The bear market rally in equities waned further following the strong ISM Manufacturing data

What’s happening in markets?

US & European markets closed lower on the first day of June, kicking off a gloomy mood with the Fed Reserve beginning to wind down its $9 trillion bond portfolio by reducing bond holdings by up to $95 billion a month.  Strong U.S. ISM Manufacturing data raised market concerns about more for longer interest rate hikes by the Fed and triggered renewed selling in U.S. equities after opening higher. JPMorgan CEO Jamie Dimon’s warning of a “hurricane” coming towards the U.S. economy further dampened market sentiment and in particular financial stocks.  The Nasdaq lost 0.7% S&P500 0.8% on Wednesday, weighed down by the Agricultural product sector and Airlines Index taking a hair cut. While the best performers were in the Oil and gas sector Gas and Hotels with the oil price likely to hit new highs as China’s economy begins to reopen. At a stock level Salesforce rose about 10% after better than expected results were released.

Asia Pacific equities on a decline as Fed hike bets pick up. Japan’s Nikkei 225 (JP225.I) was down close to 0.3% led by healthcare and Sony (6758) while Fast Retailing (9983) gained. Singapore’s STI index (ES3) was in loss of 0.5% as concerns around US economy grew with JP Morgan CEO Jamie Dimon giving a starker warning on the US economy from his earlier comments that there are storm clouds to now calling it a 'hurricane'. He said it could be a minor one or a Superstorm Sandy, we don’t know but Fed should address that.

Australia’s ASX200 retreats 1.1% as tech stocks crumble as Fed tightens money flow and bond yields spike.  Meanwhile Australia’s biggest oil and gas company Woodside (WPL)  continued to rally up as this years best performer, after rising 5% today on expectations that the oil price will likely continue to rise over the year ahead.

Hong Kong and Chinese equity markets are muted to incremental stimulus measures.  China’s State Council gave the two state-owned policy banks additional lending quota of RMB800 billion for the infrastructure sector.  The amount is equivalent to about 21% of aggregate new loans for the infrastructure sector in 2021.  The National Development & Reform Commission (NDRC) and eight other ministries and departments jointly released a development plan to boost investment in renewable energy.  Hang Seng Index (HSI.I) and Hang Seng TECH Index (HSTECH.I) fell almost 2%.  Chinese property stocks and pharmaceuticals were among the underperformers.  CSI300(000300.I) was little changed.

Crude oil prices dipped in Asia. After strong gains amid China reopening hopes over the last few days, crude oil is down this morning as much as 3% on reports that Saudi Arabia is ready to pump more should Russian output decline substantially due to financial sanctions because of the war in Ukraine. The OPEC+ meeting is scheduled for today and has certainly gained more attention now, with room for other members such as UAE to follow Saudi Arabia too to raise production.

USDJPY rose to 130+ as yield differentials in focus again. USD was stronger overnight as US yields rose and the pressure on the yen was obvious. USDJPY surged above the key 130 as BOJ continued to emphasize its dovish stance while US yields rose. Volatility in yen is likely to remain high as the tug of war between inflation and recession concerns continues.

What to consider?

ISM data puts more weight on NFP. US ISM manufacturing headline rose to 56.1 in May from 55.4, far better than expectations of a decline 54.5. However, the employment sub-index was disappointing, falling beneath the 50.0 neutral mark to 49.6. That makes the job data out this week from ADP and NFP more interesting. While momentum is set to slow, given expectations of 325k in NFP vs. 500k odd at the start of the year, but wage growth remains key.

Hawkish Fed comments. Fed's Bullard, who is undoubtedly the most hawkish Fed member, has urged other FOMC members to move to 3.5% this year. This comes after Fed’s Bostic yesterday said that he didn’t suggest a Fed put with his comments last week which led to a September pause started to get priced in. We think that the inflation threat has come roaring back with the Eurozone embargo on Russian oil and that might mean upside risks to tightening paths for both the Fed and ECB.

Bank of Canada’s hawkish surprise. BOC reaffirmed its hawkish stance not just with a 50bps rate hike and the QT, but it said that it is "prepared to act more forcefully if needed" to meet its inflation target. This opens the door to a potential 75bps moves in the future if it is required.

Lithium stocks were adjusted for a likely fall in lithium prices, but profitable lithium stocks found their fee in APAC today. Credit Suisse advised that it expects the lithium price to fall, adding to Goldman calling the end of the battery metal bull market, citing oversupply could kick-in in 2023 and pressure lithium prices slightly lower this year and heavily in 2023. Morgan Stanley has also been calling a hard pull back in 2023. Adding weight to this, Argentina yesterday set a reference price for lithium, noting ‘irregularities’ in prices over the last two years. ASX lithium stocks were the first to react to the news and tumbled. However today nerves have calmed after investors dived0deeper in the research; drawing a conclusion that the most oversupply of lithium will come from China. Secondly, Bloomberg published a research report saying EV sales will triple by 2025. Australia’s Pilbara Minerals (PLS) shares trade 0.7% lower today after yesterday’s tumbling 22% yesterday. Allkem (AKE) is down just 0.3% after yesterday’s drop of 15%. Overnight US giant Albemarle (ALB) shares fell 8% and SQM (SQM) fell 5%.

Australia’s exports hit a new record high rising 1% month on month to AUD$50.4 billion, while imports fell 0.7% to $39.9 billion, meaning Australia’s surplus income grew to $10.50 billion in April. This is the second time in two days Australia has received better than expected economic news. Yesterday’s GPD data was stronger than expected, meaning the RBA will likely be more aggressive with rate rises than expected.

Potential trading and investing ideas to consider?

ECB hawks are back. ECB’s Holzmann was more vocal yesterday about the potential 50bps rate hike to be considered, after Eurozone inflation reached record highs in May. While we are now getting into a quiet period ahead of the June meeting next week, the ECB rhetoric is likely to shift to a more hawkish stance thereafter ahead of key Q3 meetings. EURUSD has plummeted back below 1.0660 and support at 1.0640 remains on test with the NFP on cards this week.

AUDEUR; Australia's trade surplus data as mentioned above, rose to $10.495 billion, vs the $9.3 billion expected. And given Europe’s trade deficit is expected to get bigger, this supports the case for going long AUDEUR. Also supporting the AUD is that Chinese manufacturing in Shanghai resumed.