused index was primarily driven by the downturn in EV stocks and China Internet companies. Alibaba (09988:xhkg), Tencent (00700:xhkg), Meituan (03690:xhkg), and JD.COM (09618:xhkg) all plummeted by more than 3%. Meanwhile, EV manufacturer XPeng (09868:xhkg) faced a steep decline of 9.3% following the release of its Q1 delivery and revenue figures, which fell short of analyst estimates. The company's gross margins also experienced a significant decrease, attributed to heightened sales promotions and the expiration of government subsidies.
The CSI300 index closed Thursday's session 0.2% lower after experiencing an initial drop of up to 1%. The afternoon witnessed a partial recovery driven by gains in telco, new energy, and semiconductor companies.
Investors should note that the Hong Kong equity market will be closed on Friday in observance of a public holiday, while mainland bourses will remain open.
The dollar index rose further on Thursday amid a hawkish shift in Fed expectations on strong US economic data. Debt ceiling talks also progressed, but deal has still not been made. NZDUSD continued to slide and tested 0.6050 support, while AUDUSD reached lows of 0.65 and AUDNZD testing highs at 1.0750. No respite for sterling too even as 10year UK yields rose a further 16bps, but GBPUSD in close sights of 1.23. USDJPY is now back at 140, highest since November, and potentially increasing pressure on the BOJ again to tweak policy.
Crude oil gave up recent gains amid signs OPEC is unlikely to cut production further. Russia’s deputy prime minister, Alexander Novak, said the OPEC+ alliance is unlikely to take new steps at its June meeting. Expectations for another production cut had started to build after recent comments from Saudi Arabia’s energy minister sending a message to sellers to “watch out.” Meanwhile, firmer US economic data also brought one full rate hike into market pricing for the Fed, and reduced the rate cut pricing to only one 25bps cut this year, which also weighed on demand concerns. WTI prices slumped below $72/barrel while Brent touched lows of $75. European gas prices, Dutch TTF benchmark gas (TTFMc1), also slumped to a two-year low to reach levels of €25/MWh amid tepid demand and strong LNG arrivals. Traders are even contemplating the risk of brief periods with negative prices this autumn, a far cry from the +€350 peak seen last August.
Gold fell further on Thursday, breaking below the key $1950 support, to print 2-month lows of $1938.97 after strong jobless claims and GDP growth in the US raised bets on further monetary tightening from the Fed. Hopes of a resolution on the debt ceiling also reduced the safe haven appeal of the yellow metal. Next key support is at the 100DMA at $1935, break of which will open the doors to $1900 level. Meanwhile, a break back above $2001, the 21-DMA will be needed to improve sentiment.
Debt ceiling talks progressed on Thursday, albeit slowly with issues still remaining, and no deal reached yet. Republicans said differences with the White House are narrowing and Joe Biden expressed optimism as the two sides try to reach an agreement on spending cuts. The Treasury's cash balance fell to just $49.5 billion on Wednesday, down from $76.5 billion a day earlier and the lowest since 2021 and the X-date of June 1 is just a week away now. With a long weekend in the US approaching, the meetings are only set to resume on Tuesday (May 30) now. If no agreement is seen then, volatility could spike and an eventual short-term solution may be sought, which will prolong the debt ceiling drama to spill over into next few weeks.
Initial jobless claims came in lower-than-forecast at 229k (exp. 245k) in the week ended May 20, with the prior revised much lower to 225k from the initial 242k, albeit amid the reported Massachusetts fraud figures as ahead of the release the state revised 3month jobless claims lower by an average of 14k per week. Continued claims dipped to 1.794mln (prev. 1.799mln), shy of the expected 1.8mln. Meanwhile, US Q1 GDP was revised higher to 1.3% from 1.1% in the second estimate, with notable increases in consumer spending as well. The better-than-expected data has now brought one full rate hike being priced in by the market by July and only one rate cut left in this year’s pricing.
The headline print for Tokyo CPI for May softened to 3.2% YoY from 3.5% previously and 3.4% expected. However, the core-core print was once again firmer than expected, coming in at 3.9% YoY from 3.8% previously. This suggests that there will be continued pressure on the BOJ to tweak policy, and the recent spurt of weakness in the Japanese yen may also add to these pressures.
Meituan, the popular Chinese food delivery and e-commerce platform, surpassed market expectations with impressive Q1 financial results. The company's revenue grew by 2% year-on-year, reaching RMB 58.62 billion, slightly exceeding the consensus estimate of RMB 57.48 billion. Meituan demonstrated remarkable progress compared to the same period last year, transitioning from a loss of RMB 5.70 billion to a net income of RMB 3.36 billion, surpassing the estimated loss of RMB 0.2 billion. Meituan's strong performance extended across its core segments, including food delivery, core local commerce, and the Instahopping division. This success highlights the company's ability to navigate competition.
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