Summary: The major US stock indices traded lower overnight on signs that the AI-hype fueled rally was running out of steam and after China manufacturing PMI weakened more than expected. Treasury yields softened on hopes the US Congress will pass a debt deal today that will avoid a default. In commodities copper and iron ore prices traded lower in response to the weakness in China data supporting a stronger dollar.
Equities headed lower yesterday following a strong opening across many AI-related stocks that were sold off during the session. S&P 500 futures closed above the prior session close, but this morning the weakness has continued with significant selloffs across Chinese equities as the country’s manufacturing PMI figures for May went deeper into contractionary territory as the inventory destocking wave continues to hurt global manufacturing production. S&P 500 futures are trading just above the 4,200 level and could easily break below this level again and back into the trading range established since early April. The key downside risk to US equities remains equity valuations and especially a turnaround in risk sentiment around AI-related stocks.
After a brief one-day pause, Chinese stocks traded in Hong Kong and the mainland resumed their downward spiral, with the Hang Seng Index falling by around 2.5%, down more than 20% from the January highs, and the CSI300 shedding over 1% as of Asian early afternoon. China’s official NBS manufacturing PMI plunged to 48.8 in May, deeper into the contractionary territory than expectations and the figure in April. The Non-manufacturing PMI slowed to 54.5, softer than the 55.2 expected and 56.4 in the previous month. The construction sub-index dropped sharply to 58.2 from 63.9 as well. Meanwhile, President Xi warned party officials at a national security meeting to “get ready for a tempest” on the national security front.
Yesterday, speculations were surfacing that the BoJ is contemplating intervening in currency markets as the USDJPY had recently moved above 140 again. The last time the BoJ intervened was around the 146 level so as USDJPY gets closer to this level we could expect some action by Japanese policymakers. In the past currency intervention was driven solely around stimulating Japan’s exports but with inflation added to the equation the balance is now more complex than in the past as a weak currency aggravates inflationary pressures for Japan.
Oil prices slumped by more than 4% on Tuesday and remained on the defensive after China’s manufacturing PMI showed more signs of weakness in May, adding to concerns about the outlook for demand from the world’s biggest importer. Lower prices ahead of the OPEC+ weekend meeting may raise the temperature in the room with Russia continuing to pump while key Middle East producers have shown constraint. The front month spreads of Brent and WTI both trades in contango, a sign of ample supply. Support in Brent at $72.
Gold bounced strongly on Tuesday after selling ran out of steam ahead of support at $1934, supported by softer US bond yields and the dollar pausing its recent advance in anticipation of US debt-ceiling deal will be voted through Congress today. Short-end rates fell on expectations the deal could limit the government's ability to support US growth, thereby lifting recession fears while reducing the potential for rate hikes beyond the one that has been fully priced in for July. Focus on today’s JOLTS data and Friday’s job report. Resistance at $1985 followed by $1992, the 21-day moving average.
HG copper traded lower to $3.63 a pound overnight but still well above support at $3.55 while iron ore traded back below $100 a tonne after China manufacturing PMI data showed a drop to 48.8, the lowest reading since last December, highlighting the current weakness in the world’s top metal consuming economy. The figure missed the median estimate of 49.5 which would still have indicated a contraction. Calls are getting louder for more stimulus measures, such as interest rate cuts, as investors turn more bearish about the growth outlook. Exports remain weak, a rebound in the property market has faded and businesses are being hit by falling profits.
US Treasury yields dropped across the yield curve yesterday, and 2-year yields dropped for the first time in 12 trading sessions. We believe that the majority of the move is attributed to month-end bond index rebalancing. Indeed, rate hikes bets for June and July remain elevated despite markets’ concerns about the debt ceiling bill’s drag on the economy. The risk of a liquidity squeeze remains as the Treasury has to issue a total of $1 trillion to replenish its reserves. Approximately $500 billion will need to be raised in just five weeks. That would be the biggest quarterly issuance outside of a crisis such as during the pandemic and the global financial crisis. Thus, we expect the bear flattening of the yield curve to resume, probably surrounding Friday’s non-farm payrolls. In the short term, it may be possible to see the two-year yields to break above resistance at 4.63% and soar to 4.8%. Ten-year yields will rise at a slower pace but might test resistance at 4%. Thirty-year yields are likely to soar to 4.07%.
The Gilt yield curve bull flattens as US Treasury yields drop. However, the British Retail Consortium showed yesterday that shop price inflation accelerated by 9% YoY, the highest on record. Therefore, there continue to be scope for yields to soar as the Bank of England prepares to hike rates further. Although 10-year yields are likely to break resistance at 4.59% and 2-year yields might soar test resistance at 4.68%, we believe rates will unlikely soar to break 5%. As yields rise towards the 5% level, the financial sector will begin to suffer as happened last September during Truss’ mini-budget crisis. Therefore, the BOE will need to step into rescue, limiting rates’ upside to avoid a financial crisis. Yesterday, the DMO announced it will issue GBP 2.5 billion bonds with maturity 2053 next week, testing investors’ appetite for long-term debt.
The April monthly CPI in Australia accelerated to 6.8% Y/Y, well above the 6.4% expected and the 6.3% in March. The upside surprise is attributed to higher holiday travel prices, new housing, and durable goods.
Speaking to the Parliamentary Senate Committee this morning, the Reserve Bank of Australia Governor Lowe said the Australian central bank is in “data-dependent mode” while reiterating the commitment to fight inflation.
HP reported worse than expected revenue in the previous fiscal quarter as PC sales continues to be weak amid inflationary pressures and hangover from excessive pandemic demand. The personal computer maker also lowered its fiscal year guidance a bit on earnings suggesting headwinds will persist in the next two quarters. HP shares declined 4% in extended trading. HP Enterprise reported disappointing revenue missing estimates and the outlook for the current quarter on revenue was much weaker than estimated suggesting lower technology spending for the company’s products. HP Enterprise shares declined 8% in extended trading.
After the Turkish election that ended with Erdogan getting re-elected the Swedish government is now pursuing again to convince Turkey to accept its NATO bid. Sweden is saying it has bolstered its anti-terrorism policies and is cooperating with Turkey on its concerns related to Kurdish res
U.S. wheat, corn and soybean futures tumbled on Tuesday, pressured by macroeconomic worries, strong competition for global grain export business and some forecasts for beneficial Midwest rains next month that could bolster production prospects. The Bloomberg Commodity Grains index trades near an 18-month low having dropped 3.7% in the last two trading sessions. US wheat exporters continue to be challenged by competition from Russia amid softer export prices as they try to clearout storage facilities ahead of the next harvest. The US corn and soybean growing season is off to flying start with corn planting at 92% complete, ahead of the five-year average of 84%, while soybeans at 83% complete is well ahaed of the 65% five-year average.
The Bloomberg consensus forecast anticipates a decline of 190K job openings in the JOLTS report for April, settling at 9,400K compared to the previous month's figure of 9,590K. Should this projection materialize, it has the potential to bolster the Federal Reserve's confidence in the belief that the labour market's tightness could ease by means of a sustained reduction in job openings, without significant spikes in the unemployment rate.
Today’s US earnings watch is Salesforce which we wrote about last week – see our earnings preview here. With Salesforce shares up 65% this year the market is betting heavily on the software application maker to beat estimates and deliver on the market’s demand for higher profitability.
2024: The wasted year
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
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