What’s happening in markets?
US equities (US500.I and USNAS100.I): Strong jobs report boosts market sentiment
Equity investors expressed their enthusiasm over a robust job gain, which alleviated concerns of a recession, while the unemployment rate and weekly earnings data indicated a potential decrease in wage inflation. As a result, the S&P 500 surged by 1.5% and the Nasdaq 100 climbed by 0.7%. The stock market rally was widespread, with all 11 sectors in the S&P 500 experiencing gains, led by materials and industrials. Notably, Celanese (CE:xnys), 3M (MMM:xnys), and DuPont (DD:xnys) registered remarkable surges of over 8%.
The market sentiment has shifted risk-on. The CBOE Volatility Index (VIX) dropped to 14.6, reaching its lowest level since February 2020. Additionally, the previously struggling regional banking sector staged a strong rally, with SPDR S&P Regional Banking ETR soaring by 6% on Friday and surpassing the 50-day moving average.
Treasuries (TLT:xnas, IEF:xnas, SHY:xnas): yields surge on strong payroll data
Yields surged due to an unexpectedly large increase in non-farm payrolls for May, coupled with upward revisions for the preceding two months (see details below). The initial market reactions were volatile as traders deliberated the strong headline payroll figures against the rise in the unemployment rate due to a decline in employment indicated by the household survey, as well as the moderation observed in average hourly earnings and weekly hours. Consequently, selling pressure intensified and extended the losses in Treasuries throughout the afternoon trading session, resulting in yields concluding near their highest levels of the day. The 2-year yield surged 16bps to 4.5% and the 10-year yield added 10bps to 3.69%.
Chinese equities (HK50.I & 02846:xhkg): Hong Kong and mainland Chinese stocks rally on the property, EV, and Internet boom
Hong Kong and mainland Chinese stocks rallied strongly driven by China real estate, Internet, and EV names. The Hang Seng Index surged 4% and the CSI300 Index advanced 1.4%. Market chatters of additional policies from the Chinese authorities to stimulate demand for residential housing and the expectation of a pause in rate hikes in the U.S. were cited as triggers for the upward movement. Given the prevalent underweight allocation to China exposure among institutional investors and the widespread pessimism prevailing in the market toward Chinese and Hong Kong equities, even minor catalysts were sufficient to spark a rush to buy. A close above the 200-day moving average (currently at 19286) in the upcoming sessions could enhance the technical outlook for the Hang Seng Index and potentially trigger further buying.
The advance in both Hong Kong and mainland bourses was foremost led by China real estate stocks, with Longfor (00960:xhkg) soaring 17.2% and Country Garden Services (06098:xhkg) surging 13%. EV stocks also performed well, benefiting from strong May delivery figures. BYD (01211:xhkg) gained 4.5% after doubling its sales to over 240k vehicles in May. Nio (09866:xhkg), Li Auto (02015:xhkg), and XPeng (09868:xhkg) saw gains ranging from 3.8% to 7.9%. China Internet stocks rallied sharply, with Tencent (00700”xhkg), Alibaba (09988:xhkg), JD.COM (09618:xhkg), Baidu (09888:xhkg), and Meituan (03690:xhkg) surging by 6% to 7.8%.
FX: USDJPY above 140 on positive headline US jobs report
The dollar index firmed up following the US jobs report on Friday as the headline job gains and revisions of the last two months were a positive surprise. As yields surged, USDJPY rose above 140 again after some expected intervention brought the pair to 138.50 last week. The move to 140+ was being extended slowly at the Asian open on Monday keeping focus on May highs of 140.93. GBP also extending the downside, and eyes are on 1.24 while EURUSD is testing a break below 1.07. AUDUSD stays above 0.66 after firmer CPI print last week and China’s Caixin manufacturing PMI also supports sentiment. Meanwhile, iron ore futures rallied last week on hopes of fresh policy support for China’s property sector.
Crude oil: gapped higher at Asia open on Saudi output cut
WTI crude oil futures (CLN3) gaps up 4.5% at the Asia open on Monday, touching $75, the highest level since May 2 after Saudi Arabia agrees to an extra 1m barrel per day (bpd) supply cut in July to bring stability to the market. This will be on top of a broader OPEC+ deal to limit supply into 2024 as the group seeks to boost flagging oil prices. OPEC+ has in place cuts of 3.66 million bpd, amounting to 3.6% of global demand, including 2 million bpd agreed last year and voluntary cuts of 1.66 million bpd agreed in April. The group also agreed on Sunday to reduce overall production targets from January 2024 by a further 1.4 million bpd versus current targets to a combined of 40.46 million bpd, but these reflect lower targets for Russia, Nigeria and Angola to bring them into line with actual current production levels. While the cuts once again show OPEC’s commitment to support oil prices, the impact from a similar move in April has been completely erased due to the concerns about the weakness of the global economy and its impact on demand.
Copper and Gold: debt ceiling deal and NFP surge improve macro outlook
Copper recorded its first weekly gain in seven weeks as focus turned back to fundamentals amid a slightly improved macro outlook. The deal to lift the US debt ceiling helped boost sentiment across commodity markets, while the strong NFP headline along with weaker details continued to suggest that Fed will remains on a cautious path. Prospects of housing stimulus in China also lifted industrial metals like Copper and Iron ore. Still, a break above $3.80 is needed in copper to reverse the downtrend. Meanwhile, Gold traded higher last week to challenge resistance above $1980 before another strong US job report helped drive some profit taking ahead of the weekend. Key support has now been confirmed around $1950 while resistance remains at $1984.
What to consider?
Mixed US jobs report: strong headline but weak details
The US nonfarm payroll report released on Friday saw strong headline gains of +339k in May, coming in well above the expected 195k. There were also a net +93k revision to the headline prints of the last two months. Wage data was also firm, coming in at 0.3% MoM and 4.3% YoY. And yet, while the Establishment survey was a blowout beat and the strongest print since January, the Household survey unexpectedly tumbled by the most since April 22 as it plunged by 310K jobs resulting in a 0.3% jump in the Unemployment rate which rose from 3.4% to 3.7%. Odds of a June rate picked up slightly after the release, but still only 30% probability is seen, with a July rate hike priced in fully by the markets now. Several Fed officials such as Jefferson and Harker have also recently hinted that the Fed could skip tightening in June to give themselves more time to assess the effect of their actions so far.
President Biden signs the debt ceiling bill into law; markets await bond market response and banking liquidity impact
President Biden successfully enacted the bipartisan legislation on Saturday, effectively halting the $31.4 trillion debt ceiling and mitigating the potential risk of a default by the U.S. federal government. As a result, the focus of the market has shifted towards assessing the bond market's reaction to the influx of Treasury securities and the implications of replenishing the Treasury General Account (TGA) with $500 to $600 billion at the Federal Reserve (Fed), particularly in relation to liquidity within the banking system.
The magnitude of this impact primarily hinges on whether the increase in the TGA arises from a reduction in bank excess reserves, thereby draining liquidity from the banking system, or from a decrease in the Reverse Repo balances of the money market fund at the Fed, which would transfer liabilities on the Fed's balance sheet without affecting banking liquidity.
If money market funds choose to procure the newly issued Treasury bills from the Treasury and finance the transaction by reducing their investments in the Fed's Reverse Repos, while the Treasury deposits the acquired funds into the TGA at the Fed, the liquidity of the banking system would remain unaffected. However, if investors opt to withdraw funds from their bank accounts to purchase the newly issued Treasury bills, and the Treasury subsequently deposits the resulting proceeds into the TGA, it would lead to a depletion of banking liquidity.
Russian defence forces said Ukraine’s offensive failed
The Ukrainian armed forces failed to achieve success in a large-scale offensive on five front sectors in the south Donetsk area, official spokesman of the Russian Defense Ministry Lieutenant General Igor Konashenkov said. In an interview with the Wall Street Journal released on June 3, President Volodymyr Zelensky had said that Ukraine is "ready for counteroffensive."
Amazon explores mobile phone service partnership, Dish Network surges 16.4%
Newswire reports suggest that Amazon is in talks with wireless carriers, including Verizon (VZ:xnys), T-Mobile (TMUS:xnas), and Dish Network (DISH:xnas), to offer low-cost or even free mobile phone service to its Prime subscribers. Following this news, the share price of Dish Network surged by 16.4%, while Verizon slid 3.2% and T-Mobile shed 5.6%. Meanwhile, Amazon registered a gain of 1.2%.
For a global look at markets – tune into our Podcast.