What’s happening in markets?
US equities (US500.I and USNAS100.I): Cyclicals outperform mega-cap techs amid position adjustments
Equity markets saw a modest uptick, with the S&P 500 edging up by 0.2% and the Nasdaq 100 ending the day nearly flat. The VIX, a measure of market volatility, dropped to 13.96, reflecting a slightly calmer sentiment among investors. However, beneath the surface, there were notable shifts in performance as cyclicals exhibited outperformance against mega-cap tech stocks, while small-cap companies gained ground against their larger counterparts.
The market dynamics could be attributed to a waning concern of an impending recession in the US as well as position adjustments aimed at fine-tuning the prevailing overweight position in mega-cap tech stocks in favor of cyclicals and small-caps. This tentative rotation in investor sentiment was evidenced by the impressive surge of 2.7% in the Russell 2000, significantly outperforming both the S&P 500 and the Nasdaq 100 on Tuesday. Meanwhile, Nvidia (NVDA:xnas) retraced, falling 1.3%, while Apple (AAPL:xnas) ticked down by 0.2% and Microsoft (MSFT:xnas) declined by 0.7%.
On a positive note, regional banks rallied, providing a boost to the market. The SPDR S&P Regional Banking ETF (KRE:arcx) rebounded from the support of the 50-day moving average, surging 5%. This resurgence in regional banking shares came as concerns about potential turmoil among these lenders abated to some extent.
Treasuries (TLT:xnas, IEF:xnas, SHY:xnas): yields exhibit mixed performance
A large block sale of 10,575 contracts in the September 2-year T-notes futures (ZTU3) exerted pressure on the front end of the yield curve. Additionally, remarks from former Federal Reserve Vice Chair Richard Clarida, indicating the likelihood of one or two further interest rate hikes and a “very high bar” for any rate cuts in 2023, added to the upward momentum in the rise in yields. The 2-year yield rose 8bps, reaching 4.54% at one point. However, it managed to recover some of the losses and concluded the session with a mere 1bp uptick, settling at 4.48%. In contrast, the longer end of the curve exhibited a stronger performance, as the 10-year yield declined by 2bps to reach 3.66%, resulting in a flattening of the 2-10 yield curve by 3bps to -82bps.
Chinese equities (HK50.I & 02846:xhkg): Weakness in Apple's suppliers
The Hang Seng Index started strong, rising as much as 1.4% in the early trading session due to a robust rally in China property developers. Longfor (00960:xhkg) experienced a notable increase of 11% at one point. However, the benchmark index relinquished all its gains in the afternoon and ended the day nearly flat, primarily influenced by weakness in the industrials and utilities sectors.
Techtronic (00669:xhkg) faced a significant decline of 4.7% following the release of another short-selling report by Jehoshaphat Research. The report alleged that the power-tool manufacturer improperly sold products that were supposedly exclusively made for Home Depot in its own outlet stores as "factory blemished" items.
The Apple supply-chain industrial names also suffered as investors displayed a lukewarm reception to Apple's newly introduced Vision Pro mixed reality headset. Cowell E (01415:xhkg), which supplies lenses to Apple, experienced a sharp drop of 19.1%. Sunny Optical (02382:xhkg) declined by 1.6%, and AAC Technologies (02018:xhkg) saw a decrease of 2.6%.
Weakness was observed in the utilities sector, with China Resources Power (00836:xhkg) falling by 3% and CK Infrastructure (01038:xhkg) experiencing a decline of 1.3%. The HSTECH index concluded the day 0.2% lower, as the gains made by EV makers, JD.COM (09618:xhkg), and Netease (09999:xhkg), were offset by weakness in China Internet stocks. Additionally, concerns regarding mounting local government debts dampened market sentiment.
The CSI300 also faced a decline of 0.9%, primarily influenced by semiconductor companies and manufacturers in Apple's supply chain. Goertek (002241:xsec) witnessed a significant plunge of 6.9%, while Luxshare Precision (002475:xsec) fell by 7.3%.
FX: AUD boosted by RBA’s surprise hike, BOC up next
AUDUSD emerged as the strongest currency on the G10 board yesterday after a second consecutive surprise rate hike by the Reserve Bank of Australia to take the cash rate to 4.1%. Bank of Canada meets next, and a similar hawkish surprise is expected, which is strengthening CAD. USDCAD edging lower below 1.34 going into the meeting despite oil prices in a modest decline yesterday. USDJPY remains capped at 140 while EURUSD attempting to move back above 1.07 with eyes on German industrial production due today to assess whether the growth story worsens into Q2. GBPUSD continues to find support at 1.2400, edging back higher above 1.2430.
Crude oil: remaining range-bound after pump and dump
Concerns over global demand weakness are back in focus for oil traders and the Saudi-cut driven gains have thus been erased. The Energy Information Agency said that oil demand in the US will grow at just under 1% in 2023 due to a forecast slump in diesel demand. The EIA also upgraded its forecast for US supply in its Short-Term Energy Outlook. WTI prices traded below $71 before recovering in the late US session while Brent was below $75 at one point.
What to consider?
World Bank raised 2023 growth forecast while lowering 2024 forecast
The World Bank has raised its 2023 global growth outlook as the United States, China and other major economies have proven more resilient than forecast, but said higher interest rates and tighter credit will take a bigger toll on next year’s results. It forecasted read GDP growth of 2.1% this year, up from 1.7% forecast issued in January but well below 2022 growth of 3.1%. Meanwhile, 2024 growth forecast was lowered to 2.4% from 2.7% in January. The bank also released a new 2025 global growth forecast of 3%.
Australia’s RBA surprises with another rate hike
For the second consecutive meeting, the RBA surprised expectations with another 25 basis point rate hike, taking the cash rate target to 4.1%. The RBA’s statement indicated that while it felt inflation was past its peak, that it would require some time for it to return to the target range and that the move was aimed at increasing confidence that inflation would fall. The statement also noted wage pressures rising (as it began increasing rates last year, much of its focus was on weak wage growth as a reason to take a slow approach to hiking rates), particularly in the public sector. House price rises were also noted and the Bank guided for possible further policy tightening going forward: “some further tightening of monetary policy may be required”. RBA’s Lowe and Bullock were on the wires this morning in Asia and Lowe further reaffirmed the need for more rate hikes.
China’s export growth projected to have slowed significantly in May
According to Bloomberg's consensus forecasts, China is anticipated to experience a deceleration in export growth, measured in USD terms, during the month of May. Projections indicate a decline of -1.8% Y/Y, a significant drop from the 8.5% Y/Y growth observed in April. Similarly, the median forecast in the Bloomberg survey suggests that import growth in USD terms is expected to exhibit a slightly more negative trend in May. Projections indicate a contraction of -8% Y/Y, compared to the -7.9% Y/Y decline in April.
Coinbase sued by SEC as crackdown on crypto exchanges widens
Coinbase tumbled 12% after it was sued by the SEC for allegedly breaking US securities rules by failing to register as a broker, national securities exchange or clearing agency. The enforcement action came a day after the SEC filed a complaint against Binance and its chief executive Changpeng Zhao, alleging an array of civil charges including improperly mixing customer funds with those of a trading firm owned by Zhao.
Destroyed dam in Ukraine opens new risks
The dam at the Kakhovska hydroelectric power plant has been destroyed yesterday which led to flooded banks on the west side of the Dnipro River in the Kherson regions. In addition, the destruction will lower the water level in Kakhovska reservoir which is used for cooling of the Zaporizhzhia nuclear power plant, although experts say that a nuclear incident is “highly unlikely”. The destruction of the dam is also an indication that the Ukrainian offensive is accelerating.
German industrial production on watch today
Recent data has highlighted that the Germany economy slid into a recession in Q1 as dwindling global demand added downside pressures on the industrial economy. This makes German data a key focus this week, with factory orders for April out yesterday also hinting at further economic stress in Q2. Factory orders were down 0.4% MoM vs. expectations of +2.8%. industrial production for April will be key to watch today with EURUSD trading just below 1.07.
Bank of Canada expected to send a hawkish message
Bank of Canada’s policy announcement is due today. Although no rate hike is expected, but stronger-than-expected GDP and CPI metrics, as well as a buoyant housing market have increased the possibility of a 25bps rate hike and a rate hike by July is fully priced in. CAD is strengthening despite lower oil prices in anticipation of a hawkish shift from BOC which has kept the door open to further tightening despite being on a pause since January.
Blinken visits China in coming weeks
Bloomberg reports that the U.S. Secretary of State Antony Blinken is visiting China in the coming weeks. Blinken’s trip was initially planned for February this year, but it was scrapped after the China balloon incidence.
TSMC cuts 2023 capex outlook
TSMC (TSM) expects H2 performance to be better than H1 but sees H1 revenue down 10% Y/Y. overall 2023 revenue is seen down by low-to-mid single digits amid global tech slump and uncertainty over Chinese recovery. Company said that the rising demand for AI is driving orders and it is seeing a recovery in some of its end markets. But it said its FY capex is to come around USD 32bln vs its 32-36bln prior guidance, dimming the outlook for semi cap names.
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