Bond. Long Bond(s)
Chief Investment Officer
Market Strategist, Greater China
Summary: US non-farm payrolls fell to 209k in June, below the forecast of 230k, while average hourly earnings exceeded expectations at 0.4% M/M and 4.4% Y/Y. US equities experienced volatility, closing lower with the S&P 500 down 0.3% at 4,399 and Nasdaq 100 dropping 0.4% to 15,036. The US Energy Department plans to acquire 6 million barrels of crude oil for strategic reserves, boosting WTI crude oil by 2.9% to $73.86. China imposed fines on Ant Group and Tencent but will transition regulation of platform companies' financial services to regular supervision. China's CPI inflation is expected to remain unchanged, while PPI deflation deepens in June.
US equities had a volatile session, with gains in the morning giving way to a complete reversal and a lower close on Friday. The afternoon sell-off was driven by concerns that the hotter average hourly earnings growth in the June payrolls report, might lead to a prolonged rate hike path for the Federal Reserve. The S&P 500 Index declined by 0.3% to 4,399, and the Nasdaq 100 dropped by 0.4% to 15,036. However, the Russell 2000 Index managed to retain most of its gains and finished the day 1.2% higher.
The energy sector emerged as the top-performing sector within the S&P 500, gaining 2.1% due to a nearly 3% increase in oil prices. Schlumberger (SLB:xnys) and Halliburton (HAL:xnys), the giants in oil drilling and exploration services, led the advance with gains of 8.6% and 7.8%, respectively. Leading oil producers Marathon (MRO:xnys), APA (APA:xnys), and EOG (EOG:xnyg) recorded gains of around 3% to 4%. Electric vehicle maker Rivian (RIVN:xnas) saw a surge of 14.1% on Friday, marking its eighth consecutive rising session. Conversely, Levi Strauss (LEVI:xnys) experienced a sharp decline of 7.7% due to a downbeat guidance for the year.
Treasuries concluded a volatile session with lower yields on the front end, while the longer end of the yield curve saw an increase. Following a June non-farm payrolls report that fell short of expectations, Treasuries initially rallied, leading to yield declines across the curve. However, notes and bonds with maturities exceeding 5 years quickly reversed course and sold off as traders shifted their attention to a substantial rise in average hourly earnings, indicating upward wage pressure. At the close, the 2-year yield dropped 3bps to 4.95%, while the 10-year yield rose by 3bps to 4.06%. In the short-term interest rate markets, there remains nearly a 90% probability of a 25bps rate hike at the upcoming July FOMC meeting, albeit with slightly reduced odds for rate increases in the September and November meetings.
The Hang Seng Index experienced a three-day consecutive decline, closing Friday 0.9% lower at 18,366, a level last observed on June 1. Within the consumer discretionary sector, Sportswear manufacturers Li Ning (02331:xhlg) suffered a significant drop of 4.3%, while Anta (02020:xhkg) slid 2.6%. Electric vehicle (EV) stocks also faced consolidation, with XPeng (09868:xhkg) and NIO (09866:xhkg) experiencing declines of 5.2% and 4.1%, respectively. Additionally, BYD shed nearly 3%. The Hang Seng TECH Index declined by 1.2%, and Kingsoft (03888:xhkg), Netease (09999:xhkg), and Xiaomi (01810:xhkg) each saw losses exceeding 3%.
Financials continued to face pressure as investors expressed concerns about the local government debt overhang and the weakness of the Chinese property markets that might weigh on Chinese banks' financial performance and their ability to maintain dividend payouts. On Friday, the financials sub-index of the Hang Seng Composite Index decreased by 1.1%, extending its weekly loss to 5.3%. Notably, Bank of Communications (03328:xhkg), China Construction Bank (00939:xhkg), and ICBC (01398:xhkg) witnessed significant declines of over 13% for the week.
Amidst the decline, Alibaba (09988:xhkg) stood out by rising 3.4% and emerged as the best-performing stock in the Hang Seng Index. This increase was attributed to a Reuters story indicating that Chinese authorities had finalized a fine on Ant Group, thereby concluding the regulatory investigation on the e-commerce giant's fintech affiliate. In the evening, the People's Bank of China announced a fine of RMB7.1 billion and the completion of its probe into Ant Group.
In the A-share market, the CSI 300 experienced a decline of 0.4%. This decline was driven by weaknesses in the semiconductor, computing, electronics, electric equipment, and defense stocks. However, these losses were partially offset by gains in agriculture, transportation, and coal mining stocks.
The Dollar Index (DXY) declined 0.9% as the dollar weakened versus all the G10 currencies after weaker-than-expected non-farm payrolls on Friday. EURUSD advanced 0.7% to 1.0970 and USDJPY weakened by 1.3% to 142.15. Against emerging market currencies, USDCNH retreated 0.3% to 7.2320 and USDBRL fell 0.9% to 4.8720.
The US Energy Department announced its plan on Friday to acquire an additional 6 million barrels of crude oil for the strategic petroleum reserve, scheduled for delivery in October and November. This decision effectively doubles the department's yearly purchase to approximately 12 million barrels. The Energy Department had previously obtained 3.2 million barrels at an average price of around $72 per barrel. The department intends to procure more oil for the reserve based on favorable market conditions. The average selling price of the US strategic reserve last year was $95 per barrel. In response to the news, NYMEX WTI crude oil futures (CLQ3) surged by 2.9% to $73.86 per barrel. This rally is expected to test the price range of $67 to $75, which has been maintained since May.
COMEX high-grade copper futures (HGU3) rose 1.3% to USD3.78 on Friday and ended a choppy week with a small 0.6% gain. Despite some disappointment in the strength of the economic recovery, China’s refined copper demand in the first half of the year still grew by 11% compared to the previous year. Looking ahead in the medium to long term, regardless of the absence of aggressive stimulus measures in China, the global theme of green transition will continue to provide strong support for copper.
Gold gained 0.74% in a rally fueled by a weakened dollar on Friday following a non-farm payroll figure that fell short of expectations. This upward movement aided gold in achieving a modest weekly gain of 0.3% and staying above the crucial support level of USD1,900, ultimately closing at USD1,925 per ounce. In the near future, there are improved technical indicators suggesting that gold might make an effort to rally toward USD1,963.
The headline non-farm payrolls came in below expectations, falling to 209k in June from 306k (revised down from 339k) in May, versus the median forecast of a June reading of 230k. Private payrolls declined to 149k in June from 259k (revised down from 283k) in May, below the forecasted 200k. However, the growth in average hourly earnings surprised on the upside with a gain of 0.4% (0.356% unrounded) M/M and 4.4% Y/Y, higher than the median forecast of 0.3% and 4.2%. The number in May was also revised upward to 0.4% M/M (0.36% unrounded) and 4.4% Y/Y from the previously reported 0.3% and 4.3%. The unemployment rate fell to 3.6% in June, in line with expectations, from 3.7% in May.
China is scheduled to release June CPI and PPI this morning. The median forecasts in Bloomberg’s survey of economists anticipate that CPI inflation will remain unchanged from May at 0.2% year-on-year (Y/Y) in June, as both food and non-food prices are expected to be largely steady. However, the PPI is expected to experience a deeper deflation, declining to -5.0% Y/Y in June from -4.6% in May, primarily due to price weaknesses in raw materials.
As she concluded her visit to China, U.S. Treasury Secretary Janet Yellen said that “some progress” had been made to establish better communication between Beijing and Washington.
The People's Bank of China (PBOC) announced in a statement a fine of RMB7.12 billion on Ant Group, the fintech affiliate of Alibaba, for its violation of Chinese laws and regulations on consumer protection and corporate governance on Friday evening. The statement also states that the regulation and supervision of the financial services business of platform companies will transition from scrutiny and probing to regular supervision. Investors welcomed the move and saw the ADR share price of Alibaba surging by 8.1%.
The PBOC also fined Tencent's Tenpay arm for approximately RMB2.4 billion and forfeited RMB0.6 billion of allegedly unlawful profit.
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Bond. Long Bond(s)
Bond. Long Bond(s)
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.
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.
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.
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.
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.