Summary: Equity markets jumped higher yesterday as risk sentiment weathered the fresh rise in global yields and even a strong comeback in crude oil prices yesterday after an OPEC meeting. The US dollar is lower and gold prices are pushing on resistance ahead of what is traditionally seen as the most important data of the month - the US payrolls change and earnings data and later the US May ISM Services survey. Particularly positive data may be the least supportive for the market should US treasury yields jump aggressively higher in response.
Nasdaq 100 futures staged a big comeback yesterday after briefly breaking below the prior session’s low taking the futures the highest close since 4 May. This morning Nasdaq 100 futures pushed as high as 12,945 getting closer to the 13,000 level but has since retreated a bit. Today’s macro event is naturally the US Nonfarm Payrolls figures for May which is expected to show more gains, but the key detail to watch is the hourly earnings data. Sentiment has changed for the better in equities and we can see an extension of the recent rebound over the coming week. The key risk to equities is still inflation and here commodities are a must watch and especially given the ongoing reopening of China.
The most sensitive of USD pairs traditionally to US data is poised near the 130.00 level, the last resistance ahead of the 131.35 top ahead of key US economic data (see more below) and yields rising globally this week at a faster pace than the US (note EU yields posting new cycle highs along much of the curve) has kept the JPY under broad pressure due to the Bank of Japan’s yield-curve-control policy, which means that any rise in yields elsewhere cannot be absorbed by the Japanese bond market and is instead absorbed by the yen.
Watching whether AUDUSD “sticks the landing” this week after a strong rally week that has seen rising yields globally outpacing the rise in US treasury yields, with hopes for an improved Australian outlook, especially on China possibly transitioning out of Covid lockdown limitations, seeing Australian yields punching to new cycle highs. And yet financial conditions globally have generally eased as this fresh rise in yields has not spooked risk sentiment, encouraging a strong comeback in the Aussie. AUDUSD has been interacting with the key resistance around 0.7260, which includes the 200-day moving average ahead of important US data today. A significant follow through higher will essentially wipe away the bearish case for the pair, which is already on life support.
Crude oil jumped on Thursday after OPEC+ decided to raise their monthly production output by around 50%, thereby making a futile attempt to soothe worries about a summer price spike as demand picks up. Ahead of the meeting prices dropped on speculation Saudi Arabia would increase production but with the announced increase being shared according to existing rules, the impact is going to be minimal. Not least considering OPEC+ is already trailing their production target by around 2.5 million barrels per day and only a few producers led by Saudi Arabia have spare capacity to increase production. US inventories of crude oil fell more than 5 million barrels last week while gasoline stockpiles hit a five-year low. In addition, refinery margins hit a fresh multiyear high, all signs of tightness, pointing to the need for demand to be curbed and only higher prices or a global economic slowdown can make that happen.
Gold trades near a three-week high as it mounts a fresh challenge on resistance around $1870, the 38.2% retracement of the April to May 211 dollar selloff. Economic growth worries once again lift demand from investors looking for a hedge against a policy mistake, i.e. central banks raising interest rates to the point where growth slumps. Focus on today’s US job report with the next level of interest being $1892.
Traded in a tight range yesterday after selling off sharply the prior day. It is an important day for the treasury market as we have important US data up in early US hours that is likely to set the tone after yields reversed higher earlier this week, with the 10-year Treasury benchmark threatening the 3.00% level ahead of the 3.20% top.
US ADP posted a much-smaller-than expected rise of 128k jobs last month and revised the prior reading down from 247k to 202k. This was below the expected 300k. Jobless claims fell more than expected and, at 200k, continue to signal tight conditions in the labor market. While ADP isn’t a reliable indicator of NFP, there is some sense of caution.
Fed's Brainard said it is hard to make the case for a September pause while Mester reiterated that it is difficult to predict how high rates will need to go but she agrees with 50bps hikes at the next two meetings before considering the appropriate pace.
CrowdStrike Q1 earnings delivered a beat with revenue up 61% and adj. EPS at $0.31 vs. $0.23 expected. Q2 forecasts were at adjusted earnings of 27-28 cents a share on sales of $512.7-516.8 million, above consensus of 24 cents a share on sales of $510 million. Other players such as Okta and Secureworks reported a loss but subscription revenue is on the rise and both also beat expectations. Overall, we remain bullish on cybersecurity theme basket amid rising demand for data security especially after the Ukraine invasion.
US May Nonfarm payrolls change out later today is expected at +320k versus the +428k posted in April. The Unemployment Rate is expected to settle to the modern historical low of 3.5%, which was posted a handful of times before the pandemic disruption of early 2020, although the participation rate has not yet fully normalized to the level prevailing before the pandemic, currently at 62.2% versus about a percent higher on average in late 2019. US Average Hourly Earnings are worth watching as well for any indication of a renewed concern on wage-price spiral risks after the moving average of the month-on-month earnings gains has declined over the last few months. The May data is expected to show a rise of +0.4% MoM and +5.2% YoY. The May ISM Services data is expected to show the pace of economic growth in services-related industries to cool slightly with a reading of 56.5 vs. 57.1 in April. If we get both strong jobs data and a better-than-expected services survey, US yields may rush toward the cycle highs in anticipation of a more hawkish Fed an more inflation, an important test for market sentiment, which this week has managed to maintain a positive risk-on tone despite the snap-back higher in yields.
No important earnings today, so the list of earnings below shows the expected earnings releases next week with the three most important ones to watch are Inditex, NIO, and DocuSign.
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2024: The wasted year
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
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Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
