Summary: Equities tried to piece together a rally yesterday in the US, but only managed a very choppy session with no real direction by the close of trading. Elsewhere, crude oil plunged more than seven dollars per barrel intraday before cutting losses into the close and industrial metals continue to slide. In testimony before a Senate panel, Fed Chair Powell expressed the hope that the Fed tightening will not take the US economy into recession, but that it is possible.
Yesterday’s session was a volatile session that looked very weak initially before turning around and going briefly above the 3,800 level in the S&P 500. However, S&P 500 futures ended the session slightly lower and this morning the index futures are trading around the 3,755 level with the 3,800 level remaining the key one to watch on the upside; a close above 3,800 would confirm that US equities could continue their rebound from the recent lows. Today, we will get a new data point on initial jobless claims which will give a glimpse of whether the US labour market is continuing to weaken.
... climbed 1.3% and 0.7% respectively. Auto makers jumped following report that the Chinese government may extend tax exemptions on electric-car purchases. BYD (01211), Li Auto (02015), NIO (09866), XPeng (09868), Geely (00175) and Great Wall (02333) surged 6% to 10%. Alibaba (09988) rose over 6% following a Bloomberg report suggesting that Ant might apply to the PBoC to become a financial holding company as part of the effort to clear the way for a potential IPO of Ant. Industrial metal mining stocks declined. Jiangxi Copper (00358) was down 11% and China Molybdenum (03993) declined 9%.
The price action in USD pairs remains inconclusive as the USD rally yesterday was reversed, seemingly in inverse correlation with the equity market, which rallied from early weakness. Still, AUDUSD continues to look heavy as the focus there is on weak commodity prices, particularly for industrial metals. Traders are watching the cycle lows near 0.6830 there, with considerable “white space” on the chart on a break. EURUSD is caught in tactical limbo between 1.0400-50 downside pivot levels and the upside resistance zone of 1.0600-50. Watching the Eurozone flash June PMIs this morning for the impact on the euro, while the US dollar will react to swings in risk sentiment and US treasury yields as we are set for another day of Fed Chair Powell testimony.
As noted below, the JPY was sharply stronger overnight on comments from a prominent former official, but the recent extension of JPY weakness looks rather at odds with a considerable consolidation lower in global bond yields. In any case, we now have a modest reversal that provides a “hook” for a tactical bearish case in USDJPY as long as the price action remains below the cycle top of 136.70 as we watch for whether the pair follows through the next important area near 135.00. A further rally in US Treasuries that takes 10-year Treasury yields lower toward 3.00% would offer considerable background support for a JPY rebound.
Gold remains rangebound, and while other commodities, including silver (XAGUSD) trades lower on mounting growth and demand fears, gold has been supported by safe haven bids and lower bond yields after Powell acknowledged that steep interest rate rises could tip the US economy into recession. Holdings in bullion-backed ETFs have remained unchanged during the past month when US yields surged and the Dollar Index hit a twenty-year high, a sign that investors hold onto their gold for other reasons, and as we have mentioned on a regular basis, one of the other reasons being the risk of stagflation, now rising. For now, however, gold remains stuck in a wide $1780 to $1880 range, but with recession concerns on the rise and US yields potentially topping out, the bullish outlook in our opinion remains.
US Treasury yields remain in tactical limbo here, with the 10-year benchmark yield pushing slight below the lower part of the pivotal 3.15-20% area (the pivot high from May on the way up was 3.2%). A rally in bonds that sees downside resolution would prove an interesting test of market sentiment elsewhere: something to be celebrated due to easing pressure on valuations and the economy or simply a crystallization of growing fears that the outlook for the economy is darkening as we move toward recession?
Fed Chair Powell’s testimony to the Senate Banking Committee yesterday jolted the markets as he endorsed the market’s pricing of future FEd hikes, and while hoping that this would not lead to a recession, said that it was a “possibility”. He has kept the doors open for everything, by not even ruling out a 100bps rate hike but also saying that he saw rates going modestly above neutral (~2.5%) by year-end as against the current market pricing of 3.50% through the December FOMC meeting. The market doesn’t seem to be buying his 100bps remark or really anything that he said yesterday, as rate expectations have moved little over the last week.
... which is (more aligned with our expectations) from a mid-March forecast of between 2.8 % and 3.4 % this year. It was overly optimistic. GDP growth contracted in Q1 and inflation continues to rise across the board (reaching potentially 5.6 % this year). Like in other eurozone countries, inflation is broad-based. The central bank expects GDP to reach 1.2% next year (the March forecast was at 2.0%). This is certainly optimistic. We believe that growth will probably be much lower, under the 1 % threshold. Several companies are currently reviewing their business plan for the second part of 2022 and 2023 and are looking to cut costs – meaning postponing investments and hiring, most of the time. There won’t be any golden decade for the French economy.
In June 2022, there were many IPOs on the Paris Stock Exchange. This year, there are almost none. Okwind, a small cap specialized in self-consumption of electricity from renewable energy, is going public in early July. The operation takes the form of a capital increase of 20 million euros. This company has solid financial figures (EBITDA margin of 7.9 % in 2021, for example).
Led by BHP, RIO & Glencore the group have seen their market cap slump since peaking above $600 billion on April 1, and during this time, the Bloomberg Industrial Metal index has lost 22% with aluminum, tin and iron ore down by more than 30% while copper has lost around 15%. Weakness driven by China growth worries as lockdown continues to impact demand, global recession fears as central banks slam the brakes in order to kill inflation, and thirdly, investors booking profit on what for many has become a few remaining profitable positions.
While most indicators on the US labor market remain very robust, including the payrolls growth, current unemployment rate and record levels of job openings, one of the classic leading indicators on the US labor market, the weekly initial jobless claims, has trended in the wrong direction for over a couple of months after posting record low levels, adjusted for population. The market is looking for 226k in new claims after 229k last week and the almost five-month high of 232k the week before last. Tomorrow, the market will closely watch for any revision to the 5-10 year inflation expectations survey within the final June University of Michigan sentiment survey after the initial reading of 3.3% raised eyebrows as it jumped well clear of 3.0% to the highest level since a one-off spike in 2008 (and before that since the mid-1990's). Inflation expectations are an important input into Fed considerations for setting the appropriate level of monetary policy.
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Global Head of Macro Strategy
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Head of Commodity Strategy
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Global Head of Macro Strategy
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