What’s happening in markets?
US equities (US500.I and USNAS100.I): Market lifted by consumer discretionary stocks and mega-cap tech
The US equity market got a boost driven by the strength of consumer discretionary stocks and mega-cap tech companies. The S&P 500 halted a 3-day decline, bouncing back with a 0.4% increase to reach 4,381, while the Nasdaq 100 surged ahead by 1.2%, reaching 15,042. Leading the charge higher were Amazon (AMZN:xnas) with a 4.3% rise, Alphabet (GOOGL:xnas) gaining 2.2%, and Tesla (TSLA:xnas) with a 2% increase.
However, bank stocks faced a slump following comments from Fed Chair Powell during his Congressional testimony. Powell mentioned that the Federal Reserve was collaborating with banks that had significant exposure to commercial real estate. Consequently, the KBW Bank Index, which measures the performance of national money center banks and leading regional banks, declined 2.3%. The SPDR S&P Regional Bank ETF (KRE:arcx), which invests in regional lenders, tumbled by 3.2% reflecting the concerns in the sector related to commercial real estate.
Treasuries (TLT:xnas, IEF:xnas, SHY:xnas): Yields rise as Powell's rate hike comments impact market
The Treasury market sold off as yields increased by 6-8bps across the curve. This was prompted by Fed Chair Powell's reiterated statements about potentially raising rates twice more this year during his second day of congressional testimony. Additionally, hawkish comments from Fed Governor Bowman and Fed President Barkin on Thursday further dampened market sentiment. The Bank of England's decision to raise rates by 50bps also exerted downward pressure on Treasuries. Both the 2-year and 10-year yields surged by 8bps, reaching 4.79% and 3.79% respectively.
Hong Kong & Chinese equities (HK50.I & 02846:xhkg): closed
Both Hong Kong and mainland Chinese bourses were closed for the Tuen Ng holiday on Thursday. Hong Kong returns today while the exchanges in the mainland remain closed.
FX: JPY weakness could bring attention of authorities
USDJPY rose above 143 in the late US session overnight and a hot CPI print for May this morning brought only a momentary decline in USDJPY below the key level. NOK was the outperformer after a surprise 50bps rate hike from the Norges Bank, with EURNOK sliding to 11.55 before inching back above 11.65 subsequently. Gain in GBPUSD to 1.28 in the wake of the hawkish BOE meeting was quickly reversed while EURUSD failed another attempt at 1.10.
Crude oil: 4% decline on amid rate hike concerns
A sharp selloff was seen again overnight in crude oil following the bigger-than-expected rate hikes from BOE and Norges Bank which prompted worries about the economy and fueled demand concerns. That outweighed support to oil prices from a surprise draw in US oil supplies. In fitting with the private inventory data on Wednesday night, crude stocks saw a surprise draw of 3.831mn. WTI prices slid from $72.50 to sub-70 levels and Brent was down from $77 to $73.50/barrel.
Gold: fresh 3-month lows on rising real yields
Gold broke key support level around $1930 yesterday to slid to fresh 3-month lows of $1915 amid higher Treasury yields following Chair Powell’s comments in the Senate and a hawkish surprise from Bank of England and Norges Bank. Next key level to focus is the psychological $1900 barrier. Silver is down over 5% so far in June and the $22 level is key to focus.
What to consider?
Bank of England surprises with a 50bps rate hike
Following the hotter-than-expected May inflation data a day before, the Bank of England opted to deliver a surprise 50bps hike in the Bank Rate to 5%. Policymakers said persistent inflation would require more action and the minutes included nothing to rein in market expectations for rates peaking at about 6%. That helped to restore some credibility for the central bank in its fight against inflation, but sterling reversed the initial gains quickly given its recent ride had already priced in a lot. Terminal rate expectations are now over 6% for the BOE, hinting that a recession may remain hard to avoid for UK.
Norges Bank also goes for 50bps, SNB as expected
Norway’s central bank accelerated its rate hike pace to surprise markets with a 50bps increase in key deposit date to 3.75% amid stubborn inflationary pressures and a weak currency. Meanwhile, the Swiss National Bank (SNB) raised its benchmark interest rate by 25bps to 1.75%, but cut its inflation forecast for 2023 Q2 to 2.1% from 2.7% and for Q3 to 1.7% from 2.4%. However, the bank still guided for further rate increases.
US jobless claims above expectations, Chair Powell repeats his message
Initial Jobless Claims data for the week of June 17 was unchanged at 264k, with the prior revised up to 264k from 262k, and above expectations of 259k, marking the third consecutive week above 260k. This is yet another sign that the pace of cooling in the labor market is extremely slow, and there is little push for markets to price in the two rate hikes that the FOMC dot plot hinted and Chair Powell has been pushing for in his testimonies this week. Continuing claims for the week ending June 10 declined to 1.759mn from 1.772mn, beneath expectations of 1.785mn, suggesting that there is still some pockets of a tight labour market. Comments from Governor Bowman leaned hawkish, as she noted inflation is still unacceptably high despite the drop in the headline data and further policy rate increases will be needed.
Japan’s May CPI came in higher than expected
May inflation in Japan continued to complicate the task of Bank of Japan that wants to patiently wait for signs of wage inflation before any moves to remove excess stimulus from the economy. Headline CPI rose 3.2% YoY, decelerating from 3.4% YoY in April and as expected, although the core measures came in above expectations. Ex-fresh food, May CPI came in at 3.2% YoY while the core-core measure (ex-fresh food and energy) was higher at 4.3% YoY from 4.1% YoY in April. BOJ’s July meeting is in focus as updated economic forecasts are released, and JPY is likely to remain under pressure for now. Our Market Strategist Charu Chanana discusses here what moves the yen and how to trade it.
Biden-Modi meeting sets a positive tone around US-India relations
U.S. President Joe Biden and India’s PM Narendra Modi hailed a new era in their countries' relationship during Modi’s visit to the US. They signed defense and commercial deals, including for aircraft engines, naval repairs and semiconductors. Some are aimed at diversifying supply chains to reduce dependence on China. Others are aimed at cornering the market in advanced technologies that may feature on the battlefields of the future. They also ended disputes at the World Trade Organization, and India removed some tariffs on U.S. goods. Improving US-India relations is another reason to continue to expect India to be a winner in the global fragmentation game, and more was discussed on investing in India here.
Turkey’s smaller-than-expected rate hike
The Turkish central bank's decision to raise its key rate by a whopping 650 basis points to 15% was seen as a positive step but fell short of economists' expectations. They had expected a rate hike to 20%, with some even expecting 40%, to support the lira and regain market confidence. In its accompanying monetary policy statement, the central bank hinted at further rate hikes. TRY fell to fresh record lows.
The absence of the feared liquidity crunch supports the equity market
Contrary to market expectations, recent data suggests that concerns over a liquidity drain are unfounded as the US Treasury replenishes its General Account (TGA) at the Federal Reserve. Our analysis, available through this link, reveals that money market funds have utilized reverse repo balances to purchase Treasury bills, effectively offsetting the liquidity impact. The data highlights that the TGA increase has been counterbalanced by a decrease in overnight reverse repo balances. Furthermore, bank reserves at the Federal Reserve has remained nearly unchanged, indicating no contractionary effect on banking system liquidity.
While it remains essential to remain vigilant, especially in monitoring the sources of TGA funding and their implications for market dynamics, it is reasonable to expect that the absence of the feared liquidity crunch will contribute to supporting the equity market.
For a detailed look at what to watch in markets this week – read or watch our Saxo Spotlight.
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