End of Quarter; Outlook for US dims, but China shines; H2 may make bonds relevant again in a portfolio

End of Quarter; Outlook for US dims, but China shines; H2 may make bonds relevant again in a portfolio

Equities 4 minutes to read
Saxo Be Invested
APAC Research

Summary:  As Q2 ends, recession fears have been overpriced by the markets while Fed’s inflation focus has taken a step-up. This will likely mean a very different H2, with bonds likely gaining relevance again. China’s relaxations and support measures, while unlikely to be consistent, will send a positive impulse to economy and markets. USDJPY is back at record highs despite a retreat in US Treasury yields, setting a stage for markets to test Bank of Japan’s resolve yet again in Q3. OPEC+ meeting in focus, although a positive surprise remains unlikely.


What’s happening in markets?

End of quarter but equities having trouble finding a clear direction

APAC equities were in the red for the day, even as China’s PMI rebound added a flare or optimism in the region. Lower treasury yields meant some gains in tech stocks like Apple and Microsoft but semiconductors stocks were lower as Bank of America warned that chip demand will be weaker which led to declines in NVIDIA and AMD.

China’s CSI300 (000300.I) led the region with gains of 1.3% even as President Xi’s reiteration of sticking to zero Covid policy dented some optimism on the relaxation of quarantine requirements. There is however little doubt that China will focus more on reviving economic growth as a key political event is ahead, and that will mean a positive impulse to the markets. Hang Seng Index (HSI.I) also followed higher with 0.2% gains.

Japan’s Nikkei (NI225.I) fell close to 1% as semiconductor stocks led the index lower. Singapore’s STI (ES3) was down 0.3%; NIO recovered slightly in Singapore after a plunge yesterday on accusation by Grizzly Research for inflating revenues. Australia’s ASX 200 was in losses of 0.85% as banking and mining stocks dipped.

USD gains despite lower yields

The DXY index rose above 105 again overnight despite the 10-year Treasury yields dipping below 3.1%. EURUSD plunged below 1.0500 to lows of 1.0433 as German inflation cooled but Spanish HICP touched 10% levels coming in above expectations. The lack of a fragmentation tool may limit the ECB to a 25bps rate hike in July, meaning more pressure on EUR. USDJPY touched the key 137 level overnight, printing a new 24-year high. Thursday brings announcement of BOJ's quarterly bond purchase plan for July-September, which may likely be revised higher as BOJ’s resolve on yield curve control continues to be tested. Tokyo inflation for June is also due on Friday.

Crude oil snapped three days of gains, OPEC+ in focus

Crude oil came under pressure again overnight and may be looking at its first monthly decline since November, although both WTI and Brent are on track to close the week in gains. We believe demand destruction fears have been over-priced by the markets and the focus will shift back to supply constraints. OPEC+ meeting today will confirm the supply plans until September, but major oil producers led by Saudi Arabia and Russia are expected to stick to a previously decided output boost. It will be hard to get a positive surprise from the meeting given that the current production targets have also not been met.

What to consider?

Fed Chair Powell reaffirms inflation fight

Fed Chair Powell said the job for policymakers is to find price stability even during the new forces of inflation and that a reversal of globalisation could mean lower growth in place, while he added the US economy is in strong shape and can withstand monetary policy moves. Powell added the aim is to have growth moderate and there is a risk that the Fed could go too far but it is not the largest risk as the biggest risk would be a failure to restore price stability. Meanwhile in a separate speech in another event, Cleveland Fed President Mester (FOMC voting member) said she supports a 75bps hike in July if econ conditions stay unchanged.

China’s PMIs returned to expansionary territory in June

June Manufacturing PMI came at 50.2, marginally back to the expansionary territory and below expectations (Bloomberg consensus: 50.50, May: 49.6).  At 54.7, non-manufacturing PMI however beat expectations nicely (Bloomberg consensus: 50.5, May: 47.8), with the service sector sub-index at 54.3 and the construction sector sub-index at 56.6, both showing notable improvements from last month. Reopening of Shanghai and release of pent-up demand contributed significantly to the recovery in the service sector.

Bank of Japan’s resolve keeps getting tested

Japan’s bond traders are still testing the BOJ’s resolve on the yield curve control, even as US Treasury yields turned lower. Super long yields (30year) are still running higher and the yield curve is the steepest since 2016. The BOJ’s bond buying schedule for Q3 will be closely watched today, but greater risks are seen from US data coming out on the stronger side and ruling out the scenario of a deep recession, which would mean US Treasury yields will go higher again and make things ugly for the BOJ yet again. But more than the bond markets, focus of Gov Kuroda will be on the stickiness of Japan’s inflation and that could be a trigger point for BOJ to capitulate. Certainly one of the things I am watching going into Q3.

Potential trading and investing ideas to consider?

Bonds become relevant again

The battle between recession fears and inflation concerns continued to escalate. U.S. Q1 GDP was revised further lower to -1.6% from -1.5% but Chair Powell is now getting more aggressive to fight inflation, and it and appears they will do that even if the economic slowdown worsens. It may start to make more sense to consider bonds in this situation as H2 will likely bring more Fed tightening but also more slowdown fears. iShares 20+ Year Treasury Bond ETF (TLT) is on track for its third weekly gain and up over 5% since June 16 low.

 

For a global look at markets – tune into our Podcast. 

Quarterly Outlook

01 /

  • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Quarterly Outlook

    Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Althea Spinozzi

    Head of Fixed Income Strategy

  • Equity Outlook: Will lower rates lift all boats in equities?

    Quarterly Outlook

    Equity Outlook: Will lower rates lift all boats in equities?

    Peter Garnry

    Chief Investment Strategist

    After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto...
  • FX Outlook: USD in limbo amid political and policy jitters

    Quarterly Outlook

    FX Outlook: USD in limbo amid political and policy jitters

    Charu Chanana

    Chief Investment Strategist

    As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ...
  • Macro Outlook: The US rate cut cycle has begun

    Quarterly Outlook

    Macro Outlook: The US rate cut cycle has begun

    Peter Garnry

    Chief Investment Strategist

    The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c...
  • Commodity Outlook: Gold and silver continue to shine bright

    Quarterly Outlook

    Commodity Outlook: Gold and silver continue to shine bright

    Ole Hansen

    Head of Commodity Strategy

  • FX: Risk-on currencies to surge against havens

    Quarterly Outlook

    FX: Risk-on currencies to surge against havens

    Charu Chanana

    Chief Investment Strategist

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperfo...
  • Equities: Are we blowing bubbles again

    Quarterly Outlook

    Equities: Are we blowing bubbles again

    Peter Garnry

    Chief Investment Strategist

    Explore key trends and opportunities in European equities and electrification theme as market dynami...
  • Macro: Sandcastle economics

    Quarterly Outlook

    Macro: Sandcastle economics

    Peter Garnry

    Chief Investment Strategist

    Explore the "two-lane economy," European equities, energy commodities, and the impact of US fiscal p...
  • Bonds: What to do until inflation stabilises

    Quarterly Outlook

    Bonds: What to do until inflation stabilises

    Althea Spinozzi

    Head of Fixed Income Strategy

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain ...
  • Commodities: Energy and grains in focus as metals pause

    Quarterly Outlook

    Commodities: Energy and grains in focus as metals pause

    Ole Hansen

    Head of Commodity Strategy

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities i...
Disclaimer

The Saxo Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-hk/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo or its affiliates.

Saxo Capital Markets HK Limited
19th Floor
Shanghai Commercial Bank Tower
12 Queen’s Road Central
Hong Kong

Contact Saxo

Select region

Hong Kong S.A.R
Hong Kong S.A.R

Saxo Capital Markets HK Limited (“Saxo”) is a company authorised and regulated by the Securities and Futures Commission of Hong Kong. Saxo holds a Type 1 Regulated Activity (Dealing in Securities); Type 2 Regulated Activity (Dealing in Futures Contract); Type 3 Regulated Activity (Leveraged Foreign Exchange Trading); Type 4 Regulated Activity (Advising on Securities) and Type 9 Regulated Activity (Asset Management) licenses (CE No. AVD061). Registered address: 19th Floor, Shanghai Commercial Bank Tower, 12 Queen’s Road Central, Hong Kong.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products may result in your losses exceeding your initial deposits. Saxo does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo does not take into account an individual’s needs, objectives or financial situation. Please click here to view the relevant risk disclosure statements.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-hk/about-us/awards.

The information or the products and services referred to on this site may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and services offered on this website are not directed at, or intended for distribution to or use by, any person or entity residing in the United States and Japan. Please click here to view our full disclaimer.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc. Android is a trademark of Google Inc.