Bond. Long Bond(s)
Chief Investment Officer
Summary: Equity markets traded largely sideways yesterday, while bond markets had more volatility on display, with a rise in US yields tamed once again later in the session. The Asian session was fairly upbeat, although China reported a larger than expected drop in exports in May. The Bank of Canada meets later today, will it prove the second G10 central bank after Australia’s RBA to resume hiking rates after a brief pause?
US equities are shrugging off every piece of bad news this year with S&P 500 futures extending their gains again yesterday to a new all-time high on the close for the current cycle. The most spectacular observation amid this recent AI-driven rally has been the collapse in implied volatility with the VIX Index closing below 14 yesterday, the lowest level since before the pandemic broke out in early 2020. Earnings estimates for the next 12 months also continue to be revised up suggesting the equity market is not worried about a recession despite many predictions of this from many leading economists and signals from the bond market. In S&P 500 futures the next level to climb and stay above is the 4,300 with the index futures trading around 4,291 this morning.
The AUD maintained broad strength after a second consecutive surprise hike at yesterday’s RBA meeting, although AUDUSD has yet to punch through critical resistance ahead of the 0.6700 area, which includes the 200-day moving average. US treasury yields were capped after a sell-off in the treasury market, helping the JPY to trade at the strong end of the range versus the Euro (the 148.59 pivot low of the last three weeks in focus there). Later today, the Bank of Canada meets (more below) after USDCAD recently fell sharply within its trading range of the last couple of months but has been trendless and bottled up in a wide 1.3262-1.3862 range for over six months.
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. China’s crude import jumped by 17% last month to 12.2m barrels a day on rising refinery demand after the recent maintenance period. WTI and Brent both trades softer for a third day but within their established ranges, in Brent between $72 and $78.
Gold traded steady on Tuesday following Monday’s recovery rally that was triggered by data showing the US service sector nearly stalled in May as business activity and orders dried up, raising the prospect of a Fed pause while reducing bets on a July rate hike. It highlights gold’s current data dependency given their impact on short term rates to which the yellow metal is currently highly correlated. Overall, gold remains in a short-term downtrend, and for that to change it first needs a break above $1974, the 21-day moving average, and then the recent highs around $1985.
The US Treasury announced it will increase the size of the upcoming T-Bills auctions. Wednesday’s 4-month T-Bills sale will be increased by $2bn to $46bn. Thursday's 4- and 8-week T-Bill auctions will increase by $25bn to $60bn and $15bn to $50bn, respectively. The yield curve bears flattened at the news, and 2-year yields rose to test resistance at 4.50%. Since the end of April 2-year US Treasury yields soared by approximately 50bps, signaling that the Fed might not be done hiking and that it might keep rates higher for longer. To confirm this thesis might be the dot plot next week.
We still see scope for 2-year yields to soar test resistance at 4.68%, we believe it’s unlikely rates will soar to break 5%. As yields rise towards the 5% level, the financial sector will begin to suffer as happened last September during Truss’ mini-budget crisis. Therefore, the BOE will need to step into rescue, limiting rates’ upside to avoid a financial crisis.
The Direction 20+ Year Treasury Bull 3X (TMF:arcx) more than doubled its assets as investors bought it amid speculations that the Fed is done with its rate hiking cycle. Yet, it returned only 2% YTD, while it plunged 73% in 2022, showing that the strategy didn't take off yet. On the contrary, the Ultra Short 20+ Year Treasury ERF (TBT:arcx) suffered from the worst outflows showing that there might be little downside in US Treasury still.
China reported a –7.5% year-on-year drop in exports in dollar terms, far below expectations for a –1.8% drop. It was the first drop in exports in three months. The import numbers were also negative, at –4.5% year-on-year, well above expectations for a –8% drop, and marking the third consecutive month of falling demand. The weak export numbers will have observers looking for a new round of policy stimulus. Imports of key commodities meanwhile was firm with crude oil imports rising to 12m b/d, second highest this year, and natural gas to a January 2021 high at 10.6m tons. Copper (ore & concentrates) and soybeans both reached record highs at 2.6m and 12m tons respectively.
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%.
The Spanish fast-fashion retailer reports Q1 revenue and EBIT beating estimates as the company’s cost focus and improved store efficiencies have improved underlying performance. Gross margin for the quarter rose to the highest level in a decade suggesting fashion retailers might have turned a corner after years of headwinds due to the pandemic.
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.
EU member states may be banned from using equipment from firms thought to represent a security risk in 5G wireless networks. Topping the list of notable firms is China’s Huawei, with only about a third of EU nations having moved to bar Huawei from its 5G networks since the EU rolled out security recommendations back in 2020.
Bank of Canada’s policy announcement is due today. The Bank has paused its hiking cycle since January as it preferred to assess the impact of the tightening it had carried out since last year, but now the market is approximately 50/50 on whether the BoC will tightening rates today, with most of a 25 basis point rate hike priced for the following meeting in July. Stronger-than-expected GDP and CPI metrics, as well as a buoyant housing market are likely weighing on the Bank’s considerations. CAD has maintained its recent strengthening move despite oil prices coming off their rally highs this week on this anticipation of a hawkish shift from BoC.
Next earnings release to watch is DocuSign reporting tomorrow after the market close with analysts expecting FY24 Q1 (ending 30 April) revenue growth of 9% down from 26% a year ago reflecting the ongoing decline in corporate technology spending. Adjusted EBITDA is expected at $156mn up from $2mn a year ago.
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.