Market Strategist, Greater China
Summary: US equity indices had minimal movement, with the S&P 500 index finishing nearly unchanged and the Nasdaq 100 seeing a slight increase. The energy sector performed well, rising 1% driven by a rally in crude oil prices. Nvidia dropped 1.8% as investors assessed the potential impact of an additional export ban on AI chips to China. Cruise line and timber stocks outperformed due to strong consumer confidence and home sales date earlier. Treasury yields decreased. The Federal Reserve's stress test results affirmed that the 23 large US banks have sufficient capital to withstand adverse conditions. Chinese EV maker Nio partners with CNOOC Refining to develop EV charging and battery-swapping infrastructure.
US stocks concluded a volatile trading session with minimal movement. The S&P 500 index remained nearly flat at 4,376, while the Nasdaq 100 saw a marginal increase of 0.1% to reach 14,964. On the other hand, the Russell 2000 index recorded a gain of 0.5%, closing at 1,858. The energy sector emerged as the top-performing sector within the S&P 500, rising 1% propelled by a rally in crude oil prices.
Nvidia (NVDA:xnas) dropped by 1.8% as investors were weighing the potential impact on the chipmaker’s revenues amid reports suggesting that the Biden Administration might implement an additional ban on the export of AI chips to China. Saxo's Peter Garnry provides a detailed analysis of the subject in his article here.
Tesla, on the other hand, advanced 2.4% ahead of its upcoming announcement of second-quarter deliveries numbers, anticipated over this weekend. The cruise line operations and timber stocks outperformed, driven by strong consumer confidence and favorable home sales data earlier in the week. Carnival (CCL:xnys) soared 8.8% and Norwegian Cruise Line (NCLH:xnys) added 7.6%. Weyerhaeuser (WY:xnys) surged 4.3%.
In extended trading hours, Micron (MU:xnas) gained 3% after reporting FY Q3 revenue that surpassed estimates and providing positive guidance.
Treasuries were initially weighed by Fed Chair Powell’s higher-for-longer comments but bounced strongly in New York afternoon to finish higher in prices and lower in yields. The rally was driven by large block buying in the 5-year T-note futures (ZFU3) and a strong 7-year auction. The USD25 billion 7-year notes were stopped at 1.1bps richer than the level at the auction deadline and registered a decent 2.65 bid-to-cover ratio with strong participation (75.3%) from indirect bidders. Yields on the 2-year, 5-year, and 10-year notes fell by 5bps to 4.71%, by 6bps to 3.97%, and by 6bps to 3.71% respectively. The market continues to price in one more 25bp rate high and most probably in July.
The Hang Seng Index and CSI300 Index remained stagnant near recent lows, failing to extend the previous rally. However, market reactions to reports regarding potential additional US export bans on microchips were relatively subdued. The Hang Seng Index fluctuated between gains and losses throughout the day, ultimately closing 0.1% higher. Consumer stocks advanced, with sportswear and catering companies outperforming. Among the top winners of the Hang Seng Index were Shenzhou (02313:xhkg), Anta (02020:xhkg), and Haidilao (06862:xhkg).
Meanwhile, the Hang Seng Tech Index gained 0.8%, primarily driven by electric vehicle (EV) stocks. XPeng (09868:xhkg) jumped 11.2%, while Nio (09866:xhkg) surged by 7.2%. XPeng is set to launch its new G6 model today and has plans to commence shipments in July.
In the A-share market, technology, media, and telecommunication sectors weighed on the overall market performance. Conversely, coal mining, electricity utilities, and electric equipment stocks gained amid increased coal consumption in electricity generation, driven by a widespread heatwave. Additionally, the food and beverage sector also saw positive growth.
The Australian dollar fell around 1.3% after the CPI unexpectedly tumbled to 5.6% in May from 6.8% in April and much below the 6.1% expected. The pessimism toward the Chinese economy also weighed on the sentiment about the AUD.
WTI crude oil rose by 2% after data from the American Petroleum Institute indicated a larger-than-expected 2.4 million barrel weekly decline.
The Federal Reserve has announced the results of its annual stress test conducted on the 23 large banks in the U.S The test concluded that each of these banks possesses adequate capital to absorb losses and maintain lending operations even under highly challenging conditions. The hypothetical stress scenarios employed in the test encompassed various adverse factors, including a 10% rise in the unemployment rate, a 38% decline in house prices, a 40% decrease in commercial real estate prices, widened corporate bond spreads, and heightened market volatility.
Under the stress test, the aggregate of the 23 large banks’ common equity tier-1 (CET1) ratio drops to a minimum of 10.1 before bouncing to 10.7 in Q1 2025, the end of the 2-year stress test period. On the individual bank level, the 5-quintile or the bottom five banks ranked by the minimum CET1 are Citizens (6.4), US Bankcorp (6.6), Truist (6.7), M&T (7.0), PNC (7.9). All of them, despite being relatively weaker than the others, have a minimum CET1 ratio comfortably above the required 4.5 under Basel III.
Industrial profits in China declined by 12.6% Y/Y in May, a smaller contraction than the -18.2% in April. The decline was largely driven by a smaller decline in profits in the manufacturing sector. In particular, profits in the equipment manufacturing industry increased by 15.2% Y/Y.
Nio signed a strategic cooperation framework agreement with China National Offshore Oil Refining Co (CNOOC Refining) to jointly build electric vehicle charging and battery-swapping infrastructures across China. So far the two companies have jointly built three EV charging and battery-swapping operations. The announcement from the two companies des not give details of how many such infrastructures are to be built under the agreement.
Nike (NKE:xnys) is set to release its earnings report today after the US market closes. Analysts' consensus estimate projects a modest 2.8% Y/Y increase in revenue, reaching USD 12.57 billion compared to USD 12.23 billion. This reflects slower growth in North American markets, specifically in the North American wholesale channel. Expectations for the EBITDA margin are at 11.8%, down from 13.5% a year ago. This decline is attributed to promotions aimed at clearing excess inventory, higher supply chain costs, and rising wages, which are offsetting lower freight expenses. Adjusted EPS is anticipated to plunge to USD 0.67 from USD 0.90.
Investors will closely monitor Nike's FY24 guidance, the share of direct channel revenue, and signs of improvement in China (where peers have recently shown more positive outlooks). According to Saxo's Peter Garnry, the reaction from investors will be defined by Nike's FY24 guidance on operating and gross margin. Further insights on this topic can be found in Garnry's article.
For a detailed look at what to watch in markets this week – read our Saxo Spotlight.
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