What’s happening in markets?
US equities (US500.I and USNAS100.I): Tech giants propel S&P 500 and Nasdaq to new highs; regional banks face pressure
The S&P 500 and Nasdaq indices both continued their upward trajectory, reaching their highest levels since April 2022. The Nasdaq 100 index led the charge with a significant surge of 1.8%, closing at 14,784 while the S&P500 gained 0.9%, closing at 4,339. Several mega-cap tech companies contributed to this upward movement, with notable gains seen in Broadcom (AVGO:xnas), Intel (INTC:xnas), Adobe (ADBE:xnas), Lam Research (LRCX:xnas), and Advanced Micro Devices (AMD:xnas), each experiencing increases between 3% and 6%.
Tesla continued its impressive performance by registering a streak of 12 consecutive gaining sessions, rising 2.2% to reach USD249.83. In the extended hours, Oracle (ORCL:xnys) saw a 3.6% increase following its report of a 54% rise in cloud revenue during fiscal Q4.
On the other hand, regional banks faced downward pressure. KeyCorp (KEY:xnys) declined 4.2% after announcing that its net interest income for the quarter would be lower than previously forecasted. Citizen Financial (CFG:xnys) also slid 3.3% due to the regional lender's guidance indicating an increase in charge-offs.
Treasuries (TLT:xnas, IEF:xnas, SHY:xnas): resilient despite auction tails and UK gilt selloff
Treasuries finished with small gains (lower yields) in the front end and the belly after a choppy session. The market was initially under pressure from a UK gilt selloff across the pond on hawkish comments from Bank of England officials, Haskel and Mann, on UK inflation and rates. The softer inflation expectations in the New York Fed Consumer (see below) boosted the market sentiment. Notable block buying in the 2-year T-notes futures (ZTU3) also helped lift the front end, seeing the 2-year yield lower.
Both the USD40 billion 3-year and the 10-year auction results came with tails, being awarded at slightly higher yields than the when-issued levels at the time of auction. The bid-to-cover ratios were also modestly lower, 2.7x vs 2.92 prior for the 3-year and 2.36x vs 2.45 prior for the 10-year. Nonetheless, the Treasury markets traded firmer after the auction result announcements. The 2-yield dropped by 2bps to 4.58% and the 10-year yield finished the session unchanged.
Hong Kong & Chinese equities (HK50.I & 02846:xhkg): subdued market session
The equity markets in both Hong Kong and mainland China had a lackluster session, with minimal movement observed. The Hang Seng Index concluded the day nearly unchanged, while the CSI300 index inched up by a modest 0.2 percent. Despite expectations of an impending reduction in the 1-year Medium-term Lending Facility Rate (MLF rate) by the People's Bank of China this Thursday, market excitement remained subdued as investors opted to remain on the sidelines, awaiting key economic data from China and the US Federal Reserve's decision on interest rates.
Notably, shares of automakers exhibited strong performance in both the Hong Kong and mainland A-share markets. XPeng (09868:xhkg) witnessed a remarkable surge of 11.1 percent as its newly launched G6 SUV garnered significant attention, attracting 25,000 customers who placed pre-orders with a down payment of RMB2,000 each within the initial 72 hours. Furthermore, companies in the new energy and consumer sectors also experienced gains. Xingyi Solar (00968:xhkg) advanced, while Trip.com (09961:xhkg) recorded a 2.6 percent rise. Haier Smart Home (06690:xhkg) witnessed a gain of 2.9 percent, and Budweiser (01976:xhkg) added 1.9 percent to its stock value.
In recent days, the momentum of the Hang Seng Index rally has diminished, while the CSI300 index continued to exhibit sideways trading at low levels.
FX: Choppy day for yields and cable
The US dollar was mixed on Monday ahead of event risks lining up for the week. GBPUSD touched highs of 1.2600 but was rejected and slid all the way to sub-1.25. UK gilt yields rose higher, with 2-year yields revisiting the September highs, on BOE Mann warning of persistent inflation, but failed to support cable as fiscal concerns rose. AUDUSD continued to surge on China stimulus hopes, rising above 0.6750. EURUSD as rejected ahead of 1.08 but now seeing fresh gains above 1.0760 again. USDJPY staying range-bound but may well be exposed if US CPI surprises today.
Crude oil: down 4% on demand weakness concerns
Crude oil prices fell sharply on Monday on continued worries about demand outlook in the US and no announcement from China on any stimulus hopes despite widespread hopes. WTI prices plunged to lows of $66.80/barrel while Brent was seen below $72 breaking below the recent range lows. Futures markets continue to signal weakness in the physical market despite Saudi warnings but macroeconomic outlook will need to stabilize before that changes. Iran confirmed that it was not in talks with the US about a nuclear deal after the market was spooked by rumours last week that it was making progress in talks over its nuclear program. Focus turns to OPEC‘s monthly oil market report due today followed by the IEA on Wednesday.
Gold: all eyes on key central bank decisions
Gold remains rangebound after as it continues to struggle for momentum, currently exemplified by its struggle to break above the 21-day moving average, today at $1965. An eventful week awaits with rate decision from several major central banks, the most important being Wednesday’s FOMC meeting where a hawkish pause is expected. Support remains firm below $1940.
What to consider?
Ahead of the CPI release, NY Fed’s May survey sees near-term inflation easing
The NY Fed's May Consumer Survey saw median 1yr-ahead inflation expectations fall to 4.1% (prev. 4.4%), the lowest levels since May 2021. On the flip side, 3yr-ahead inflation expectations rose to 3% (prev. 2.9%), and 5yr-ahead rose to 2.7% (prev. 2.6%). Commentary said labour market expectations were mixed with expected earnings growth declining, and unemployment expectations and perceived job loss risk improving. This remains in-line with what the market is expecting – with recession risks having reduced as banking sector and debt ceiling concerns have eased but rate hikes working through the economy resulting in a slowdown.
Trading the US CPI release
Traders may find it extremely difficult to position for the CPI release today as it comes just ahead of the FOMC decision. Consensus is looking for core CPI to soften to 5.2% YoY from 5.5% previously but stay unchanged on a MoM basis at 0.4%. Meanwhile, market is only pricing in a 25% chance of a rate hike from the Fed in June, so it will take a massive CPI beat to really change that. Let us consider the different scenarios on what the CPI release could mean for the markets:
- Core CPI above 5.5% YoY
- 25bps rate hike for June could be fully priced in
- Equities reverse lower
- USD higher on the back of JPY
- Gold slumps
- Core CPI between 5.2-5.5% YoY
- higher probability for a July rate hike
- range-bound to higher markets driven by momentum but focus turns to Fed decision the next day
- Core CPI below 5.2% YoY
- more rate cuts being priced in for 2023
- Animal spirits in equities (potentially more bubbles)
- USD could still go higher as risk sentiment takes a beating
- Gold rushes higher
Weekly US crop conditions report shows decline in conditions for key crops
The USDA reported crop conditions declined for corn, soy, oats, and spring wheat in the latest week. Report showed that 8% of corn is rated poor/very poor as of June 11, up 2% from the previous week while corn rated good/excellent fell 3% to 61%. Similarly, 9% of soybeans in poor/very poor condition, up 2% from the previous week while 59% of soybeans were rated in good/excellent condition, down 3% from the previous week.
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