Financial Markets Today: Quick Take – May 31, 2022 Financial Markets Today: Quick Take – May 31, 2022 Financial Markets Today: Quick Take – May 31, 2022

Financial Markets Today: Quick Take – May 31, 2022

Macro 6 minutes to read
Saxo Strategy Team

Summary:  Equity markets continued higher in Europe yesterday as US markets were closed, Asian stocks were mixed and down from the highs intra-session in many cases as global crude oil prices continue to soar with sharp fresh price gains overnight in the wake of new EU bans on Russian imports. Rising oil prices risk sapping the bullish momentum and US treasury yields have jumped in overnight trading, adding possible further headwinds after the recent sharp market squeeze higher.


What is our trading focus?

Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I)

Nasdaq 100 futures rallied to 12,883 before meeting resistance pulling back to the 12,745 level this morning indicating a potential short-term headwind. Unless the Nasdaq 100 futures close below Friday’s close 12,678 then there is still room for hitting 13,000 in the short term. The news flow is light given yesterday’s holiday in the US, but trading is back today, and Fed’s Waller suggested yesterday that he favours 50 basis points hikes for several meetings suggesting financial conditions are not tight enough relative to the perceived inflationary pressure in the economy.

Hong Kong’s Hang Seng (HSI.I) and China’s CSI300 (000300.I)

The two indices continued to rally on reopening and recovery prospects as Shanghai will go ahead and lift the lockdown tomorrow except for high/medium risk areas. The opening includes orderly resumption of public transport as well as private vehicle transport and allowing movements in and out of residential compounds. Residents are required to do regular PCR tests every 72 hours. The National Development & Reform Commission (NDRC) and National Energy Administration released an action plan on new energy development yesterday. Chinese new energy and electric utility names surged 3% to 13%. 

GBPUSD

Our outlook for sterling is one of the least favorable among G10 currencies as the UK is beset with massive external imbalances, aggravated over the last several months by the spike in energy prices. As well, the UK economy is severely supply-side constrained and will likely prove one of the first economies to tilt into recession in this cycle, with a Bank of England that is generally reluctant to hike aggressively due to the fears for a cost-of-living crisis and recession incoming. Recently, the GBPUSD has backed up sharply from below 1.2200 to all the way above 1.2600 but is finding resistance just above that level and well below the huge 1.3000 area. If the recent squeeze in risk sentiment rolls over to new concerns for the general outlook for global markets, GBPUSD may roll over for a retest of the cycle lows and perhaps beyond toward the 1.2000 level.

AUDUSD

The Aussie is getting a boost from a combination of hopes for Chinese growth resurgence on the news that free movement has resumed in Shanghai and as the fresh jump in oil prices is pulling focus back to commodity markets, but the strong comeback from the lows in AUDUSD below 0.7000 may be challenged soon if the rise in oil prices drives concerns for risk assets and eventually, the global growth outlook. Already, the USD has rallied a bit from support elsewhere from yesterday’s lows as US yields have come back higher after yesterday’s US holiday. An important resistance level for the AUDUSD pair is the 0.7260 area, which is near the 200-day moving average and a pivot high from early this month. For a rejuvenation of the bearish case, A sharp sell-off back below about 0.7125 support would go a long way.

Crude oil (OILUKJUL22 & OILUSJUL22)

Crude oil trades higher for a ninth day after EU leaders agreed on a partial ban on imports of crude oil from Russia while China’s reopening has raised the prospect of recovering demand from the world’s top importer. Both WTI and Brent look set for a sixth consecutive monthly gain, and a near 90% gain during this time. The tight supply of refined fuels meanwhile has pushed prices of gasoline and diesel up by 103% and 123% respectively. The EU ban will immediately cover more than 2/3 of oil imports (1.6 million barrels a day), and with Germany and Poland saying they will cut pipeline supply; the impacted oil would exceed 90% by year end. The ban would force Putin to sell his oil in Asia instead at a sharply discounted price, currently around $35/b below Brent. OPEC+ meets on Thursday to rubberstamp another illusive 430k barrels per day production increase. The group has fallen well behind its own target with several countries, led by Russia, struggling to reach their quotas.

Gold (XAUUSD)

Gold once again failed to challenge key resistance at $1868/70 after a spike in US Treasury yields, a recovering dollar, and another risk-on day in the stock market hurt sentiment towards the safe-haven metal. The recovery has yet to show enough strength to challenge those looking for lower gold prices, hence a continued focus on economic data, the dollar and yield developments. Key support being an area between $1841 (200 DMA) and $1838 (38.2% of the recent recovery)

US Treasuries (TLT, IEF)

US treasury yields jumped higher overnight on the reopening of US futures markets after the Monday holiday, suggesting that the recent low-energy trading sessions bottoming out for the 10-year Treasury benchmark yield just above 2.70% area are an important resistance area for the recent treasury market consolidation. Focus for treasury traders will now shift to the impact of the Fed’s balance sheet reduction, or QT, that is set to kick off tomorrow, as well as whether inflation may prove stubbornly high and require more Fed tightening. Important US data for the balance of the week, including the ISM Manufacturing survey up tomorrow and ISM Services survey up Friday after the May jobs report will also weigh in the mix. The May 9 cycle highs in US treasury yields of 3.20% fell just a few basis points short of the late 2018 high.

What is going on?

The ECB is ready to hike interest rates

ECB’s chief economist Phillip Lane confirmed in an interview to the Spanish media outlet Cinco Dias that the central bank will likely hike by 25 basis points interest rates either in July or in September depending on the evolution of inflation and growth (the first estimate of the eurozone Q1 GDP will be released one day before the July ECB meeting). He also indicated that the central bank plans to exit negative rates by the end of the third quarter. This is basically what ECB president Christine Lagarde mentioned last week.

Real estate volume down 60% in Sweden. Fresh data by Pangea suggests that higher financing rates is causing increased uncertainty over pricing and deals. The sector’s market value is about 40% GDP and the Riksbank is becoming worried over falling activity and potentially prices as it could cause credit agreements to be violated.

Higher EU inflation may boost ECB tightening expectations

May inflation prints in Germany and Spain have come in above expectations. Germany’s May HICP inflation jumped to 8.7%, beating consensus forecast of an 8.1% increase mainly as food prices jumped higher. Spanish inflation was also higher at 8.5% vs. a consensus estimate of 8.3%. This adds upside risk to the outlook for euro-area inflation of 7.6% in May and will likely reinforce the European Central Bank's resolve to lift rates, possibly at a more aggressive pace than previously hinted.

Fed’s Waller hints at more than a couple of 50bps rate hikes

Fed Governor Christopher Waller said he “supports tightening policy by another 50bps for several meetings”. His remarks hinted that he is not taking 50bps hikes off the table until inflation comes down closer to the 2% target, which suggests more than two 50bps rate hikes. Fed also begins QT tomorrow which adds another layer of uncertainty to the markets.

China’s May PMIs bounced from their April lows

Official manufacturing PMI came at 49.6 in May, beating street consensus (Bloomberg survey 49) and bouncing 2.2 points from April’s 47.4. Non-manufacturing PMI rose to 47.8 in May, well exceeding the market expectation at 45.5 and 41.9 in April.  Although both are still in contractionary zone, the rebound was board based. Large enterprises led the recovery in manufacturing PMI with the index back to expansionary zone with a 51.0 print. Among non-manufacturing activities, the construction sub-index moderated to 52.2 from 52.7 in the previous month while the services sub-index bounced to 47.1 in May from 40.0 in April.

Port congestion remains a major issue partially due to China’s zero covid policy

Due to Shanghai’s lockdown which started from late March onwards, up to 260,000 twenty-foot equivalent units (twenty-foot-long containers) could not leave the port of the city in April. This will take weeks to ship, perhaps between eight to ten weeks. Neighboring ports are congested too. This is the case of the port of Ningbo-Zhoushan (busiest port in the world in terms of cargo tonnage) where many containerships have been diverted away from Shanghai in recent weeks. Expect the situation to worsen in the short-term as a new wave of Chinese exports looms with the reopening of the economy.

What are we watching next?

New inflection point for global markets dead ahead?

The recent relief rally, and arguably squeeze, in global equity markets was driven in part by excessive bearish sentiment, but also as the narrative has developed that we may have reached peak inflation for now after the April US Core PCE inflation came in line with expectations on Friday and sharply lower from the March peak, in part on base effects from the prior year. As well, US yields and Fed tightening anticipation have eased lower this month, for short rates on May 4 after Fed Chair Powell pushed back against the idea the Fed could hike by more than 50 basis points, and for longer US treasury yields a few days later, helping in turn to take the US dollar lows as well from a peak just before mid-month. And yet, here we are with global crude oil prices jumping aggressively to new highs and set for the Fed to actually begin balance sheet tightening (QT) tomorrow, with a ramping up of to a pace of $95 billion/month over the next three months.

President Biden will hold a rare meeting with Fed Chair Powell at the White House today

The meeting is to discuss the state of the US and global economy, especially as inflation remains a key concern ahead of the mid-term elections and as US gasoline prices are set for fresh records in the wake of the most recent sharp rises in crude oil prices.

Earnings Watch

Today’s focus is Salesforce earnings, with analysts expecting Salesforce to report FY23 Q1 revenue (ending 30 April) growth of 24% y/y on top of a significant operating margin expansion expected to boost free cash flow generation substantially. The strong USD in Q1 may have weighed on revenue growth. The key metric besides operating margin is the cRPO (current remaining performance obligation) metric which is deemed to be the best leading indicator for Salesforce.
  • Today: DiDi Global, Salesforce, HP, KE Holdings
  • Wednesday: Acciona Energias Renovables, China Resources Power, Veeva Systems, HP Enterprise, MongoDB, NetApp, Chewy, GameStop, UiPath, SentinelOne, Elastic, Weibo
  • Thursday: Trip.com, Pagseguro Digital, Remy Cointreau, Toro, Cooper Cos, Meituan, Crowdstrike, Lululemon, Okta, RH, Asana, Hormel Foods

Economic calendar highlights for today (times GMT)

  • 0645 – France May Flash CPI
  • 0700 – ECB's Villeroy to speak
  • 0755 – Germany May Unemployment Change/Rate
  • 0800 – Poland May CPI
  • 0830 – UK Apr. Consumer Credit / Mortgage Approvals
  • 0850 – ECB's Makhlouf to speak
  • 0900 – Eurozone May Flash CPI
  • 1000 – Sweden Riksbank Governor Ingves to speak on Inflation Target
  • 1200 – Hungary Rate Decision
  • 1230 – Canada Mar. GDP
  • 1300 – US Mar. S&P CoreLogic Home Price Index
  • 1345 – US May Chicago PMI
  • 1400 – US May Conference Board Consumer Confidence
  • 1430 – US May Dallas Fed Manufacturing Activity
  • 2030 – API's Weekly Crude and Fuel Stock Report
  • 0130 – Australia Q1 GDP
  • 0145 – China May Caixin Manufacturing PMI

Follow SaxoStrats on the daily Saxo Markets Call on your favorite podcast app:

Apple Sportify Soundcloud Stitcher

Quarterly Outlook 2024 Q3

Sandcastle economics

01 / 05

  • Macro: Sandcastle economics

    Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.

    Read article
  • Bonds: What to do until inflation stabilises

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain inflation and evolving monetary policies.

    Read article
  • Equities: Are we blowing bubbles again

    Explore key trends and opportunities in European equities and electrification theme as market dynamics echo 2021's rally.

    Read article
  • FX: Risk-on currencies to surge against havens

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperform in Q3 2024.

    Read article
  • Commodities: Energy and grains in focus as metals pause

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities in Q3 2024.

    Read article

Disclaimer

The Saxo Group entities each provide execution-only service, and access to analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Inspiration Disclaimer and (v) Notices applying to Trade Inspiration, Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular, no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Trading in financial instruments carries risk, and may not be suitable for you. Past performance is not indicative of future performance. Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/en-sg/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Markets or its affiliates.

Saxo Markets
88 Market Street
CapitaSpring #31-01
Singapore 048948

Contact Saxo

Select region

Singapore
Singapore

Saxo Capital Markets Pte Ltd ('Saxo Markets') is a company authorised and regulated by the Monetary Authority of Singapore (MAS) [Co. Reg. No.: 200601141M ] and is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms & Risk Warning to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products such as Margin FX products may result in your losses exceeding your initial deposits. Saxo Markets does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Markets does not take into account an individual’s needs, objectives or financial situation.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-sg/about-us/awards.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website are not intended for residents of the United States, Malaysia and Japan. Please click here to view our full disclaimer.

This advertisement has not been reviewed by the Monetary Authority of Singapore.

Apple and the Apple logo are trademarks of Apple Inc, registered in the US and other countries and regions. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.