Financial Markets Today: Quick Take – June 1, 2022
Saxo Strategy Team
Summary: A choppy session for global markets yesterday as an equity market sell-off, partially inspired by a fresh spike in crude oil prices on new EU sanctions against Russia, was reversed intraday when the bottom suddenly fell out of a steep oil market rally on a story that OPEC may exempt Russia from its oil output targets, allowing OPEC members with any spare capacity to increase production. Elsewhere, the US dollar has firmed on US yields are higher all along the curve ahead of key US data through the Friday May jobs report.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I)
Nasdaq 100 futures lost momentum yesterday closing below Friday’s strong close suggesting the market is unable to carry through with the positive sentiment. In early European trading hours Nasdaq 100 futures are trading around the 12,640 level and if risk-off continues today we see the 12,224 level as the 50% retracement level that will attract attention. Yesterday showed mixed manufacturing PMI figures from Chicago (good) and Kansas (bad), while the US house price index showed a strong 21.2% y/y increase highlighting that the Fed will have to move more aggressively in the coming FOMC meetings to tighten financial conditions further.
Hong Kong’s Hang Seng (HSI.I) and China’s CSI300 (000300.I)
The two indices were off 1% and 0.2% respectively. The anticipated reopening of Shanghai today has not generated much excitement in the equity market as the Chinese economy is still facing a steep climb to recovery. After the Ministry of Finance cut passenger car purchase tax from 10% to 5% starting today and through the end of 2022, shares of ICE carmakers surged about 3% in early trading before paring much of their gains. KE Holdings (BEKE) jumped 16% overnight in U.S. trading after reporting in-line revenues but better than expected earnings due to margin improvements in Q1.
The consolidation in USDJPY proved rather shallow just as the consolidation in US longer treasury yields likewise never threatened significantly lower yields. Suddenly we have 130.00 back in view from the 129.25 area trading this morning after trading as low as 126.36 last week. The reaction in the US treasury market to the start of the Fed’s quantitative tightening set to begin today as well as the latest US data through this Friday’s US jobs report bears watching for JPY traders as the yen is the most interest rate sensitive of currency. Any fresh surge in the US 10-year yield benchmark beyond 3.00% would likely see this par challenging its cycle highs.
The Aussie rally has softened up in recent days, about half a figure ahead of the key resistance zone that would further threaten a reversal of the downtrend, which is already under fire after the rally back well above the pivotal 0.7000 level. Hopes for a Chinese growth comeback and a further rise in commodities that Australia exports, as well as general risk sentiment are key factors for whether the rally can seal the deal with a reversal above the 0.7260 area, which is near the 200-day moving average and a key early May pivot high. Higher US yields driving a stronger US dollar are the key factors for a move back lower.
Crude oil (OILUKAUG22 & OILUSJUL22)
Crude oil dropped sharply on Tuesday after the WSJ reported some OPEC members are considering exempting Russia from its oil-production deal, thereby paving the way for others, especially Saudi Arabia and the UAE, to pump more. The move comes at a time when fuel prices around the world have reached record levels and after EU signaled its intent to stop buying Russian crude oil. In addition, the prospect for a revival in Chinese demand may add further upside pressure at a time of tight supply, and the combination of all these factors may eventually begin to kill demand, something the major oil producers would like to avoid. OPEC+ meets tomorrow and from expectations of another pointless meeting rubberstamping an elusive production hike, the meeting has suddenly become a potential major market moving event. For now, Brent is holding above resistance-turned-support at $114.80/b. EIA’s weekly stock report delayed until Thursday with the API on tap tonight.
Gold tumbled back below its 200-day moving average at $1841 on Tuesday, after stronger than expected US data and the beginning of Quantitative Tightening helped send the dollar and Treasury yields higher (see below). In addition, comments by Fed Governor Waller on Monday suggesting the Fed should keep raising rates in 50-bp steps and yesterday’s Biden Powell meeting also kept the bullion market under pressure. Equally important, however, has been the yellow metals recent and failed attempt to break above key resistance at $1870, resulting in renewed selling from short-term focused momentum traders. The risk of a central bank policy mistake is likely to continue to attract interest from investors, hence the intense scrutiny of incoming economic data for any signs of weakness. Next key data point being ISM and Friday’s US job report
US Treasuries (TLT, IEF)
A strong technical reversal for US treasury yields is an important development across markets, as it appears to spell the end of the consolidation phase in yields that took the US 10-year benchmark Treasury yield near 2.70%. A further cementing of the comeback in yields would be a rise to the 3.00% area or above. Focus for treasury traders in coming days and weeks will shift to the impact of the Fed’s balance sheet reduction, or QT, that is set to kick off today. As well, any further increase in hawkish Fed rhetoric is on the radar after Fed Chair Powel met with President Biden at the White House yesterday. Important US data for the balance of the week, including the ISM Manufacturing survey up tomorrow and ISM Services survey up Friday after the May jobs report will also weigh in the mix. The May 9 cycle highs in the US 10-year treasury yield of 3.20% fell just a few basis points short of the late 2018 high. If the 10-year benchmark rises to above that 2018 high, it will be a more than 10-year high in yields, the first since 1981.
What is going on?
US data upbeat but consumer confidence getting hit by higher pricesChicago PMI saw an upside surprise after rising to 60.3 from 56.4, against expectations for a decline to 55.0. Consumer confidence, although still upbeat and higher than expectations, declined to 106.4 from a revised higher 108.6. Higher prices are hitting consumer sentiment, but not enough to materially impact economic momentum for now.
Biden meets Powell. President Biden met Fed Chair Powell yesterday and said he respects central bank independence – the obvious statement to make in a public setting. He made Powell in charge of fighting inflation, kind of laying the ground for putting the blame of economic slowdown on him a few months down the line.
Euro CPI at record highsThe Euro-wide CPI rose to all-time highs of 8.1% y/y in May, higher than last month's 7.5% and the consensus estimate of 7.8%. The print is likely to make the ECB policymakers open to more aggressive tightening moves after a move to exit negative rates in Q3.
Salesforce shares rose 9% on higher earnings outlook. The company reported Q1 revenue of $7.4bn vs est. $7.4bn and adjusted EPS of $0.98 vs est. $0.95 while lowering its FY revenue guidance to $31.7-31.8bn from previously $32-32.1bn. But investors reacted to the FY EPS outlook which the company raised to $4.74-4.76 vs previously $4.62-4.64 indicating that profitability is improving remaining strong.
Vietnam outperforms Asia’s manufacturing PMIs
Vietnam’s manufacturing PMI rose to the highest since April 2021 at 54.7 in May from 51.7 earlier, with both output and new order rising. Other regional PMIs were marginally lower but remained broadly in expansion. Australia’s manufacturing PMI fell to a four-month low of 55.7 in May from 58.8 in June, while Japan’s fell to a seasonally adjusted 53.3 in May, a three-month low, from previous month's 53.5. Factory activity in the Philippines also slowed to 54.1 in May from 54.3 in April, while that for Malaysia fell to 50.1 from 51.6 in April. Taiwan's manufacturing activity stood at 50.0 in May, down from 51.7 from April.
Short-term downside pressures in wheat
Chicago wheat futures (ZWN2) fell by their exchange limit on Tuesday while Paris Milling wheat futures (EBMU2) dropped by 3.6% on improved prospects for Ukraine grain shipments as Russia has opened the possibility of removing the blockade on Black Sea. Meanwhile, a good monsoon is India is also erasing output concerns due to the heatwave earlier, and US June weather forecast also looks favorable for much of the farm belt. US wheat planting picked up last week but still at a record slow pace while the winter wheat crop ratings remained the worst in 16 years, both suggesting that the respite in prices may be short-lived unless we continue to see further progress on Ukraine, planting and weather.
What are we watching next?
Market narrative shift underway?
The brief period of consolidation US treasury yields and the weaker US dollar have helped ease the pressure on risk sentiment over the last two weeks or so. This period of improved sentiment arrived just after the US S&P 500 index nearly fell into “official” bear market status (although the greatest draw-down from intraday all-time high to low earlier this month did exceed -20%, the close-to-close drawdown has only been –18.7%). The pressure on the equity markets may pick back up, somewhat ironically, if US data through Friday’s May jobs (and earnings) report, and the May ISM Services suggest that US growth is humming along at a solid clip, taking US yields back toward cycle highs. Uncertainty on the impacts of Fed QT that kicks off today and ramps up to full force over the next three months to a pace of $95 billion/month could also prove a factor weighing on sentiment.
Bank of Canada Rate Decision today
The bank is expected to hike 50 basis points today to take the policy rate to 1.50%, keeping the BoC rate tightening cycle a bit more than a rate hike ahead of the US Fed’s pace of tightening, although the policy rates are priced to converge by the end of this year. USDCAD has sold off heavily recently and is interacting with its 200-day moving average near 1.2660 on the recent comeback in crude oil and risk sentiment more than due to any relative move in yield spreads to the US, which are relatively flat over the last two weeks. Today’s meeting is an important market check on whether the CAD rally finds support from BoC guidance.
Earnings WatchToday’s earnings focus is MongoDB, UiPath, Elastic and Weibo in terms of their potential impact on the technology sector. MongoDB is one of those companies that is still trading around 13x on 12-month EV/Sales despite taking a big hit to its market value over the past year and is a showcase of how the market is reacting to revenue growth vs improved cash flow generation.
- Today: Acciona Energias Renovables, China Resources Power, Veeva Systems, HP Enterprise, MongoDB, NetApp, Chewy, GameStop, UiPath, SentinelOne, Elastic, Weibo
- Thursday: Trip.com, Pagseguro Digital, Remy Cointreau, Toro, Cooper Cos, Meituan, Crowdstrike, Lululemon, Okta, RH, Asana, Hormel Foods
Economic calendar highlights for today (times GMT)
- 0715-0800 – Eurozone Final May Manufacturing PMI
- 0900 – Eurozone Apr. Unemployment Rate
- 1100 – ECB President Lagarde, others to speak on green transition
- 1400 – Bank of Canada Rate Decision
- 1400 – US May ISM Manufacturing
- 1400 – US Apr. JOLTS Job Openings
- 1515 – ECB Chief Economist Lane to speak
- 1530 – US Fed’s Williams (voter) to speak
- 1700 – US Fed’s Bullard (voter) to speak
- 1800 – US Fed’s Beige Book
- 2030 – API’s Weekly Crude and Fuel Stock Report (delayed by a day)
- 0130 – Australia Apr. Trade Balance
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