Oil price rallies back to $120. Better than expected jobs report supports a more prolonged rate hike cycle.

What’s happening in markets?

The mood is risk off again; with the Nasdaq and the S&P500 closing lower last week (down 1%) on stronger than expected US hiring data, which paves the way for aggressive Fed rate rises. The market managed to hold onto most the week prior gains of 7% for the Nasdaq and 6.5% for the S&P500, but on the weekly and monthly charts; with the RSI and MACD show buying is slowing and the market is overbought territory; with earnings tipped to slow in Q2. On top of that, the Fed starts reducing its balance sheet next week (June 15). Although there could be some more up-days, the technical indicators suggest another indices pull back is likely as market conditions weaken.

S&P500 sectors show commodities rise to the top. There’s a lot to be said about looking at the best/worst performers, as the market can tell you where it thinks the best performers will likely be for the next 6,9,12 months. Although the S&P500 is down 13% YTD, The Oil and Gas sector is up 65% with stocks like Occidental Petroleum (OXY) up 143%. Another top performing sector is Fertilizers up 32% with Mosaic (MOS) shares up 53%, while the Agri product sector up 31% as well YTD with Archer-Daniels (ADM) up 31%. The reason for this is commodity companies are seeing the most earnings growth and are guiding for a bright 2022.

Dollar resumed its incline. The USD had a run higher again late on Friday as upbeat non-farm payroll (NFP) data reporting a higher than expected jobs number in the US buoyed Fed tightening expectations. The Japanese yen was the biggest loser last week as USDJPY touched 131 levels on Friday following the NFP report bumping up US yields. Meanwhile, CAD and AUD have been the biggest winners, with CAD certainly supported by higher oil prices and BOC's hawkish tilt last week. AUDUSD could not sustain a bounce above 0.7250 with RBA on the horizon this week. EUR remains critical this week after being unable to find a direction last week, with the ECB meeting eyed.

Crude oil extends its bounce. Crude oil jumped last week 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. WTI and Brent are now back above $120/barrel where the last rejection was seen, as Saudi Arabia announced increases in prices to Asia to $6.50 premium above the Oman-Dubai benchmarks from a $4.40 premium for June. 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.

Copper at 6-week highs. HG Copper (COPPERUSJUL22) jumped 5% last week, breaking resistance at $4.35 to surge higher to $4.55, the 61.8% retracement of the April to May correction, with a break signaling a fresh push towards $4.86. The fundamental driver being the reopening of China raising demand expectations, thereby driving a sharp improvement in the technical outlook forcing speculators to reverse positions from a short back to a net long. In addition, a potential supply disruption in Peru, due to protests, also adding some tailwinds to price.

Asia Pacific Equities tipped to start week lower, after rising for 3 straight weeks, bolstered by reopening trade.

Australia’s ASX200 started the trading week down 0.5% on Monday, after rising for three straight weeks. Over the last three week, the Mining sector gained 10%, with shares in iron ore giants Champion Iron (CIA), BHP (BHP) rising 15%, and smaller diversified miners like Sandfire (SFR), South32 (S32) up over 15% as well, on hopes that earnings will grow with Shanghai reopening.

China and Hong Kong equity markets’ reactions to the long-awaited Shanghai’s reopening from lockdown are cautious as investors are assessing the pace of economic recovery and the risk of re-introduction of lockdown as long as the Zero-COVID policy remains intact.  Technology and growth stocks however managed too outperformed last week and this morning. Regarding the series of implemental stimulus measures and pledges from the Chinese authorities, investors who have somewhat been disappointed by the magnitude of stimulus measures since the hype in mid-March upon Vice-Premier Liu He’s remarks and not entirely convinced of their efficacy and sufficiency.  This morning’s much-weaker-than-expectation Caixin Services PMI data re-confirmed their concerns.  As of writing, Hang Seng Index (HSI.I) and CSI300(000300.I) gained about 1% while Hang Seng TECH Index(HSTECH.I) rallied almost 2%.  Meituan(03690) surged over 6% after last week’s better than expected Q1 results.   Bilibili (09626) surged 5% ahead of reporting earnings on Thursday.

What to consider?

US jobs data signals tight labor market. US non-farm payrolls (NFP) printed headline gains of 390k, above the expected 325k. While this was a drop from last month’s 436k, the gains have been expected to moderate as 21.2mn of the 22mn jobs that were lost in March/April 2020 have been restored. Further slowdown is inevitable as most companies are guiding for margins being under pressure, but a somewhat softer wage figure (5.2% y/y in May from 5.5% prev.) reduces the wage-price spiral concerns and supports a more prolonged rate hike cycle.

Fed’s Mester opens the doors for a third 50bps rate hike. We had one of the last Fed speakers on Saturday before the quiet period in the run up to the FOMC meeting on June 15. Loretta Mester did not just remove the September pause possibility, but in fact opened the doors to a third 50bps rate hike. She said September meeting could see a 50bps hike, or a 25bps hike if the inflation in on a downward trajectory. That may be the start of the Fed calling a third 50bps rate hike.

China’s May Caixin Services PMI came this morning at 41.4, much weaker than expectation (Bloomberg consensus 46; April 36.2) and staying firmly in the contractionary zone and being the second lowest since March 2020.  Service employment sub-index fell further to 48.5 (vs 49.3 in April), the fifth consecutive monthly decline and the lowest level since March 2021.

RBA tipped get more hawkish at their interest rate meeting tomorrow. Market expects rates to rise from 0.35% to 0.6% after stronger than expected GPD data came out last week, plus Australia’s export income surged to a record high.  And that will improve with Shanghai emerging from lockdown last week. So Aussie economy is in a good spot. Plus Labor Government’s childcare policy encourage more parent back to the workforce, and add to Australian ‘full employment’, meaning wages will likely rise, and give the RBA even more fire to hike rates. Investors think rates will be just shy of 3% in 2022.

APAC client activity in June:
Most clients are buying shares to start the moth June with 71% of orders beings buys.

Tesla (TSLA) was the most bought and sold share. Followed by Apple (AAPL). Regarding Tesla 53% of transactions were shorting Tesla expecting 2022 margins to be flat compared to 2021 (according to consensus). However with Tesla considering cutting 10% of workforce and dangling the carrot of potentially buying a lithium mine; such potential measures may paint Tesla differently

Most conviction across stocks/CFDs ETFs; the second most bought is iShares MSCI USA ESG Enhanced UCITS ETF

In Bonds, transactions in bonds were mainly buys, with investors looking for yields and shifting away from equities.

Potential trading and investing ideas to consider?

US May CPI due this week. The May CPI data from the US is due this week, and the return of inflation peaking vs. higher for longer debate is set to return more forcefully. We remain of the camp that underlying pressures on inflation will likely keep it higher for longer, and a beat in CPI print this week could increase the Fed tightening expectations. That will mean more gains for the USD and more pressure on the Japanese yen which suffers at the hands of yield differentials. A weaker print, on the contrary, could bring focus back on recession concerns and boost risk assets.

Key earnings release this week:

• Tuesday: Sinobiopharma(01177)
• Wednesday:  Kingsoft Cloud(KC)
• Thursday: Bilibili(09626/BILI), NIO(09866/NIO)

For a weekly look at what’s on the radar for investors, and traders this week;  read, watch or listen to our Monday Saxo Spotlight.

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