Summary: US equities managed another sideways session, with the megacap-heavy Nasdaq 100 index running higher and nearly touching 14,000 in overnight trading even as US treasury yields closed at the highest levels since the banking turmoil in March. Gold beat a retreat again and is facing a test of key support if the pressure continues. US Debt ceiling talks are dragging on with hopeful spin emerging from both sides yesterday, but no breakthrough yet.
The equities bounced back yesterday with the US 10-year yield rising 5 basis points suggesting an interesting pattern recently with rising equities and rising yields. This could be a sign that the market is lifting its economic outlook for the economy. S&P 500 futures closed above the 4,200 level yesterday which was important if this key US equity benchmark is to sustain the latest breakout. The key event risk remains the US debt ceiling negotiations which are still getting closer to a deal, but judging from the VIX Index that closed around 17 the equity options market is still very relaxed about the US debt ceiling issue.
Dollar traded modestly higher on Monday amid hawkish comments from Fed members Bullard and Kashkari but Bullard is a non-voter and market pricing for June is still under 20% probability of a 25bps rate hike. Jitters around the debt ceiling also remained in the US session, although comments from McCarthy hinted at positive talks. The further rise in Treasury yields supported USDJPY again, which rebounded to as high as 138.87 overnight in the Asian session. Japan’s machinery orders for March hugely missed consensus. AUDNZD remains below 1.06 with RBNZ expected to hike rates again this week, with some even looking for a 50-bp hike.
While the broader macro conditions remained complex as hawkish Fed speak and debt ceiling deadlock weighed, crude oil prices managed to inch higher and start the week on a positive note after heavy selling both in paper and physical market over the last few weeks. Supply side news remain mixed with Russian exports remaining firm while OPEC’s early April production cut is only now starting to be felt. Extreme heat across Asia has ramped up demand for fuel oil to run air conditioning and lights while oil traders will be on alert for comments scheduled later today from Saudi Arabian Energy Minister Prince Abdulaziz bin Salman at the Qatar Economic Forum, especially following the recent jump in short selling by funds to levels seen before the April 2 production cut.
Gold prices (XAUUSD) trades lower for a second day but holding above $1950 support as optimism about a US debt ceiling deal and whether the FOMC will need to raise rates again continue to ebb and flow. The latest weakness being triggered by renewed weakness in bonds and SOFR futures after two central bank officials said they see the need to raise interest rates further this year. Speaking against such moves are the rising risk of recession later this year, potentially forcing another U-turn in rate projections. For now, the market suffers from a relatively large hedge fund long that could be reduced on further price weakness. To regain some positive momentum gold would need to break back above its 21-DMA currently at $2002.
Even as debt ceiling deadlock may be overcome, a deal has still not been reached. Even with a deal, the expected cut in spending will likely weigh on economic momentum, and a drag on liquidity could potentially result in a credit crunch. Together with China’s moderate recovery from a year of lockdowns and lack of extra stimulus has kept base metals in check, with iron ore down 4.8% and HG copper down 1.6% so far this week. Iron ore is also weighed by the winding down of China’s construction season. Meanwhile, iron ore stockpiles at Chinese ports are in a decline. Copper prices are also sliding lower amid lack of stimulus in China. Key levels to watch are $3.60 in copper and $100 in iron ore.
Investors are waiting for the US Treasury to announce the issuance of 3- and 6-months this Thursday. Normally, if there is no space under the debt ceiling, an auction will not be planned to avoid market disruptions.
Although none of the Fed’s members who spoke yesterday are voting members this year, it’s clear that inflation remains a concern. The market is beginning to price out rate cuts later this year and is reconsidering a rate hike this June provoking a selloff across the whole yield curve. Yesterday, also 2-year yields broke above their resistance level at 4.24% and are now rising to 4.49%. Today’s 2-year US Treasury auction will be in the spotlight as it can give room for the front part of the yield curve to rise further. If 2-year yields break above 4.49%, they will find next resistance at 4.63%.
10-year Greek government bonds yields dropped by 14bps to 3.88%. The Greek-Bund spread is now trading 40bps tighter than the Btps-Bund spread as a Greek credit upgrade to investment grade becomes likely.
Fed members are showing a clear divergence in stance for the June meeting. James Bullard (non-voter) said the Fed may still need to hike another 50bps this year. He said that the FOMC's median projection of 5.1% Fed Funds rate at the end of this year was based on slow growth and inflation improvements that have not occurred. Minneapolis Fed President Kashkari (voter this year) said that the Fed could need to go north of 6% as he is not yet seeing evidence that the banking stress is doing the Fed's inflation-fighting work for it. With the committee being split in June, it is likely that we will get a hawkish rate guidance if the Fed does hold in June. Mary Daly (non-voter) was more balanced, but declined to endorse a June pause, emphasized that monetary policy operates with a lag, and said tighter credit conditions could be worth "a couple" of hikes. Raphael Bostic (also a non-voter this year) backed holding next month.
Zoom Video reported Q1 revenue and EPS above consensus estimates last night issuing a fiscal year outlook for revenue that again was above estimates at $4.47-4.49bn. Shares were up 1% in extended trading hours.
Chancellor Olaf Scholz and Economic Minister Christian Lindner are said to be making plans to reduce a 2-3% spending cut to all government departments except for defense, a move that risks fallout from their coalition partner, the Greens. Further cuts may be in the works to bring the German budget close to balance and if they move forward, will impact Germany’s economic growth outlook. Since the global financial crisis, Germany’s national debt to GDP topped out above 80%, and governments managed to reduce that to about 60% before the pandemic response saw an increase back to 70%.
Japan is said to be planning to restrict exports of 23 types of equipment for manufacturing semiconductors from July of this year, a move that would bring into alignment with US policy on limiting China’s ability to manufacture high-end chips. The FT reports that, according to Chinese sources who have examined the deal, the restrictions could impact the ability for China to produce even older generations of chips up to 45 nanometers, while US restrictions cut off around the 14-16 nanometer area, and thus could prove more damaging than US restrictions.
The meeting between Republican House Speaker McCarthy and President Biden yesterday was billed as “productive” by Biden and McCarthy said that the “tone was better than any other time we have had discussions”. Still, no agreement is yet in place as the two are set to meet daily until a deal is agreed. If US Treasury Secretary Yellen is correct, crunch time comes as soon as June 1, and an added pressure is the upcoming Memorial Day weekend and its Monday holiday, with Congress back in session on Tuesday, May 30 after the Senate is out this week and the House in session only through this Thursday.
A majority of analysts surveyed suggest that Hungary’s central bank will cut its overnight interest rate 100 basis points to 17%, while keeping its base interest rate unchanged at 13%. It would be the first rate cut by a European central bank in the post-pandemic period. The decision has been made easier by the strong recover in the Hungarian forint over the last seven months from EURHUF of 430 to 375 currently. Still, the most recent CPI data point from April measured CPI still running at 24% annual clip, while growth for Q1 was –0.9% YoY.
Today’s US earnings focus is Palo Alto Networks expected to report FY23 Q3 earnings (ending 30 April) after the US market close with analysts expecting revenue growth of 24% and EBITDA of $423mn up from $26mn a year ago. Cyber security stocks have been some of the best performing stocks the past week and demand remains robust amid the war in Ukraine and general high level of cyber security threats.
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Chief Investment Strategist
Quarterly Outlook
Head of Fixed Income Strategy
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Chief Investment Strategist
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Head of Commodity Strategy
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Head of Fixed Income Strategy
Quarterly Outlook
Head of Commodity Strategy