Summary: A positive session for equities yesterday partially spoiled after the closed as the Biden administration is said to be weighing a restriction on exports of AI-related semiconductors to China. This knocked Nvidia and AMD shares lower after the close of trading. The US dollar is slightly resurgent as long US treasury yields continue to coil in their range despite very strong New Home Sales and Consumer Confidence data yesterday.
US equities regained their lost territory in a significant rebound session with S&P 500 futures rising 1.1% as strong US June consumer confidence and May new home sales came in better than expected suggesting the US consumer outlook is still robust. Travel and leisure related stocks such as cruise lines and airliners were leading the gains together with technology in US equities and retailing stocks are now the best performing industry group over the past week. If we couple the move with the low VIX Index and the loose financial conditions in the US it is difficult to see how inflation will ease substantially and thus the case for rates for longer is still strong.
Hang Seng Index and CSI300 Index treaded water around recent lows, failing to extend the rally yesterday. Market reactions to reports about potential additional US export bans on microchips were muted. The Hang Seng Index slid moderately by around 0.2% and the CSI300 shed 0.5%. New energy vehicle (NEV) manufacturers topped the market performance, seeing Xpeng (09868:xhg) and Nio (09866:xhg) rallying strongly by over 6%. In the A-share market, technology, media, and telecommunication names weighed on the market while coaling mining stocks gained amid stronger consumption of coal in electricity generation under a widespread heatwave. Industrial profits in China declined by 12.6% YoY in May, a smaller contraction than the decline of 18.2% in April.
Volatility remains quite muted across much of FX, but the US dollar fought back after wobbling at times yesterday as US data was supportive, with CNH weaker after a PBOC-inspired boost the prior session and AUD and NZD fading lower on lower than expected Australian CPI reported yesterday. USDJPY poked back to a new high for this cycle as long US treasury yields were supported by the strong Consumer Confidence and other data (more below). Still, US long treasury yields may need to surge higher still to support a notable extension of the rally there. Sterling could eye Bank of England speakers today at the ECB’s forum in Sintra, Portugal today, with Fed Chair Powell and others in attendance.
A fresh slump in crude oil prices on Tuesday saw Brent return to challenge a trendline that by now has provided support six times since it was established on March 20. Today, the level comes in at $71.85 and given its importance the risk of it being challenged by short-term technical traders remains. To the upside, meanwhile, the 21-day moving average currently at $74.85 has provide resistance for the past two days. For now, the market remains stuck with demand concerns weighing on the market while OPEC production cuts have helped prevent a deeper setback. The API report last night was mixed with a 2.4m barrel crude stocks decline being offset by a 1.45m barrel increase at Cushing. EIA’s official report is due later and apart from stock levels, traders will look out for changes in demand from refineries and consumers.
HG Copper has retraced 50% of the recent China stimulus inspired rally and for a fourth day it is trading below its 200-day moving average, currently at $3.825. A combination of speculators joining the rally too late, forcing them to reduce bullish bets, and sluggish economic data from China highlighting the current softness in domestic demand. In a three-week period up until last Tuesday, speculators had bought 46,300 contracts of HG contracts, in the process flipping a net short to a net long of 23,200, a four-month high. In the short-term the market will continue to look for additional government initiatives to support the Chinese economy and to arrest the recent slide. Support at a $3.755 followed by $3.700.
Yesterday, US durable goods orders and home sales surprised to the upside, paving the way for the market to increase Fed rate hikes expectations. The data leaves the front part of the yield curve vulnerable to rising rates tomorrow as several central bankers speak at Sintra. We expect 2-year US Treasury, German bond, and Gilt yields to resume their rise with gilts underperforming peers. Although yield curves are deeply inverted, they might flatten further. As font term yields rise and long-term yields remain pinned down.
Two-year Gilt yields rose to 5.25% yesterday as markets increased the BOE rate hikes bets. Today’s Sintra forum on central banking might push yields further up as central banks might reiterate their hawkish stance. Two-year gilt yields will not find resistance until 5.57%, the 2008 peak.
According to an exclusive report from the WSJ, the US is considering new restrictions on exports of AI-related semiconductors to China, according to “people familiar with the situation”. The article (paywall) suggests that the US Commerce Department could move as soon as early next month to halt shipments of chips from Nvidia and others to “China and other countries of concern withouh first obtaining a license”. Nvidia and AMD were up yesterday, but erased those gains in late trading after this news broke.
US Consumer Confidence came in stronger than expected on all fronts, with the Present Situation component improving sharply to 155.3, the highest since the summer of 2021, while the Expectations component jumped sharply to a six month high of 79.3 after a string of more downbeat readings in the low seventies.
The pace of New Home Sales in the US was the highest in over two years according to data released yesterday, which saw a blistering 763k annualized pace of sales versus 675k expected and vs. 680k the prior month. The irony in the US housing market is that existing home supply is extremely low due to high mortgage rates, with those having rolled mortgages at record low levels during the pandemic unwilling to sell and take out a mortgage on a new residence as their monthly payments would soar. The SPDR S&P US Homebuilders ETF (XHB:xnys) rose nearly 2% yesterday on the news to a new high since early 2022.
The US drug store chain beat on revenue in its FY Q3 but lowered its earnings guidance for the fiscal year due to lower demand and rising input costs from wages.
During the Snowflake Summit 2023, Snowflake (SNOW:xnas) and Nvidia (NVDA:xnas) announced a collaborative effort to empower businesses in creating tailored generative AI applications using their own proprietary data. Operating securely within the Snowflake Data Cloud, customers can utilize NVIDIA's NeMo framework designed for AI developers, which was initially unveiled in September.
ECB President Lagarde cautions about the ongoing high and enduring inflation, necessitating additional rate hikes to address the situation. A further interest rate hike is anticipated in July, and she expresses scepticism that the central bank will soon be able to definitively declare that inflation has reached its peak. However, she does acknowledge that the intensity of price pressures is beginning to diminish.
In some of the smaller economies recently, including Norway and the United Kingdom, inflation readings, and core inflation readings in particular have come in hotter than expected. Then we saw a slightly softer core inflation reading reported yesterday for May in Canada and even a softer than expected Australia May CPI number reported overnight (only a headline number, the core inflation data is only reported quarterly there). Tomorrow, Germany reports its preliminary June CPI data after the May data showed a lower print than expected. Friday, the Eurozone will report flash June inflation numbers for headline and core inflation, with the latter surprisingly dropping 0.3% to 5.3% YoY in May. The US May PCE inflation data, the inflation data series used in Fed policy making, is up on Friday, expected to drop below 4.0% for the headline, but show a steady 4.7% YoY at the core. Should inflation numbers come in-line and lower than expected, it could take the steam out of central bank expectations, although the longer end of global sovereign yield curves bears watching for a break higher in yields (US 10-year benchmark has been poised in a tight range with key resistance near 3.85%, although 4.00% is the attention-getting level.
Our next earnings focus is Micron after the US market close with analysts expecting Micron’s (MU:xnas) FY Q3 revenues to fall by 57% to $3.7bn from $8.6bn a year ago and to slide into a $1.58 per share loss versus a profit of $2.59 per share when reporting today. After the Chinese Government’s ban on certain Chinese manufacturers to use DRAM and NAND chips from Micron, the memory chip maker is expected to see their China sales halved, representing an about 12% loss to its total revenue. Investors will pay attention to any updates from the earnings call. Investors will also scrutinize the company’s comments on AI-related demand. It is believed that AI servers use 6 to 8 times more DRAM chips than regular servers and present a promising opportunity for Micron. Updates on Micron’s effort to catch up with SK Hynix in the high bandwidth memory (HBM) products that are used in AI-related GPUs will be another focus.
Bond. Long Bond(s)
With real rates being too positive, we see three scenarios: Opportunity to lock in rates at cycle high, government overreach to keep the economy afloat or a complete reset of the economy.
Steen Jakobsen,
Chief Investment Officer
Is a bond bull market ahead? Inflation still poses a risk for investors, but the moment for increasing duration to your portfolio may be approaching towards the end of the year, when central banks might be forced to cut interest rates.
Althea Spinozzi,
Senior Fixed Income Strategist
The furious rate hike cycle has brought gains in the US dollar, but with stagflation risks in Europe and the UK and weakness in the Chinese economy, USD may have more room to run. But a strong dollar could also have repercussions for US growth, emerging markets and commodity prices.
Charu Chanana,
Market Strategist
With the cost of capital rising painfully, stagflation fears are back, illuminating the fragile state of the green transformation, while giving a tailwind to nuclear power, and threatening the growth of AI-related stocks.
Peter Garnry,
Head of Equity Strategy
With supply tightness not only in energy but all commodities, the momentum in commodity prices may continue, pressuring central banks to lower real rates. That could be a good setup for precious metals, including gold, silver and potentially platinum as well.
Ole S. Hansen,
Head of Commodity Strategy
As the pandemic showed, even the US Treasury can experience seismic shifts. With the government increasing the pace of issuing bonds to support fiscal spending, the complex Treasury market and regulatory constraints could spark a liquidity event.
Redmond Wong,
Market Strategist
The tide has turned for bonds. Given the current yields, bonds have become an attractive investment, with added benefits including lower risk than stocks, increased diversification and a steady stream of income unaffected by economic changes.
Peter Siks,
Investment Coach
